VAT on construction services

September 14, 2021

In his web column in the “La República”, accountant Carlos Morales Martínez expressed his opinions regarding the beginning of VAT collection on construction services.

1. Taxation of construction services

As it is a matter of public knowledge, as of September 1st, the 4% VAT for the construction sector began to be collected. It should be taken into account that, in Transitory V of the Law for the Strengthening of Public Finances No. 9635, engineering, architecture, topography, and civil work construction services, rendered to projects registered in the Costa Rican Association of Engineers and Architects, could enjoy the benefit of exoneration and gradual application of the tax rate.

2. Preliminary measures

The new control measures demand that all companies in the construction sector take the necessary measures to make the corresponding accounting records and, above all, to proceed with the VAT charge, which must be reflected in the Electronic Invoice. Likewise, it is necessary to proceed with the registration of the tax credit, specifically the application of the 4% proportion and the right to a tax credit of 4%, whenever the construction service is taxed at the reduced rate of 4%. In this regard, Article 26 of Law 9635 states:

“Article 26- Tax credit in transactions subject to a reduced rate. In the case of transactions subject to the reduced rate referred to in Article 11 of this Law, the tax credit shall be that resulting from applying the reduced rate to the taxable base of the tax paid on the acquisition of goods and services used in carrying out the transactions subject to the reduced rate.”

According to the above, it can be stated that the tax credits must be supported with an electronic invoice in the name of the taxpayer and corresponding to the month of the tax return. Likewise, it is worth mentioning that the credit generating purchases must qualify as expenditures related to the business, in the sense of being necessary and pertinent for the generation of income.

3. Application of the regulations

According to the provisions of the VAT law regulations, engineering, architecture, topography, and civil work construction services shall be understood as follows:

  • Those services rendered by a professional or firm registered with the CFIA (Colegio Federado de Ingenieros y de Arquitectos – Federated Engineers and Architects Association) or those under the direction of a responsible registered professional to carry out all phases of a work or project, including all services necessary for the preparation of the plans required by the CFIA for their visa, from their conception to the final stage, as required by the Regulations on Consulting Services in Engineering and Architecture and its amendments, as well as those referred to contractors and subcontractors in the case of civil works construction.
  • In the case of subcontractors, the above treatment shall be applicable only in those cases in which they invoice directly to the owner of the project that enjoys the benefit of the graduality provided for.

4. Exception

Regarding the implementation of the new tax policies, many doubts have arisen regarding the concept of construction of civil works, specifically the items included. In official notices issued by the Tax Administration, reference is made to services generating an “ostensible value” to the work.

For this purpose, the Tax Administration has indicated that transportation and freight services are not directly related to the construction process, precisely because they do not add ostensible value to the work, they are not directly associated with the work, reason why they do not qualify for the gradual VAT rate, remaining taxed at 13% as consequence.

Source: La Republica 06/09/21