Tax controversies usually arise from tax audits conducted by the tax authorities. Taxpayers are audited periodically by the tax authorities, and these audits can conclude with a challenge of the tax amount paid by the taxpayer. If the audited party does not share the position of the tax authorities, it can state its intention to initiate the tax controversy procedure.

Income Tax and Value Added Tax (VAT) are the taxes that arise most often in tax controversies. Since these represent most of the government's income, the tax authorities usually focus their efforts on auditing the proper payment of these taxes.

Other common tax controversies arise from municipal taxes and withholding tax situations.

Tax controversies can be mitigated by conducting a proper accounting, complying with regulations and consulting with specialised professionals when unclear matters arise.

The measures implemented by BEPS and EU recommendations have led to taxpayers strengthening the quality of the information and documentation they supply to support the veracity of their commercial transactions (eg, price transferring studies). Although these measures reinforce a more transparent tax legal system, non-compliance or the provision of misinformation by taxpayers could result in an increase in tax disputes.

In Costa Rica, taxpayers do not need to render a guarantee or pay the additional tax assessment considered due by the Tax Authority in order to be able to lodge an administrative or judicial claim. On this matter, the Constitutional Court has recognised the unconstitutionality of the principle requiring payment before claiming (solve et repete) in tax procedures.

However, if it is within their abilities, taxpayers are advised to pay the additional tax amount assessed by the Tax Authority, in order to avoid negative interest and eventually recover positive interest.

The Tax Authority focuses its main efforts on qualified large taxpayers, who are more frequently targeted for audits because of the economic importance of their contributions.

The Tax Authority also pays particular attention to the financial sector.

Even though there are no statutory time limits regarding the duration of tax audits, they can generally be expected to last approximately 24 months, counting from the communication of the initial notice of the procedure to the issue of the notice of deficiency. In most cases, the Tax Authority presents the tax audit findings to the taxpayer within six to 12 months after the audit has started. If the taxpayer does not agree with the proposed additional tax assessment, the Tax Authority would issue a notice of deficiency in the following six to 12 months.

There is a four-year statute of limitations within which the Tax Authority must initiate the tax audit. This term is extended to ten years when the taxpayer is not registered with the tax authorities, when the returns are considered fraudulent, or when the taxpayer did not submit the legally required sworn statements.

The initial notice of the tax audit interrupts the count of the statute of limitations term. Therefore, once the Tax Authority communicates the taxpayer the opening of a tax audit, it will have four years to analyse relevant information, communicate the tax audit findings, and issue the notice of deficiency.

Regarding the duration of the tax audit and to protect the taxpayer from endless procedures, Costa Rican legislation states that, if an audit procedure is suspended for a two-month period, the interruption of the statute of limitations period made by the initial notice of the tax audit is cancelled.

In most cases, the entire audit procedure is conducted electronically, by requesting the electronical data and records of the taxpayer and third parties. However, the Tax Authority can request visits to the taxpayer's premises to validate information about the taxpayer's operation.

In general terms, tax auditors focus their efforts on finding discrepancies between the information contained in the tax return and the information requested during the tax audit procedure.

On this matter, providing precise answers and surrendering only the requested documentation is a key aspect to consider when entering into a tax audit procedure.

There has not been an increase in tax audits in Costa Rica due to the cross-border exchange of information. There have also not yet been any tax audits involving different states.

A key aspect to consider during a tax audit is surrendering only the precise information and documents that are requested by the Tax Authority. During the procedure, the auditors request several meetings and statements from the representatives of the taxpayers; when answering these requests, obtaining proper advice on legal and accounting matters should make a difference in further stages of the procedure.

When the Tax Authority has finished with the audit, a notice of deficiency will be issued, detailing its findings. After the tax authorities give notice of the additional tax assessment, the taxpayer is given five days in which to express its acceptance or rejection of this assessment.

If the assessment is rejected by the taxpayer, the Tax Authority will issue a formal act to express its reasoning and establish the additional tax fee to be paid. The taxpayer is given ten days to argue and submit evidence against this formal communication.

If the Tax Authority considers the arguments and evidence submitted by the taxpayer to be insufficient, it will issue a final act establishing the final additional tax fee to be paid by the taxpayer.

Against this final act of the procedure, the taxpayer can file a revoke plea requesting the authority that issued the act to re-evaluate its position and withdraw the additional tax fee charged to the taxpayer. This revoke plea needs to be filed within 30 days.

If the Tax Authority maintains its position, the taxpayer can submit an appeal before the Administrative Tax Court, to revise the legality of the procedure, the validity of the arguments and the additional tax fee set by the Tax Authority. The ruling of the Administrative Tax Court finalises the administrative procedure.

Connected to the above-mentioned assessment, a sanctioning procedure is processed, where the taxpayer can file both the revoke plea and the appeal before the Administrative Tax Court, against the sanctioning act.

The taxpayer is not obliged to attend the administrative claim phase in either the determinative procedure or the sanctioning procedure. The taxpayer can file a lawsuit before the Administrative Judicial Court at any point during the procedure, requesting the annulment of the notice of deficiency and/or the sanctioning act.

There are no time deadlines within which the tax authorities are compelled to decide on the claim submitted by the taxpayer. However, the Tax Authority must issue the response to the revoke plea within two months; if the ruling is not issued within this term, the taxpayer can presume that this silence is a rejection of their plea and can file the next appeal before the Administrative Tax Court.

Likewise, he Administrative Tax Court is supposed to issue its ruling on the appeal filed by the taxpayer within six months. From this moment forward, no additional interest (besides the amount already computed) would be charged if the appeal is rejected.

A judicial tax process is initiated by the plaintiff filing the lawsuit requesting the annulment of the acts of the procedure that increase the amount of tax to be paid by the taxpayer, the refund of the amounts paid, and the annulment of the sanctioning decision.

The judicial procedure before the Administrative Court, which is the competent jurisdiction to annul a tax assessment and notice of deficiency, has eight different stages:

• submission of the lawsuit;
• response of the defendant;
• audience granted to the plaintiff regarding the defendant's response;
• preliminary hearing;
• trial hearing;
• judicial ruling;
• appeal of the judicial ruling before the First Chamber of the Supreme Court; and
• final judgment of the First Chamber of the Supreme Court.

The acceptance of evidence submitted by the parties to the process is discussed and decided in the preliminary hearing. However, the cross-examination of witnesses and expert evidence is conducted in the trial hearing before the judges who will issue the final ruling.

Witness and expert evidence – particularly from accountant experts and the testimonies of representatives of the companies – helps to explain complex matters to judges. It also helps the judges to comprehend commercial matters that directly affect the way specific transactions were made, which may not be visible or clear in the filed documentation.

From a strategic point of view, testimonies offered during the trial can also help relevant points of the case to stand out that may have been overlooked by the judges because of the extensive files and wide documentation.

The vast majority of processes are initiated by taxpayers that are obliged to pay additional tax fees. Taking this into account, the burden of proof rests with the taxpayers, to demonstrate the illegality of the Tax Authority's assessment. On this same matter, taxpayers that file a lawsuit alleging procedure infringements are responsible for proving the existence thereof.

In less common cases in which the Tax Authority files the lawsuit (eg, when the Administrative Tax Court rules favourably in the interest of the taxpayer), the burden of proof rests with the state's representation.

The proper time to submit evidence is with the filing of the lawsuit. The plaintiff should mention in the lawsuit the evidence that supports the facts and arguments established in the claim. The parties are entitled to submit evidence to support the lawsuit at any point before the preliminary hearing, when the acceptance of the evidence is discussed and settled.

Likewise, legal arguments are formulated on the lawsuit and during the hearing granted about the State's response; however, both parties can make opening and closing arguments during the trial hearing.

Submitting expert reports and witness testimonies as evidence gives the judges a better understanding of complex matters (eg, commercial transactions and accounting entries).

Regarding the obligation to pay the additional tax fee, the most conservative recommendation offered to taxpayers is to pay the additional tax fee and interest as soon as possible, paying under protest. This action may prevent additional negative interest accruing if there is a negative result for the taxpayer.

Case law does have relevance when courts are deciding tax cases. Primarily, jurisprudence of the First Chamber of the Supreme Court (highest hierarchical court in tax matters) is considered highly by the Administrative Court, as the losing party in the process may appeal their ruling before this superior court.

Moreover, current regulation establishes a procedure during which interested parties could request the Tax Authority to apply the case law of the First Chamber of the Supreme Court to their own cases, even before entering a judicial claim.

Doctrine and international guidelines are taken into consideration by Costa Rican national courts in innovative and non-usual matters. Although neither doctrine nor international guidelines constitute sufficient basis for a judge to decide a case, because of the Costa Rican regulatory structure, the application of these references to judicial cases should be complementary to a justification based on the law and executive regulations.

International tax court jurisprudence is not generally taken into consideration by Costa Rican national courts.

The regular judicial administrative process can be subject to three different types of appeals:

• a reconsideration plea, filed against the same tribunal that issued the ruling (Administrative Court);
• an appeal of specific proceeding rulings, filed before the Administrative Appeals Court; and
• an appeal of the final ruling.

The tribunal system of the judicial administrative process has three different courts (in ascending hierarchy):

• the Administrative Court;
• the Administrative Appeals Court; and
• the First Chamber of the Supreme Court.

The ruling of the First Chamber of the Supreme Court of Justice finalises the process entirely.

The different stages of the appeal procedure are as follows:

• the Administrative Court issues the final ruling of the process and gives notice to all interested parties;
• all parties to the process are given 15 days within which to file an appeal before the First Chamber of the Supreme Court of Justice;
• if an appeal is received in the First Chamber of the Supreme Court of Justice, both parties are given one day to designate a notifications e-mail address;
• afterwards, the judges of the Court will analyse the admissibility of the appeal and issue an acceptance or rejection judgment;
• if the appeal is admitted for analysis, the First Chamber of the Supreme Court of Justice will grant the other party in the process a term within which to express its thoughts on the appeal; and
• the First Chamber of the Supreme Court of Justice will analyse all the arguments of the appeal and the arguments filed by the opposing party, and issue a ruling.

The ruling of the First Chamber of the Supreme Court of Justice is definitive, and only extraordinary situations (eg, due process violations) enable the parties to submit a reconsideration request before this same tribunal.

The reconsideration plea is an appeal that can be submitted during the procedure against rulings regarding the process, and is decided by the same judge of the Administrative Court who issued it.

The appeal of specific proceeding rulings can be filed against specific and very restrictive rulings issued during the procedure (eg, rejection of precautionary measures), and is decided by the Administrative Appeals Court. The filing of this appeal interrupts the continuance of the process. This appeal is decided by a tribunal formed of three judges.

The appeal against the final judicial ruling is decided by the First Chamber of the Supreme Court of Justice, which is formed of five Supreme Court Justices and is in charge of deciding the appeal.

The judges of both the Administrative Court and the Administrative Appeals Court are appointed according to their experience, formal education and merits, pursuant to internal regulations of the Judiciary Branch. On the other side, Supreme Court Justices are appointed by the Costa Rican Congress.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

However, taxpayers are able to request a payment arrangement plan after the notice of deficiency has been communicated, which would avoid additional interest accruing over the doubted amount. This arrangement does not imply the acceptance of the assessment made by the Tax Authority.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

If the Tax Authority, when conducting the tax audit procedure, determines that taxes were not appropriately paid, a sanctioning decision is issued. The severity of the monetary sanction depends on the actions that are presumed to have been committed by the taxpayer (eg, false statements, withholding information, not reporting income). In addition, some infractions committed by taxpayers could be considered tax fraud and lead to a criminal investigation and related criminal judicial process.

Tax fraud can be committed by evading the payment of taxes, by evading the payment of amounts withheld from third parties or that should have been retained, or by enjoying unjustified tax refunds or exemptions.

Criminal sanctions only apply to the fraudulent taxpayer when the defrauded amount exceeds approximately USD360,000.

The tax assessment and the administrative infringement file are strictly related. The administrative infringement file begins after the tax assessment defines the amount of additional tax that should be paid by the taxpayer. If the taxpayer can revoke the administrative assessment, the sanction will be overridden as well.

In a criminal investigation, both the administrative assessment and the administrative infringement file are suspended until there is a final ruling of the criminal court sanctioning or dismissing the charges.

If the Tax Authority, when conducting the tax audit procedure, determines that taxes were not appropriately paid, a draft sanctioning decision is issued, constituting the first act of the administrative infringement file.

On the other hand, if the Tax Authority considers after concluding the administrative assessment that the irregularities detected could constitute a crime, it can file a report to the Public Prosecutor's Office, which will determine if a criminal investigation should be commenced.

Until recently, it was not common for tax assessments to end with a criminal investigation being initiated, but the current head of the Ministry of Finance, endorsed by the President, has promoted the initiation of this process when possible.

In the tax administrative infringement process, the Tax Authority issues a draft sanctioning decision, to which the taxpayer can file a defence.

If the Tax Authority does not consider the taxpayer's defence to have sufficient merit, a sanctioning decision will be issued, to which both a revoke plea and an appeal before the Administrative Tax Court can be filed by the taxpayer.

Criminal cases are heard by a criminal court, which in the event of a conviction will determine the amount of the tax obligations and interest directly related to the facts that constituted tax fraud.

Fines cannot be reduced by the payment of the additional tax assessment; this type of reduction could only apply if the taxpayer pays the additional tax without any action being conducted by the Tax Authority to recover the due amount.

However, fines can be reduced (in different percentages) by paying the applicable fine before the definitive sanctioning decision is communicated (50% reduction), or, if after the definitive sanctioning decision is communicated, if the taxpayer accepts the charges and fixes their non-compliance (25% reduction).

The complete payment of the assessed tax, interest and penalties would not prevent or stop a criminal tax trial.

If the criminal court decides to convict the taxpayer, an appeal of such ruling could be filed with the Third Chamber of the Supreme Court of Justice.

Very few cases relating to transfer pricing have been subject to a tax assessment procedure. In these cases, the tax authorities focused their attention on how the transfer pricing study was conducted, and on the market value of the services/products offered between companies. No cases related to GAAR, SAAR, transfer pricing rules or anti-avoidance rules have led to the beginning of a criminal investigation/process.

It is not common to use domestic litigation against a double taxation situation that occurs due to an additional tax assessment or tax adjustment in a cross-border situation, but the possibility of this happening should not be ruled out. A co-operation mechanism is imposed in Double Taxation Avoidance Agreements, but the application of this procedure has not yet been seen.

In Costa Rica, there is no case law involving the application of GAAR or SAAR in cross-border situations covered by bilateral tax treaties.

The main international transfer pricing adjustments have not been challenged under domestic Costa Rican tax courts.

Unilateral or bilateral advance pricing agreements are not common in Costa Rica.

As far as is known, the primary subjects that have resulted in litigation relating to cross-border situations are transfer pricing and taxable income obtained outside Costa Rican borders.

Regarding the mitigation of transfer pricing cases, companies should hire experienced teams to conduct the transfer pricing studies, supported by local competent local teams who should keep up-to-date with the latest regulations and judicial precedents, and maintain solid back-ups of the inputs used to prepare the study.

Regarding the mitigation of cases involving taxable income obtained outside Costa Rican borders, a recent judicial ruling of the Constitutional Court declared constitutional the case law of the First Chamber of the Supreme Court of Justice, which confirmed the taxability of income obtained outside Costa Rican borders when the economic structure or the capital to generate that income came from inside Costa Rica. For the time being, taxpayers should report income with these characteristics as taxable.

This issue is not relevant in Costa Rica, as it is a non-EU jurisdiction.

This issue is not relevant in Costa Rica, as it is a non-EU jurisdiction.

This issue is not relevant in Costa Rica, as it is a non-EU jurisdiction.

This issue is not relevant in Costa Rica, as it is a non-EU jurisdiction.

Costa Rica does not apply these procedures.

Costa Rica does not apply these procedures.

Costa Rica does not apply these procedures.

Costa Rica does not apply these procedures.

Costa Rica does not apply these procedures.

There are currently no publicly published projects including this type of procedure in Costa Rican practice.

Costa Rica does not apply these procedures.

Costa Rica only applies domestic rules to settle tax disputes.

Costa Rica does not apply international tax arbitration.

The approximate costs to litigate at the administrative level depend on the amount of additional tax fee considered owed by the Tax Authority and the complexity of the assessment made by the Tax Authority. However, in cases where the additional tax exceeds USD1 million legal fees for the administrative procedure are generally between USD10,000 and USD20,000.

The approximate costs to litigate at the judicial courts depend on the amount of additional tax fee considered owed by the Tax Authority and the complexity of the assessment made by the Tax Authority.

In cases where the additional tax exceeds USD500,000, legal fees for the judicial process can be between USD20,000 and USD50,000. These fees are always paid by the taxpayers who are interested in annulling the assessment.

The amount and the moment of payment are agreed between the lawyers and the client; however, common practice is for the client to pay the agreed fees at each stage of the procedure.

The winning party in the process recovers the amount paid for legal fees, either totally or partially; however, it will depend not on the amount of legal fees paid by the taxpayer, but on the economic interest of the process. No interest over legal fees is recognised for the winning party.

The taxpayer could request the indexation of the paid amount and interest from the moment the additional tax was paid.

Alternative forms of dispute resolution for tax matters are not applicable in Costa Rica.

Published data regarding pending court cases usually focuses only on public law cases. Data regarding tax cases has not been made public.

This data has not been made public.

This data has not been made public.

The main recommendation is to request advice on both accounting and legal matters when facing an audit. However, general strategic guidelines in tax controversy are to:

• surrender only the documentation requested by the Tax Authority;
• answer precisely when consulted about transactions by the Tax Authority;
• sustain the applicable appeals with case law to support the arguments; and
• record every detail that occurred during the procedure that may entail an annulment based on procedural motives.