Tax Controversy 2019

Last Updated June 06, 2019

Costa Rica

Law and Practice

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BDO Auditores S.A. is a member firm of BDO International, a network of audit, tax, consultancy, business services and outsourcing firms which provide professional services under the name of BDO, with 1,591 offices in 162 countries. With 16 years of experience in the Costa Rican market, BDO Costa Rica offers a broad and diverse portfolio of services supported by specialist expertise. In its tax work the firm seeks for balance between the proper management of tax risks and efficiency, ensuring compliance with substance and transparency requirements within the legal framework. It keeps clients updated on regulatory changes so that they are able to meet their tax obligations.

Tax controversies in Costa Rica mainly arise following tax audits.

The Costa Rican income tax and sales tax systems are based on self-assessment and are subject to auditing by the tax authorities.

As a consequence, deductions of expenses – for the purposes of corporate income tax and individual income tax – give rise to most of the tax controversies regarding these two specific taxes.

Additionally, the recognition of tax credits related to sales tax has generated many disputes with the tax administration.

Tax controversies may be avoided by implementing policies and procedures to facilitate early identification of tax contingencies, strengthening compliance controls and conducting preventive tests on a regular basis.

For a tax audit to start, it is necessary for the tax administration to give prior notice to the taxpayer, who is selected according to criteria previously issued by the tax administration. In order to mitigate tax contingencies, it is advisable for taxpayers to consider these criteria and prevent negative audit outcomes by conducting internal tax compliance controls.

On 7 June 2017 Costa Rica, along with other countries, executed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) in Paris. Costa Rica has also implemented all the reporting requirements of BEPS action 13 (local file, master file and country-by-country). In connection with this, the tax administration issued Resolution DGT-R-001-2018, which addresses the disclosure of information by companies residing in Costa Rica for purposes of the country-by-country (CbC) reporting requirement. The Resolution was published in the Official Gazette on 2 February 2018. Additionally, the Costa Rican Congress is analysing BEPS action 5 as part of its efforts to join the OECD.

At present, it is not yet possible to conclude whether or not these measures have influenced the amount of tax controversies.

The Costa Rican Tax Administration is empowered to appreciate the economic reality of the acts, businesses or legal modalities performed or adopted by a taxpayer. It is also authorised to make any assessment or adjustment to the tax returns filed by taxpayers whenever it considers the returns to be against the law or incomplete. The above-mentioned instruments are giving more power to the tax administration in order to assess tax infringements.

The Costa Rican tax system does not require the taxpayer to pay or guarantee the amount determined in a tax audit during an administrative procedure.

During a judicial process, the taxpayer can file for a preventive measure to suspend the collection of the tax assessed. If the court denies the preventive measure, the collection process may proceed in parallel with the judicial process challenging the tax assessed.

Administrative acts imposing fines could be challenged at the administrative or judicial level. However, criminal filings are not administrative but judicial. Only criminal tribunals are entitled to resolve matters regarding the criminal implications of a failure to pay taxes. If a criminal act is under investigation, all other administrative and judicial matters are brought under the jurisdiction of the criminal tribunal.

The Costa Rican Tax Administration issues annually the criteria for tax audits. The most important are:

  • taxpayers being part of a relevant industry for the tax administration;
  • financial and/or tax ratios diverging significantly from the industry average;
  • taxpayers not paying taxes;
  • sales tax credit/debit ratios diverging from the industry average; and
  • non-taxable income constituting more than 10% of the taxable income.

In Costa Rica the statute of limitations for tax obligations is four years. However, in the case of non-registered taxpayers, registered taxpayers who have failed to file tax returns and taxpayers whose tax returns have been deemed fraudulent, the statute of limitations is ten years. A tax audit can be prevented if the statute of limitations has expired.

The initiation of a tax audit interrupts the statute of limitations and sets the clock back to zero.

The Costa Rican tax code does not currently include a term for the completion of a tax audit; however, if the tax administration does not act for two months or more, the statute of limitation is not interrupted.

Tax audits take place in the fiscal domicile the taxpayer; or (at the taxpayer's request) in the tax authority's offices.

These audits are based on printed documents and data made available electronically, although principally the latter. Private documents executed but not registered before any public registry must also be exhibited.

From the perspective of income tax, any diminishment of the tax base would attract attention in tax audits.

Recently, transactions between related companies have also been particularly significant in this respect.

Finally, given that the Costa Rican tax system is based on a territorial principle, income not subject to taxation may be challenged by the tax administration.

For sales tax purposes, credits deriving from transactions not related to taxable activity will also attract attention.

The existence of agreements for the exchange of information has not – until now – generated an increase in audits.

We have not experienced tax audits conducted with the tax authorities of other states.

During a tax audit, taxpayers should:

  • ensure proper maintenance of accounting books and support documentation;
  • assess their weaknesses and manoeuvre to avoid attracting attention to them;
  • analyse documentation prior to supplying it; and
  • be accompanied by a tax adviser.

According to the contentious procedural code, the administrative claim phase is optional. Taxpayers may initiate the judicial phase.

The administrative tax procedure begins once the tax audit has ended. The first administrative claim is submitted to the tax administration that issued the assessment. If the tax authority resolves negatively, the taxpayer could appeal the authority's resolution before the superior Administrative Fiscal Tribunal.

The resolution of the Administrative Fiscal Tribunal could be challenged before the Contentious Administrative Tribunal (Judicial Phase).

There is no deadline for the tax authorities to issue a resolution on an administrative claim.

However, when an administrative claim for revocation has been lodged, the amount for interest is limited to 30 business days following the submission of the claim.

In the case of an appeal before the Administrative Fiscal Tribunal, interest can only be accrued for six months.

After the 30 business days (in the case of a revocation) or the six months (in the case of an appeal) have elapsed, the taxpayer may assume a negative administrative decision or dismissal of its claim.

Lawsuits against the state should be submitted before the Contentious Administrative Tribunal within one year of service of the administrative act.

The judicial process begins with the filing of a written complaint.

Tax lawsuits can be based on material tax law arguments (ie, analysis of the legal provisions giving rise to a tax) and formal tax law arguments (which concern the rules of the procedures). These lawsuits do not require testimonial evidence, expert witnesses or documents.

On the other hand, tax lawsuits can also be classified as ordinary, implying analysis of evidence mixed of tax law and facts.

There are basically two stages: a preliminary hearing and a public trial.

If the question is deemed by the Contentious Administrative Tribunal to be a material and/or formal tax law matter, the verdict will be issued after the preliminary hearing takes place. If the question is deemed an ordinary matter, a public trial must take place after the preliminary hearing and the verdict must be issued orally once the public trial elapses. In very complex cases, as determined by the tribunal, the parties shall be informed, and the verdict shall be issued in writing within a term of 15 working days following the finalisation of the public trial.

All relevant evidence must be submitted when filing the lawsuit. Any new facts should be alleged during the preliminary hearing.

It is not usual for testimonial evidence to be offered, but it is possible to call the tax officer who performed the audit as an 'expert witness' if it is necessary to clarify aspects of the audit. All testimonial evidence is analysed during the trial, rather than the preliminary hearing.

The burden of proof always lies with the complainant party.

The taxpayer has a guarantee against unfairness or error in the application of tax law. When he or she disagrees with the determination of the assessing officer it is advisable to offer testimony.

Whether or not to pay is a financial matter. Assuming that the case has solid grounds, a party may pay in order to avoid the accrual of interest.

Despite the fact that the judicial procedure includes the option of a settlement, the Costa Rican attorney general refuses it on a general basis.

Constitutional jurisprudence is binding on all parties. Jurisprudence issued at other instances can be considered, but is not binding; however, references to interpretative decisions of the courts in similar cases, especially of the First Chamber of the Supreme Court, are obviously good arguments in litigation concerning a disputed point of tax law.

Recently, the OECD guidelines have been taken into consideration by the contentious administrative court as a reference; however, cases are not resolved based on such sources.

The First Chamber of the Supreme Court of Justice is entitled to resolve cassation appeals. The First Chamber's jurisdiction is limited to questions of law. The Supreme Court is generally competent in tax matters, but an appeal to the court must be based solely on an alleged misapplication of law; should it appear that questions of fact or mixed questions of law and fact are involved, the claim, under most judicial systems, is dismissed.

The stages in the tax appeal procedure are as follows.

  • The appeal is lodged.
  • If the appeal does not meet the requirements required by law, the party is granted three days to amend it. If it still does not meet the requirements, the appeal is rejected.
  • If the defects are corrected, or if the appeal presented is not defective, the First Chamber will admit the appeal and will serve the counterparty within ten business days.
  • When the appeal is accepted, and within five days of notification of acceptance being given, parties may expand the causes and grounds of the appeal.
  • Likewise, in some cases, the Chamber may appoint an oral hearing. In this hearing parties will present their arguments, legal bases and conclusions.
  • If the parties do not attend the hearing without just cause, the appeal is dismissed and the resolution appealed is considered final.
  • Evidence that can be provided at this instance includes documentary evidence that has not been known before.
  • Once the oral hearing has been held – if it has been scheduled – the Chamber will issue a judgment.

The Contentious Administrative Tribunal is in charge of the first instance while the First Chamber of the Supreme Court is in charge of appeals.

The Contentious Administrative Tribunal has three judges, while the First Chamber of the Constitutional Court has five magistrates.

As mentioned above, the contentious administrative procedure has the opportunity of settling; however, this is not the practice of the attorney general. According to an interpretation of the attorney general, taxes are public funds and it is not possible to negotiate them.

Mediation or arbitration are not admissible for tax disputes.

This is not applicable in Costa Rica.

This is not applicable in Costa Rica.

Article 119 of the Tax Code establishes the option of requesting a private ruling. However, due a tax reform that entered into force in 2012, private rulings are informative and cannot be appealed by the petitioner. This informative character reduces their effectiveness in disputes with the tax administration.

This is not applicable in Costa Rica.

This is not applicable in Costa Rica. Article 10 of the Transfer Pricing Decree establishes the option of Advance Pricing Agreements; however, this does not prevent alternative mechanisms being used in the case of disputes.

A tax infringement could be classified as criminal when the amount of unpaid taxes equals or exceeds 500 base salaries (approximately USD404,445).

Penal sanctions and tax fines cannot be applied jointly. Any sanction is preceded by a sanctioning process, and there are no automatic sanctions.

Criminal processes are initiated by an accusation being made by the Public Ministry.

Article 92 of the Tax Code regulates public treasury fraud as criminal conduct. The threshold is equal to 500 base salaries (approximately USD404,445). However, in practice, not all taxpayers owing taxes beyond this threshold are accused of criminal charges, so there is clearly room for the tax authorities to interpret particular cases differently. However, if the tax administration judges that a criminal action has been committed, the tax audit should be halted and the case transferred to the judicial authorities, which will continue with the investigation and determine if a tax crime has been committed.

When an administrative infringement process or criminal tax case is initiated is at the discretion of the tax administration. We have witnessed cases in which the tax administration continues with a tax audit even if the unpaid taxes surpass the threshold.

Tax fines are imposed by the same administration that conducted the tax audit and the administrative process is similar to the one regarding unpaid taxes. However, criminal cases should be handled by the criminal court.

The taxpayer may reduce its fines by paying them voluntarily. Depending on the time of the tax audit, or even before it occurs, there are several reductions available.

This is not applicable in Costa Rica.

Once a criminal judgment of first instance has been obtained, this judgment can be appealed. The appeal will be filed before the same criminal court that issued the resolution and at the same hearing, by the appellant briefly indicating the motive of the grievance. The grounds of the appeal will be substantiated before the criminal court of appeals.

The Third Chamber of the Supreme Court is the final instance in criminal cases.

This is not applicable in Costa Rica.

This is not applicable in Costa Rica.

This is not relevant in Costa Rica.

This is not applicable in Costa Rica.

Despite the fact that APAs are included in the transfer pricing decree, this is not applicable in Costa Rica.

This is not applicable in Costa Rica.

Administrative litigation is not subject to costs or fees.

Judicial litigation may lead to payment of costs/fees to the state, paid at the end of the proceedings by the defeated party, according to the fee schedule approved by the Bar Association.

It is possible to request indemnities but this should be duly supported, ie, there must be evidence of the harm that substantiates the indemnities. What is common is to charge interest.

This is not applicable in Costa Rica.

No information is available in this regard.

During 2018 the tax administration conducted 514 tax audits out of 525 which were programmed (97.9%). These considered matters regarding income tax (corporate and individual) and sales tax.

During the same period the customs administration conducted 1,312 audits out of 2,666 programmed (49,2%) (source: Informe de Resultados Físicos de los Programas Ejecutados Ejercicio Económico 2018. Dirección General de Presupuesto Nacional).

This information is not available.

In December 2018 the Costa Rican Congress approved new tax legislation that will enter into force in July 2019. This will shift the relationship between the tax administration and taxpayers. Anti-avoidance rules, an increase in tax rates and the migration from sales tax to VAT are highlights of the most important tax reform in recent decades.

However, Costa Rica is in the process of being admitted as a member of the OECD and, as mentioned above, some of the BEPS actions are now part of its tax rules.

Additionally, taxation in Costa Rica is now experiencing the effects of the digital era. Electronic invoicing is now part of the tax obligations and it is expected that the consequent flow of information from taxpayers to the tax administration will be used to enhance controls.

With these new tools the tax administration will increase tax audits and, as a consequence, tax controversy will also increase.

In the future, large national taxpayers will continue to be the focus of the tax administration; however, medium and small taxpayers will be under the spotlight due to the fact that information concerning their activities is now more accessible.

Given all of these factors, it is advisable for taxpayers to reinforce their tax compliance. Failings in compliance will raise a red flag in times of fiscal need for a government under fiscal stress.

BDO Auditores S.A.

Torre Mercedes 8 floor
San José
Costa Rica

+506 2248 0808

rmadriz@bdo.cr www.bdo.cr
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Law and Practice

Author



BDO Auditores S.A. is a member firm of BDO International, a network of audit, tax, consultancy, business services and outsourcing firms which provide professional services under the name of BDO, with 1,591 offices in 162 countries. With 16 years of experience in the Costa Rican market, BDO Costa Rica offers a broad and diverse portfolio of services supported by specialist expertise. In its tax work the firm seeks for balance between the proper management of tax risks and efficiency, ensuring compliance with substance and transparency requirements within the legal framework. It keeps clients updated on regulatory changes so that they are able to meet their tax obligations.

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