01 June 2022
TMF Group BV
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The Latin American country is encouraging investment
with its free trade zone setup, offering tax and operational
advantages for companies looking to do business in the
jurisdiction, under the rules of the regime.
In Costa Rica, it is becoming increasingly attractive for
companies to operate under a ‘Free Zone Regime’ (FZR). The
FZR is a set of benefits and incentives granted by the Costa Rican
government to companies making new investments in the country, as
stated in the Free Zone Regime Act NN°7210 Act
NN°8794 and in its bylaws.
The FZR accounts for approximately 50% of Costa Rica’s
commercial shipments abroad, but firms that are under the free zone
status and jurisdiction – and stand to benefit from the
incentives – must comply with legally stipulated requirements.
Benefits
Major benefits of the scheme include a number of tax incentives,
among which is exemption from:
- Value Added Tax (VAT)
- Income tax
- Remittances abroad
An entity that operates under the FZR in Costa Rica benefits
directly from general and administrative expenses of the income
statement, due to the exemption of 13% of VAT granted by the regime
on these areas. In some cases, this applies to the income tax rate,
with the applicable corporate rate at 0% for operations within the
regime.
Obligations
Entities must comply with set obligations in order to operate
within the regime. These include designing, implementing and
maintaining the relevant internal controls relating to property,
plant and equipment; internal controls at an administrative level;
and closely following what the different local laws and regulations
stipulate.
With this approach, entities can not only ensure their
permanence within the regime, but also mitigate reputational risks
to which they are exposed, that could derive from administrative
processes with government authorities.
Complying with the FZR: general recommendations
Here are some general recommendations that can guide you in
compliance tasks, helping you ensure your entity maintains the
current benefits offered by the Free Zone Regime:
- The local regulation comes first: it is quite
usual for regimen companies to have their headquarters outside of
Costa Rica, with financial reporting frameworks based on accounting
regulations of other jurisdictions. However, tax and statutory
rules of the special regime require entities to have and present
financial statements in Costa Rican colóns, based on
International Financial Reporting Standards (IFRS).A hurdle to overcome is the conversion processes of financial
information to a framework of accounting policies under IFRS. This
means working with the ‘conversion adjustments’ on items
where there are differences in recognition or measurement of
economic events. Examples of these differences may be functional
and presentation currency, share-based payments, capitalisation of
right-of-use assets, or differences in useful lives.
- Being exempt from taxes does not mean being exempt from
controls: in the instance of property, plant and
equipment, although your company may have expressly authorised a
different capitalisation policy than the one referred to in the
Income Tax Law (LISR), this does not mean that low-value assets
have been exempted from absolute control. When Promotora del
Comercio Exterior de Costa Rica (PROCOMER) audit visits take place,
it’s important to have an auxiliary register of such assets,
which can become critical when samples are reviewed by that
authority. Therefore, the control of assets and inventories within
the regime merits particular attention, as they can be high
risk.
- Not everything is for free: the regime offers
a range of attractive exemptions (around 43% across VAT and
income), but not everything that is purchased is exempt from taxes.
It is important that, in the face of an audit, your company has
sufficient internal controls that allow it to guarantee that only
those expenses that meet the deductibility criteria of the LISR
have been purchased VAT-free. Namely, those that are useful,
necessary and relevant for the operation of your business. In a
practical example, the VAT that private insurance companies usually
pay as an incentive for their employees does not meet this
criterion, so the corresponding VAT should be paid.
- Control of property, plant and equipment (PPE) is the
entry ticket: it is vital to maintain control of assets
based on local legislation, in accordance with the LISR regulations
and its annexes. This should cover differential adjustments,
sufficient details of identification (label, description, serial
number) and its effects on deferred taxes. It is often incorrectly
assumed that, because it is exempt from income tax, temporary
differences should not be calculated for useful lives. If the
fiscal effects prevail beyond the executive agreement it does have
to be accounted for.The completeness of the PPE must be periodically ensured through
physical counts, using sampling techniques from accounting books.
This is a fairly common audit procedure in inspections carried out
by the regime authority. In our experience, if a PPE auxiliary
register is not complete and accurate, management can be expected
to receive subsequent visits, follow-up audits, and administrative
proceedings for non-compliance.Bear in mind that the value of PPE is the calculation base for the
investment level, and this is the authority’s incentive to
renew the benefits in whole or in part, once the executive
agreement has reached its limit.
- Other rules to consider: Within the regulatory
framework of the FZR, there is the obligation of the beneficiary to
comply with all the legal obligations that the country demands to
maintain tax exemptions. Therefore, it is important for your
company to periodically carry out a preventative review of
compliance with the obligations related to the FZR. This includes,
among others, the General Health Law, the Occupational Health
Standard, the Smoking Regulation Law, administration of warehouses,
security service, labelling of the authorised area, entry/exit
registration, telework law and the correct calculation of labour
benefits, maternity wards and discrimination rules.
Talk to us
At TMF Group we work with several companies that operate under
the Free Zone Regime. Our team of experts has the knowledge and
experience that can help you avoid or minimise compliance risks,
which, if they materialise, can lead to sanctions that could impact
the operation of your entity at regime level.
Contact us today to find out how we can help
your business stay compliant.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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