Taxation in Agriculture

Chapter 10. Costa Rica

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

10.1. Overview

The Costa Rican tax system consists of a set of over one hundred different types of contributions, between taxes and rates, that apply both at the national and the local level. However, few of them contribute significantly to tax collection. For 2018, of the revenue projected by the Ministry of Finance, 56% comes from taxes, while the remainder comes from domestic debt financing. In order to address this, a major tax reform was implemented in July 2019 under the Law on Strengthening Public Finance (Law No. 9635) which aims to improve fiscal actions and increase revenue.

In 2018 agriculture contributed 4.6% to GDP and employed 12% of the population. Land use dedicated to agriculture accounts for 47% (in 2014) of the total land area. Farm size is on average 25.9 hectares (in 2014) and 91% of farms are owned by the farmer.

Organic producers are exempt import taxes on equipment, machinery, work vehicles and inputs used in production. For the purposes of annual property taxes the value of farmland is based on its land use and not its actual market value. Agricultural businesses can carry forward losses for longer than non-agricultural businesses.

10.2. Income taxation

The new Law No. 9635, in Title II, Article 2 makes an amendment to Article 1 of Law No. 7092, Income Tax Law, which establishes a tax on the profits of natural and legal entities and includes the collective entities without legal status. Under the previous law, these were not included. This reform does not include the income of non-residents since this tax is territorial.

Income taxation in Costa Rica is based on the concept of “income/product” where only revenue resulting from the use of productive factors is taxable. This is a territorial, schedular tax (whereby income from different sources is taxed separately) with different tax bases and rates applied by level of revenue.

A capital gains tax calculated on the difference between the value of specific equity components at two points in time entered into effect from July 2019. A rate of 15% is applied on real estate sales and investment income.

Remittances abroad of any income originating in Costa Rica are subject to tax withholdings at variable rates depending on the type of revenue. Public entities (except companies) and civil organisations (cooperatives and solidarity associations) are not subject to this contribution.

With Law No. 9635 the profits paid by the cooperatives to associates are subject to a 10% tax rate and the profits paid by the solidarity associations are taxed by progressive rates of between 5% and 10% on dividends.

Enterprises under the Free Trade Zone modality are subject to total or partial tax exemption, depending on whether they are located or not in the Expanded Greater Metropolitan Area (GAMA).

Taxes on legal entities are calculated based on a defined scale that provides the system a certain degree of progressiveness. With Law No. 9635, the scale of monthly income rates for the collection of income tax for both individuals and legal persons is expanded.

Taxes on natural persons with gainful activities are calculated based on net revenue. As a result of the latest reforms, which broaden the tax base, there are four tax brackets with tax rates of between 10% to 25% applied after a certain income threshold.

According to Article 8, sub-paragraph g) of Law No. 7092, Law on Income Taxes, when an agricultural enterprise experiences losses in a given fiscal period, these are deductible from taxes over the next five periods. The Tax Administration will determine any losses and these will be accepted provided they are duly accounted as deferred losses. This measure is not exclusive to the agriculture sector and non-agricultural enterprises can also deduct losses but only during the next three fiscal periods.

For tax purposes producers of organics receive special exemptions under Law No. 8591 “Law on the Development, Promotion and Advancement of Organic Farming”. Groups of organised organic producers (GPO) registered with the Ministry of Agriculture and Livestock are exempt from the following taxes:

• Import taxes on equipment, machinery and inputs used in different stages of production and agro-industrialisation of organic farming products.

• Import taxes on work vehicles with a load capacity equal to or greater than 1.8 tonnes on the proviso that the vehicle is not sold within four years from its purchase. In the event that the vehicle is later sold to a third party not subject to similar tax exonerations, the corresponding taxes, rates and surcharges must be paid.

10.3. Property taxation

Annual property taxes are levied by municipal governments at a rate of 0.25% of the property value. The municipal government maintains a property valuation database on which it determines taxes. Law No. 9071 “Special Regulations on the Enforcement of Law No. 7509 and its Reforms for Farmlands” regulates property valuation of agricultural land which is based on the land use, not its market value. Farm land valuation takes into consideration the following variables: type of farm, land use, production, land use capacity, regularity, slope, access to roads and hydrology. This valuation methodology entered into force on 3 March 2017.

Also farmers can be eligible for a 40% reduction of the annual property taxes if they are certified by the Ministry of Agriculture and Livestock as using farming practices which manage and conserve soil. This exemption is still valid but owners of agricultural land prefer to use Law No. 9071 to value their land and apply the land tax, since both exonerations cannot be used at the same time.

Transfers of property are taxed at a rate of 1.5%. The tax base is the value that the parties specify in the title deed, however, the Tax Administration carries records of the minimum values applicable. Transfers of agricultural land are not exempt from transfer taxes.

10.4. Tax on goods and services

In July 2019, the general sales tax was replaced by a value added tax (VAT) applying to a larger range of goods and services. The standard rate of the VAT is 13% with reduced rates of 4%, 2% (applying to raw materials and machinery used for production, etc.) and 1%. The reduced rate of 1% applies to the sale and importation of goods and related services throughout the production chain of basic foodstuffs until they are available to the final consumer. In addition, 1% applies to veterinary products and agricultural and fishing inputs, with the exception of sport fishing.

Some goods and services are exempt from VAT, including goods and services for export to free trade zones and services for livestock auctions.

Law No. 8114 of July 2001 establishes a single general specific tax by fuel type, either produced locally or imported. Agricultural producers are not exempt from fuel taxes.

There are excise duties on alcoholic and non-alcoholic beverages, tobacco and on selective goods produced domestically or imported.

10.5. Environmental taxes

There are no environmental taxes in Costa Rica.

10.6. Tax incentives for R&D and innovation

Costa Rica does not offer any tax incentives to facilitate private investment for R&D or the introduction of innovation.

10.7. Other taxes

Costa Rica does not provide any tax concessions to the agriculture sector through its social security system.