The Progressive Liberal Party has filed a bill to generate an authentic interpretation of Article 1 of the Income Tax Law, under Legislative File No. 23,187. As its name says, the bill is an authentic interpretation of Article 1 of the Income Tax Law, properly referring to the territoriality or subjection criterion for Income Tax purposes.
In the world we know of several systems for relating the income of individuals and companies to a territory. Two are mainly used: the residency system, applied in Spain, for example, where the residents of that country are taxed on their income. country report The source or territorial tax, like ours, where only what is made in Costa Rica and not abroad is reported.
Thus, according to the first article of our Income Tax Law, the object of the tax on profits is the income from lucrative activities, in money or in kind, continuous and occasional, from any Costa Rican source. In other words, if a service is rendered abroad, it is not paid on what is paid for it, or if a capital generates interest in another country, neither.
This, which seems so clear in the norm, is not so in the development of administrative and judicial jurisprudence. After all, just like the scores of a musical piece, the rules are interpreted and depending on who is "playing" it will sound very different. But interpretation cannot lead to limiting or broadening the scope of a rule.
The bill intends to clarify the scope of the territoriality criterion, due to the fact that the General Directorate of Taxation, its different Tax Administrations and even the judicial instances (Contentious Administrative Court and First Chamber) have extended the criterion by taxing income obtained outside the Costa Rican territory under the argument that there is an alleged economic connection, according to the legislative file. The text proposed by the legislators indicates textually that "only the income resulting from transactions or contracts whose source is located in the Costa Rican territory will be taxed with the income tax". This clarification is necessary given the contrary criteria of our administrative and judicial jurisprudence:
- General Directorate of Taxation: income generated abroad constitutes Costa Rican source income when there is a direct link to the economic structure of the country. Costa Rica.
- Administrative Tax Court: income from exchange differential derived from investments outside the national territory, taxed with income.
- First Chamber of the Supreme Court of Justice: even when capitals have not been used in Costa Rica, and have been invested in a company located abroad, they come from a national source as they belong to a company domiciled in Costa Rica and must be taxed.
Thus, for example, if a company conducts surveys in other countries and then processes them here, the DGT will consider that as Costa Rican income, by attraction. If you have invested capital outside of Costa Rica, the income generated will be considered taxable as well.
This is not what our rules say about income generated outside the territory. Thus, we have two ways: either we respect the rules, or we change them, but we cannot legislate by means of interpretations. That is why we hope that the ladies and gentlemen of the Chamber of Deputies will approve this authentic interpretation.
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