Costa Rica´s Tax Reform and Impact on Housing Allowances
Posted by: Caio Leal, Client Services Director, Brazil.
Ley de Fortalecimiento de Finanzas Publicas is a tax reform bill aimed at adjusting Costa Rica’s tax laws in an effort to attack the country’s growing fiscal deficit. The bill basically centers on three areas: the creation of the Value Added Tax (VAT, or IVA in Spanish), modification of the Income Tax Provisions, and Containment of Public Expenditure. Costa Rica was the only country in the region that had not gone through any tax reforms in the last five years.
What You Need to Know About the Bill
While some aspects of the bill are still being discussed, it is known that the VAT rate of 13% normally applied for goods and services will be extended to rentals of housing over ₡646,000 per month. In other words, if one pays a rent equal to or above that figure, they will also have to bear with an additional tax of 13% over that amount.
As mentioned earlier, the Application Manual (or Regulamento) is still in discussion, so a few details may change. For example, up until now, rental prices would normally include the condominium maintenance fee which is not taxable. So, if nothing changes, the 13% VAT should be applied to the net rent only, excluding any accessorial costs that may be paid along with the rent.
What is the Impact on your Relocation Policy?
Depending on a company´s relocation policy, this change may need to be discussed by HR and compensation teams. The rationale is that if the company is supporting employees with a housing allowance, and if the intention of the housing allowance benefit is to cover the entire cost of housing, the amount may need to be altered in light of the new taxes applied.
On one hand, housing allowances are often established using parameters that reflect a specific point in time, and the quick changes in Latin American countries’ economies can impact how quickly these parameters also change. On the other hand, housing allowances can also have the nature of a subsidy, meaning that employees may be expected to contribute towards housing costs.
This is not an uncommon discussion for Latin American global mobility and HR professionals: housing subsidies are constantly adjusted to accommodate increases throughout the duration of the lease contract, triggered by inflation and currency fluctuation, such as in countries like Brazil and Chile.
The tax reform changes are expected to go live July 1, 2019, and until then, there is still time to discuss the impacts to your expat population in Costa Rica and plan accordingly.