It is customary to classify income taxes as either individual or corporate taxes, depending on who bears the burden of the tax. Due to Costa Rica’s scheduler income tax structure, this allocation is not entirely possible in Costa Rica. However, taxes on personal and corporate profits and on wages can be anyway classified. This is done in Table 4. However, some clarifications are needed: salaried workers in Costa Rica do not file a tax return and the tax is withheld at source. Only independent workers must file a tax return. Therefore, in Table 4 the total contributed by individuals is the sum of the withholdings from the salary of employees and pensions of retirees more than income tax from independent individuals. In any case, it is clear that still adding the withholdings from employees and the income tax from individual, (the sum totals 25.9 per cent of the collection related to this tax) the Corporate Income Tax contribution is much higher, equivalent to 49.5 per cent of the entire collection of personal direct taxes, or almost the double of the tax paid by individuals. The contrast with the European case, in which the individuals pay almost three times more taxes than companies, is clearly remarkable. This schedular income tax structure represents an important challenge to the tax reform currently in discussion and it will be described further on this chapter. The fact is that there is a strong internal and external pressure, in the sense of reducing the corporate income tax and compensates this revenue loss. This compensation requires a broader corporate income tax base and a constant raise on individual income tax collection, and both efforts are substantially challenging.
Table 4: Percentage distribution of the income tax collection 1998-2004
1998 1999 2000 2001 2002 2003 2004
Salary and Pension's Contribution 25,6% 23,1% 27,8%24,4%27,6%26,6%23,8% Other withholdings - a) 25,0% 21,1% 23,5%22,3%27,3%24,8%23,4% Individual and Corporate contribution, from which 45,0% 45,1% 46,4%40,3%43,8%45,5%51,6%
Corporate 43,2% 43,6% 44,7% 38,6% 41,9% 43,0% 49,6%
Individual 1,8% 1,5% 1,8% 1,6% 1,9% 2,5% 2,1%
Others - b) 4,4% 10,7% 2,2% 13,0% 1,3% 3,1% 1,2%
a) It includes securities withholding
b) It includes non domicile financial institutions tax
Income taxation in Costa Rica, ruled by Income Tax Law 7092, of 1988, has three main features: it is “Schedular” which means it is formed by several different income taxes; it is based on a
territorial principle; it is based on the Product-Income concept. A “schedular” system imposes different tax rates on different sources of income. The classification of the income is structured according to different criteria chosen by the legislator: for example, if income is obtained for personal services rendered in the capacity of dependent employee or as an independent worker, if it comes from labor or from capital and, related to this one, if it comes from regulated financial market transactions or not, etc.. The so called Income Tax, then, comprises several different taxes:
a) a tax on profits of both corporation and independent workers. These tax payers file a tax return and pay their own taxes;
b) several withholding taxes on: dividend income, interest, salaries, pensions, payment remittances to non-residents.
On the other hand, Costa Rican income tax system is based on territoriality: only income of Costa Rican sources is taxed. Finally, under “Product-Income”, only income from capital or labor services is taxed, while capital gains generally are not taxed.
3.1.1 Profits (or Net Income) Tax
This tax is imposed on some net income obtained by some individuals and corporations9. The types of taxable income are: income from services rendered by practicing professionals (since there is a specific tax in the Law for the income from dependent labor) and corporate income; capital income from real estate and movable property, and from the disposition of capital, through secured financing transactions different from financial market transactions, since the law includes a schedular tax on financial market profits under article 23. As a general rule, capital gains are not taxable. However, there are two exceptions from that rule:
a) habitual capital gains: defined under article 6 d);
b) depreciable assets: defined under article 8 f), when the taxpayer sells them for a price higher than their book value.
The tax is calculated on net income, defined as gross income minus all costs and expenses necessary to produce said income. In general, depreciation of tangible assets is recognized, however, revaluation is not. In regards to amortization of intangibles, it is recognized for software and invention patents, and it is not authorized for a restrictive list that
9 A tax is imposed on permanent establishments and branches of non domiciled entities. Additionally other
includes goodwill, trademarks, manufacturing procedures, copyrights, intellectual property rights, or formulas or other similar intangible assets.
The difference between the tax treatment for individuals and for corporations gives the applicable rates.For individuals, marginal tax rates from 0 % to 25 %10 apply as follows:
i) For income below and up to $3,58411 annually 0%;
ii) Income between $3,584 and $5,313 annually, 10%;
iii) Income between $5,313.01 and $8,928 annually, 15%;
iv) Income between $8,928.01 annually and $17,890 annually, 20%;
v) Income over $17,890 annually, 25%;
Minor deductions for family charges are allowed.12
The general corporate tax rate is 30%. However, businesses with up to up to $53,637 pay a 10% tax and those with gross income up to $107,894 pay 20%. As shown in Table 4, most of the collection comes from corporations, while collection form independent workers is quite smaller. Salaried workers pay roughly half as much income tax as corporations.
3.1.2 Withholding taxes
a)Dividends for private corporations are taxed at 15%, but are exempt when paid in stock or to another corporation. The rate is 5% for publicly traded corporations, cooperatives and “asociaciones solidaristas”.
b) Interest bearing instrument are taxed at 15%, except those traded in the Stock Exchange, which are taxed at 8%. Securities issued in foreign currency are exempt when issued by the Government or a State owned bank. All securities issued by the “Banco Popular y de Desarrollo Comunal” and the National Housing Financial System are also exempt.
c) Salaries, wages and executive compensation. In case of the income of regular personnel
(employees and officials) of the company and of the income from retirements and pensions of all regimens, the applicable rate is a progressive scale that starts at 0 % for income up to $ 809, then 10% (from $819 to $1,213) and finally 15 % (on the excess of $1,213). On the other
10 Applicable rates for the period 2006, starting on October 1, 2005. Established by Executive Decree No. 32693- H from September 19th, 2005. La Gaceta 198 from October 14, 2005.
11 Tax Brackets are defined in colones (local currency). Currency conversion used was the official average as of September 5th, 2006 (¢518.5 = $1)
12 $18 annually per dependant child. The credit is available only if the child is under age or can not attend his or her own necessities or is physical or mental disabled, or is studying and is not older than 25 years. If both spouses are taxpayers, only one can claim the credit. The credit for a depending spouse annually is $27. If the spouses are legally separate, the deduction can be applied only by the spouse that supports the other, according to the law. If both are taxpayers, only one will be able to credit it.
hand, the applicable rate to executives remunerations and income in kind is a flat 15 %, without any exempt amount.Minimal family allowances are permitted to be deducted from income to which the progressive rate is applicable: for children ($0.89 monthly per each child) for the spouse ($1.60 monthly). In case of income received from periods longer than a month, a deduction from income is allowed for every month. The employer is the withholding agent.
d) Foreign remittances tax. Income from Costa-Rican sources received by non-domiciled individuals or corporations is taxed at varying rates: 10% for wages, salaries and pensions, 15% for independent personal services, 25% for technical assistance, royalties, patents, 15% for interests and dividends, except for interest paid to a “first order entity”, declared as such by the Central Bank, 5% for transportation services and communications, 5.5% for insurance, 20% for movies, recordings, discs and the like, 30 % for the rest. If the income recipient cannot claim a credit for the remittance tax paid, Costa Rica exempts him. Also, it includes some exceptional cases of Costa Rican source: technical assistance, financial and other advisory services although clearly rendered in a foreign country in favor to a Costa Rican company.
3.1.3 Other income taxes
a) Special tax for non domiciled banks and financial institutions controlled by or related to local banking or financial group. This tax substitutes the foreign remittances tax and it consists on a flat annual amount of US$125.000. The Costa Rican institution is the withholding agent.
b) Investment funds regime ruled by the Securities Market Law. Except for profits subject to the tax imposed on the financial market interests, all other incomes received by the funds is levied by a return-auto liquidation tax of 5 %, including habitual & non habitual capital gains.
c) the amount referred as “others” in Table 4, includes the collections from non-domiciled banks and financial institutions. However, the current information does not allow us to do a precise calculation of the collection in each situation.