New Proposed VAT Could Raise the Cost of Housing in Costa Rica

A new Value-Added-Tax (VAT) advocated by the Solis administration could result in higher electric, rental, and water payments for many people in Costa Rica. The new VAT would begin at 14 percent during its first year and increase to 15 percent by the second year. Almost every product or service sold in Costa Rica would be subject to the new VAT.

Exemptions that would apply to a small number of goods and services have been proposed by the Ministry of Finance. Those goods and services include water, rent, and electricity. If those exemptions are approved, it would exempt most Costa Ricans from being forced to pay the VAT for housing costs.

Despite the possible exemptions, the VAT could still result in heavy cost increases for many people in Costa Rica.

An exemption would be made available for potable water in households consuming 30 cubic meters or less. According to the Ministry of Finance, this includes 78 percent of Costa Rican households. Ultimately, this means that more than 20 percent of households would face an increase of 15 percent in their water bills.

The ministry has also proposed an electricity exemption for households using less than 250 Kwh. This represents about 71 percent of households in Costa Rica, leaving almost 30 percent of households facing an increase in electricity bills of about 15 percent.

Landlords leasing properties for more than $764 per month would now be required to collect a VAT from tenants. Only tenants paying less than $764 per month would be exempt from the VAT. The Ministry of Finance estimates that approximately 40 percent of tenants would be subject to the tax.

The proposed VAT comes by way of an expansive tax reform package supported by the Solis administration in an effort to control a rapidly expanding fiscal deficit problem. Along with the VAT, the Solis administration has proposed a number of other reforms that include doubling the transfer tax on vehicles and real estate, as well as income tax increases. In addition, there could possibly be a 15 percent tax on all types of capital gains.

Such reforms have resulted in significant opposition, particularly from the Legislative Assembly. Lawmakers opposing the reform have called on the Solis administration to reduce public spending, including salary cuts for public servants.

Daveed Hollander

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