1. What is the tax authority in your jurisdiction, and can you give a general description of its structure? Provide a general assessment of the authority?
In Costa Rica, the competent tax authority is the General Directorate of Taxation (DGT), which is an agency of the Ministry of Finance. This agency is entrusted with the administration, control and collection of taxes within the national territory. The DGT’s organisation is made up of 11 regional Tax Administrations that are in charge of the collection of taxes within their respective region.
To carry out their mission, the Tax Administrations are, among other things, legally enabled to:
- require any individual or company, whether or not registered as a taxpayer, to comply with their tax-related obligations;
- carry out tax audits for open tax years and require information from the taxpayers, as well as related and/or unrelated parties, in order to assess the correctness of their tax returns;
- require the payment of unpaid taxes plus the corresponding interests and penalties;
- administratively interpret the provisions of the tax laws and regulations and issue private letter rulings regarding specific enquiries of taxpayers; and
- characterise a taxpayer's non-compliance as a criminal felony and request the Prosecutor's Office of Costa Rica to investigate the case, subject to the amount of the tax assessment carried out and the nature of the transactions or actions that may have resulted in said assessments.
In recent years, the Costa Rican Tax Administrations have been very aggressive in collecting taxes. Tax audits in Costa Rica have been focused primarily on the application of the territorial principle, transfer pricing, deductibility of expenses, corporate reorganisations, withholding taxes related to remittances abroad and dividend distributions, application of tax credits, among others.
A tax audit in Costa Rica may last from six months to one year. Tax litigation at the administrative appeal level may last up to three years, and five years at the judicial level.
2. Can you outline the typical process involved with tax disputes in your jurisdiction, from filing, to notice of deficiency, to litigation? Are there alternative procedures?
As provided by the tax reform in Costa Rica (known as the Law on the Strengthening of Public Finances) which took effect on 1 July 2019, the statutory tax year follows the calendar year from 1 January to 31 December each year with income tax returns being due no later than by two months and 15 days after the closing of the year. Value added tax returns must be filed on a monthly basis.
After the filing of tax returns, the tax authorities have the legal right to assess their correctness and start a tax audit if deemed necessary. If they decide to perform a tax audit, a formal notice must be provided to the taxpayer together with an information request.
Typically, the information required by the tax authorities consists of balance sheets, profit and loss statements, trial balances, book-to-tax reconciliations, detail of assets, sales and purchases, payroll, benefits granted to employees, transfer pricing studies, detail of withholding taxes paid for wages, remittances abroad, dividends and interests, invoices, contracts, bank transfers, legal and accounting books, among others. Upon being served notice, the taxpayer has a 10-business day period to provide the tax authorities with the requested information who then have to make an in-depth review of the information given. Thereafter the tax authorities may make additional information requests or request further explanations from the taxpayer to obtain a correct understanding of the information provided.
In the event of an outstanding balance of taxes to be paid identified in a tax audit, the tax authorities will serve the taxpayer a regularisation proposal. The taxpayer may totally or partially accept and pay the assessment of the tax authorities, or may reject it and pursue litigation. If at this later point the taxpayer accepts the assessment carried out by the tax authorities (totally or partially), the law grants significant discounts that apply over the penalties imposed as a result of the tax audit.
If the regularisation proposal provided to the taxpayer is rejected, the tax authorities will give notice of the corresponding notice of deficiency. At this point, the taxpayer may decide to accept the assessment and pay, in which case significant discounts will be applicable over the penalties imposed by the tax authorities. Conversely, if the taxpayer decides not to pay and continue with the administrative appeal procedure, no discounts will be granted if in further stages of the process the taxpayer decides to accept the assessment and pay any outstanding balance.
The administrative appeal procedure consists of the following stages:
- Administrative claim: after being served the notice of deficiency, the taxpayer has a 10-business day period to file an administrative claim challenging it. Once filed, the tax authorities are obliged to review the administrative claim filed by the taxpayer. If their decision is to confirm the assessment, the tax authorities will give notice of the corresponding Letter of Determination, which should contain a technical explanation of the reasons why the claim filed by the taxpayer is being rejected.
- Appeal: against the Letter of Determination, the taxpayer may file an appeal within a 30-business day period. The tax authorities will be obliged to review the appeal filed by the taxpayer and will have to issue a duly substantiated resolution. If the tax authorities’ decision to confirm the assessment, the taxpayer will be served a confirmatory resolution.
- Extraordinary appeal: against the confirmatory resolution, the taxpayer may file an extraordinary appeal within a 30-business day period before the Administrative Tax Court (Tax Court). This will be the last remedy available at the administrative level. A resolution from the Tax Court will exhaust the administrative appeal procedure. At this point, if the Tax Court totally or partially confirms the tax authorities’ determination, the taxpayer would be required to pay the amounts due.
After making the corresponding payment, the taxpayer may continue the litigation process at the judicial level. The judicial process consists of the following stages:
- Filing of the judicial lawsuit before the Judicial Court (Tribunal Contencioso Administrativo).
- Preliminary hearing: at this stage, it is possible to clear any potential procedural and formalistic related issues, clarify and adjust the lawsuit, define the participation of third parties such as expert witnesses, resolution of preliminary defences and determination of the facts in controversy and admission of evidenceto determine if the process is going to be acknowledged as a legal trial in which matters of law are going to be addressed; or if it is necessary to have an oral and public trial in which evidence is offered orally to the court.
- Oral and public trial: at this stage, the parties involved in the tax dispute will be able to share with the court members the legal and technical arguments supporting their claims. Witnesses admitted as evidence during the trial can be examined and cross-examined. In complex tax-related matters, the Judicial Court will have a 15 business-day period to issue the final ruling.
In the case of an unfavourable outcome, the affected party may file an extraordinary appeal before the First Chamber of the Supreme Court of Justice within a 15 business-day period. The ruling issued by the First Chamber of the Supreme Court of Justice will exhaust all legal remedies available and finally close the matter.
3. Are there alternative dispute resolution mechanisms prior to trial, such as mediation or arbitration? Are such processes mandatory or contingent on the agreement of the parties?
According to the Costa Rican Administrative Procedures Appeal Code and the Alternative Dispute Resolutions Law, it is technically possible to settle legal or tax disputes prior to the trial taking place through a mediation process. Such processes are contingent on the agreement of the parties. Nevertheless, commonly the Attorney General’s Office refuses to enter into mediation processes in tax related disputes.
In criminal cases, the taxpayer subject to an investigation for tax fraud may request the Prosecutors’ Office to apply a full damage repair procedure, in which case the taxpayer may avoid being indicted and going to trial by means of the full payment of the unpaid taxes, interests, penalties and an additional charge related to social damage repair.
Generally, the social damage repair charge amounts to 30 per cent of the total amount of unpaid taxes and interests.
The full damage repair procedure may only be applied once every five years. If the taxpayer to whom this benefit was granted is involved in a new tax criminal felony within the next five years, it would not be possible to request the application of such procedure, in which case and if the investigation results in an indictment, the taxpayer would have to go to trial and, if found guilty, could be imprisoned from five to 10 years.
4. What is the process for appealing trial court decisions?
In Costa Rica, trial court decisions in relation to tax-related disputes may be appealed before the First Chamber of the Supreme Court of Justice within a 15 business-day period after being served notice of the ruling. The ruling issued by the First Chamber of the Supreme Court of Justice exhausts all available legal remedies and will be considered as a final decision.
5. Is there a formal discovery process in tax litigation and controversy in your jurisdiction, and is it the same as that for general litigation?
There is no formal and comprehensive discovery process to be followed in tax litigation and controversy in Costa Rica. The discovery occurs as the tax litigation evolves through the different stages of the administrative and judicial phases. The evidence is shared by the taxpayer, the tax authorities and the courts as the controversy/litigation progresses.
The process is quite similar to the one encountered for general litigation.
6. Is attorney–client privilege recognised in your jurisdiction? Does it cover drafts of tax documents? Do any similar forms of privilege protect communications between other professionals, such as accountants, and their clients?
Attorney–client privilege is recognised in Costa Rica. The privilege acknowledges the obligation of an attorney to refuse to disclose confidential communications (verbal and written) with his or her clients or potential clients. Any type of communication or information provided to an attorney acting in his or her professional capacity may not be disclosed without the clients’ permission. Attorneys cannot be forced to disclose client private information in any type of judicial process.
Under domestic legislation, an attorney will be enabled to forfeit the attorney–client privilege only in the following cases:
- when required for the attorney’s self-defence at a judicial process or to avoid the conviction of an innocent person; or
- when the client reveals to his or her attorney his intention of committing a crime.
The privilege stays in effect even after the ending of the attorney–client relationship.
Accountants have the professional obligation to keep their client information confidential or to communicate to the corresponding authority any possible violation of law that may arise and that must be disclosed. Nevertheless, this duty of confidentiality may be disregarded if required by law or a court of law.
7. Are there formal rules of evidence and procedure? Are they different from general litigation rules?
Yes, there are formal rules of evidence and procedure to be followed. See question two for the latter. The concept of admission of evidence is broad in Costa Rica. At the administrative level, all types of evidence necessary and relevant to support the tax positions taken are admissible, which includes documentary or expert evidence.
The foregoing applies at the judicial level where (i) cross-examination of witnesses and expert witness can also be conducted and (ii) the evidence taken into account needs to be related to the facts being debated, can be excluded when duplicative or unduly burdensome for the resolution of the controversy.
8. Does the judge or opposing counsel question witnesses in tax litigation?
As provided by the Administrative Procedures Appeal Code, witnesses will be questioned in the following order:
- first, by the party who offered its testimony as part of the evidence submitted in the judicial process;
- second, by the opposing counsel who may cross-examine such witnesses; and
- lastly, if deemed necessary, court members will be entitled to question the testimony of the witnesses in order to fulfil the goal of discovering the truth.
The examination or cross-examination of witnesses should not contain confusing, suggestive, impertinent or denigrating questions. The parties will be enabled to challenge the examination of the opposing counsel or the judges themselves if the questions being made correspond to the foregoing circumstances.
The testimony of witnesses or expert witnesses has to be taken into consideration by the court members upon issuing the corresponding ruling who must explain the reasons such testimony had a significant or insignificant influence in their decision.
9. Can criminal charges be levied under tax law, and how often are criminal sanctions sought?
In the event tax authorities recharacterise any of the transactions carried out by the taxpayers and provide the Notice of Deficiency, any of the following surcharges for penalties may be assessed under section 81 of the Tax Code of Standards and Procedures:
- Mild: 50 per cent penalty calculated over the amount of unpaid taxes determined in the Notice of Deficiency.
- Serious: 100 per cent penalty calculated over the amount of unpaid taxes determined in the Notice of Deficiency.
- Very serious: 150 per cent penalty calculated over the amount of unpaid taxes determined in the Notice of Deficiency.
- Regular interest (eg, the interest rate applicable as of the date hereof is 12.2 per cent). This rate is adjusted every semester.
- Penalty interest (ie, 1 per cent per month, up to a maximum of 20 per cent).
According to section 92 of the Tax Code of Standards and Procedures, if the amount of unpaid taxes exceeds five hundred base salaries in the same fiscal year (less than US$385,000) and the tax authorities determine that the transaction may constitute a criminal felony as defined in the foregoing statute, they may then request the Prosecutors Office to initiate a criminal investigation to determine if the administrative claim should be converted into a criminal case.
It is important to take into consideration that not every tax assessment exceeding US$385,000 will be considered a criminal felony and sent to the Prosecutors’ Office. To be considered as such, the tax authorities will have to demonstrate that the transactions or actions that may have resulted in said assessment derived from an illegitimate intention of the taxpayer to commit tax fraud. Taxpayers found guilty of committing tax fraud may be imprisoned from five to 10 years.
In recent years, the tax authorities have sent several cases to the Prosecutors’ Office to initiate the corresponding criminal investigation for tax fraud.
10. Does the same agency prosecute both criminal and civil tax litigation?
No, in Costa Rica criminal and civil cases are managed by different agencies. Non-criminal tax litigation cases will follow the general administrative and judicial proceedings and may be resolved in last instance by the First Chamber of the Supreme Court of Justice. On the other hand, tax related criminal cases will be sent to the Prosecutors’ Office and will have to be handled by such agency. In last instance, tax related criminal cases may be resolved by the Third Chamber of the Supreme Court of Justice.
11. Are trials heard by the general courts, or are there specialist tax courts?
Tax-related trials in Costa Rica are heard by general courts because there are no specialist tax courts.
12. Which party has the initial burden of proof on common tax issues? What level of proof must be established?
In a tax audit, the tax authorities bear the burden of the proof. This entails that they have to request from the taxpayer all the relevant information they need to substantiate their tax position. Once they issue their tax assessment, the burden of the proof shifts to the taxpayer that needs to demonstrate the inexistence of the alleged tax liability.
In practice, however, the tax authorities often fail to provide clear and convincing evidence to support their position and tend to dismiss arguments and evidence raised by the taxpayer.
13. Is interest available to the taxpayer following a successful claim for overpayment? If so, how are the rates calculated, and when do they begin to accrue?
Interests apply in cases of overpayment or underpayment of taxes. In the event of an overpayment, interests will accrue from the moment where such taxes were unduly paid until the date of the reimbursement. In the event of an underpayment, interests will accrue from the moment where such taxes had to be paid until the payment is made.
The currently applicable annual interest rate is of 12.2 per cent. It is adjusted every semester.
14. Which is the competent authority for resolving tax treaty claims in your jurisdiction? Outline how the authority operates in practice.
The competent authority for the resolution of tax treaty claims in Costa Rica is the DGT. In the case of disagreements or differences between the parties as to the interpretation or application of the provisions of the corresponding tax treaty, the mechanism to resolve such differences will be a mutually agreed procedure to be defined in each treaty.
15. Can tax law or regulations be applied retroactively, and under what circumstances?
The Costa Rican Political Constitution establishes that no law will be given a retroactive effect to the detriment of any person, their existing rights or consolidated legal situations. Therefore, tax laws or regulations cannot be applied retroactively in Costa Rica.
16. What is the statute of limitations on tax claims, and what are some common ways it can be tolled? Are there exceptions to tolling?
Under domestic legislation and in particular the rules of the Tax Code of Standards and Procedures, the tax authorities may review, question and amend the transactions carried out and tax returns filed by a taxpayer, which may potentially result in a rejection of the positions assumed and in the assessment of tax liabilities, interest, surcharges and penalties.
To this end, the Tax Code of Standards and Procedures establishes an ordinary statute of limitations of four years. The ordinary statute of limitations may be extended to 10 years under qualified circumstances (ie, fraud or non-filing of tax returns). The statute of limitations (whether ordinary or extraordinary) starts running on the first day of the month following the due date of the relevant tax return and its corresponding payment, without taking into account the actual date of payment or filing.
The corresponding statute of limitations will be considered interrupted when any of the following circumstances occur:
- when the tax authorities give notice to the taxpayer of the start of a tax audit. If such tax audit does not start within the next month, or if once started the audit procedure is suspended for more than two months, the notice of the tax audit will not be considered as having interrupted the applicable statute of limitations;
- determination of the tax due by the taxpayer;
- the taxpayers express acknowledgement of the tax liability;
- the request to defer payment or to pay through instalments the corresponding tax liability;
- administrative or judicial notices intended to enforce the payment of the tax liability; or
- any petition, request or challenge by the taxpayer of an administrative act of the tax authorities.
When an interruption of the statute of limitations occurs, the time lapsed prior to such interruption will not be taken into account. A new statute of limitations will start running. A criminal investigation for tax fraud will suspend the applicable statute of limitations as from the date in which the tax authorities filed the corresponding request to investigate the case before the Prosecutors’ Office until a final ruling ending the criminal proceeding is rendered.
When a suspension of the statute of limitations occurs, the time lapsed prior to such suspension cannot be disregarded.
17. Is litigation over VAT or other non-income taxes significant in your jurisdiction?
Tax litigation in Costa Rica has been focused primarily in income taxes, specifically in the application of the territorial principle, transfer pricing issues, deductibility of expenses, corporate reorganisations, unjustified capital increases, withholding taxes related to remittances abroad and dividend distributions, among others.
Litigation over non-income taxes has not been as significant as litigation over income taxes, but there are currently significant litigation cases in this regard pending resolution. Audits and litigation related to non-income taxes have been focused mainly on the obligation of the taxpayer to express discounts granted to their clients in the corresponding invoice to reduce the taxable base, application of tax credits and taxation of certain services not expressly included within the limited list of the General Sales Tax Law (GSTL).
We consider that as a result of the recently enacted tax reform in Costa Rica, tax litigation over non-income taxes will gain a much greater significance. This tax reform, which took effect on 1 July 2019, replaces the GSTL with a Value Added Tax Law (VATL).
The GSTL stated that the sale of all types of merchandises (with some exceptions), the rendering of services that fell within a very limited list of taxable services and the importation of goods into Costa Rica, were subject to a 13 per cent general sales tax.
With the VATL, the sale of all types of goods and services within Costa Rica is now subject to VAT and only a certain amount of goods and services will be exempt. The standard rate is 13 per cent. The VATL, besides the increase of the taxable base to cover the rendering of services within the Costa Rican territory, introduces a totally new VAT return as well as complex rules related to exemptions, reduced rates, reverse charge mechanism, self-consumption, tax credits, proportionality, taxation of digital services, the interpretation and daily application of which is still uncertain.
The complexity of the VATL, the enlargement of the taxable base, as well as the lack of clarity as to how to interpret and apply certain newly included provisions of such law or its regulations, may cause a significant increase in the tax litigation cases related to VAT issues in the coming years. Taxpayers must necessarily seek proper professional advice and take the necessary actions to be fully compliant with the current and future tax requirements in Costa Rica, not only in relation to VAT but to any other applicable taxes.