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Tax Evasion on Real Estate Transactions


Trevor
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TAX EVASION COMMITTED BY OR ON BEHALF OF FOREIGNERS

 

In the process of buying real estate in Costa Rica the typical foreigner often commits as many as three different types of tax evasion or tax fraud all of which I would suggest is 99% completely unknown to them. These offences normally are aided and abetted by advisors, professionals and sellers of property all of which do or certainly should know better. Hence it is more than a little difficult for the buyer to know exactly what and or why what has been done is in fact illegal. Since these activities are often completely ignored, or at least viewed apathetically, I thought it would be prudent to clearly point out to readers exactly what is wrong with this situation so that they at least know what to look for rather than continue on in blind oblivion. I really don’t think that most people starting a new life or adventure here really would choose to get off on the wrong foot as an evader but nonetheless they are lead down that path of ignorance quite easily and acceptingly.

 

Recently President Pacheco was quoted in stating that tax evasion was like a national past time in Costa Rica just somewhat short of soccer. This fact is more than a little hard to deny as you see how easily this is done and how rampant it is. No doubt some of the long time expats know very well what has gone on yet I often read on various BBS such people complaining of course about roads, security, insufficient policing etc. etc. This has to be the height of hypocrisy. How can good citizens complain about what various levels of government are doing for them or providing services while at the same moment going out of their way to evade paying the taxes that feed the system they are demanding goods and services from? Compared to what most of us are accustomed to up North taxes here are actually quite low overall with one exception being the luxury tax on vehicles.

 

I know with coming from Canada taxation in various areas has just plain become offensive and downright stupid hence one reason I am here. Eg. Out of a $100 plane ticket $23 goes to the airline while the rest is taxes and fees. Meanwhile we see excess government waste becoming the norm thusly some fool has to pay for these fools wasting our money. Heck we even have a Prime Minister that registers his many ships in Panama so that he doesn’t have to pay Canadian taxes. In the states you have a Patriot Act (pork barrel) fund that donates money to communities for increased security that spend funds on necessary things like lawn mower competitions and garbage trucks with electric windows and air conditioning in New Jersey. Meanwhile I do not see this as an even remotely similar problem here in Costa Rica when I go to various government agencies and see them running on a very lean budget, often understaffed and in facilities that are hardly lavish. So I ask you if there is no sign of rampant waste should we not be paying our fair share to maintain and improve services and infrastructure based on the laws that are existent. As the opponents point out, we don’t really need a new tax plan, we just need to collect based on what is already law. More law is never better for the people, that you can rest assured, no matter where you live.

 

At any rate on with the three common methods of tax evasion:

 

1. Real price paid for property - Lying about the actual purchase price of the piece of real estate you are buying when you register your property at the Registro (Land Titles) is very common. No matter how you sugar coat it this is absolutely illegal and in law is most similar to lying about your income on your income tax form. If you would not do this where you come from why would you choose to do this here???? Lowering the registered price lowers the fees due which are 3.77% of the registered value. Therefore most lie about this to lessen the fees and transfer taxes as well as to lower the lawyer’s fees. It confuses me as to why most lawyers go along with this, it is kind of like shooting yourself in the professional foot, is it not? Rest assured though it is the owner that will have to answer for this in the end. Now if you purchase the property in the name of a company (S.A.) it is perfectly legal to later sell the shares of the company onto a buyer who would then control the property without having to pay these fees and taxes. This is the huge difference between intelligent, well thought out tax planning and stupid tax evasion!

 

2. Lowering the registered value- This also commits a second and in my opinion even more offensive dodge of property taxes due to the local municipality who will charge you based on the registered value at Registro. All evidence I have seen is that municipalities are extremely cash strapped meanwhile few property owners report true market values. Property tax is ¼ of a percent of the declared value per year. I have been at cocktail parties and had people brag about how low their taxes are while living in a $350,000 house paying $200 a year. Talk about ridiculous, should one brag about this? Even at the proper declared value the rate would have been $875 a year, is that not good enough considering that a similar property in most Canadian cities would run $3,000 to $10,000. Then we wonder why our potholes don’t get fixed. I know of one development alone that is undervaluing hence short changing the municipality over $50,000 a year in rightful taxes meanwhile the owners have to drive through a river to get to their homes as the municipality doesn’t have the money to construct a $10,000 bridge or maintain roads after the developers equipment destroys them. The law states that the property owner is to declare the actual value of the property to the municipality every five years. Absolutely incredible, you get to self assess! Meanwhile in Canada you would have some all-knowing government authority show up to reassess your property and demand of you what WILL BE paid. Then just try to get justice if the system happens to be a little wrong on your particular piece or type of property. I speak from experience of a bad assessment and getting gouged for double what others were paying in my neighbourhood. None of which was corrected no matter how intelligent my argument or how stupid the justification was. The system here is, to say the least, a breath of fresh air so why not deal fairly and ethically with it and help your local municipality at the same time?

 

3. Evading income taxes- The final area of tax evasion is almost exclusively reserved when buying from expat developers here. I have experienced this going on here, I just don’t know how rampant it is. If you are buying property and the developer wants you to make payment(s) to a bank that is not in Costa Rica Eg. Bahamas, Cayman Islands, Panama or the U.S. a huge red flag should come up immediately. There is but one reason for this! The developer is evading taxes on their income rightfully earned here in Costa Rica. If the money does not come into an account in the country it is much more difficult for the Hacienda (tax department) to track it. The property being sold is here so the transaction must occur here. It cannot possibly be considered to occur in some other jurisdiction. In other types of business this may be a gray area but such cannot be the case with real estate, the property is here and cannot move around no matter what. If they are committing this offense it goes without saying they are also committing the previous two as well. I find this particularly offensive in that developers come here and often Gringoize prices well above normal Tico levels and easily get away with it because the buyers consider the prices still quite low in comparison to where they come from. However few realize how much cheaper the developer’s in-put costs are in comparison to elsewhere hence their percentage of profit in comparison could easily run 200% to 300% higher. Rest assured they are making lots of money off of your purchase! Well great if you can get away with it, that is hardly illegal, but for heavens sake do you not legally, morally and ethically owe it to pay your fair share of taxes on your profits to the country that is making all this possible in the first place. I know there is situations here were millions of tax dollars have been evaded. How many miles of the Coastanera Highway could be completed with these stolen funds or how many pot holes could be filled on the Lake Arenal road or a new southern airport? As the old saying goes “no snowflake blames itself for the storm or no raindrop for the flood.” My advice is simple, if you insist on buying property from a clearly sleazy developer INSIST that all payments are made to a bank account here otherwise run from the deal and find someone ethical to buy from there is still lots of them out there.

 

I submit to the reader that when we assist in these frauds we in the end help enrich someone who hardly deserves it while taking funds from the good people of Costa Rica as well as depriving ourselves of needed services and improved infrastructures. Does it not in the end amount to shooting yourself in the foot. Yes this is paradise for many but it does not mean that we can’t improve a few things without destroying what has brought many of us here in the first place meanwhile operating our lives in an ethical and honest fashion that we can be proud of.

 

Trevor Chilton

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  • 11 months later...

I agree, nice post, and my question is ;

 

assuming all the north american buyers decide to follow your advice and go absolutely "by the book" which equates to doing the collections for the government of Costa Rica - what happens to the ticos who now get reported with higher transaction value and how long before the government learns about windfall revenues - ie - california in the 70's

 

no disagreement that by the book vs off book is marginally different in few hundreds of dollars and the "right thing to do" , but how do we get everyone to participate - seems like the advanced guard becomes pawns in the banking world zeal for international transparency and the IRS (and equivilents) smiling agreement to follow the banks

 

doesn't the " cedulas hipotecárias" approach clean up a lot of the abuse you describe as well as protect the buyer from land grabs as well ?

 

I am very curious about this . . . . .

Edited by BobC
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TAX EVASION COMMITTED BY OR ON BEHALF OF FOREIGNERS

 

Trevor,

I am so glad to see someone addressing the tax evasion problem. I had read in a few sources about expats misstating the price they paid for their home so they can lower the taxes, and that makes me ashamed for them. I'm not in CR yet (next year, I hope), but I would like to think that my own ethics would prevent me from doing that, or from evading any kind of taxes down there.

You spelled it out so well, talking about how the same people who are this dishonest are complaining about bad roads, lack of services, etc. I hope they all have a chance to read what you have written and take a good long look at themselves.

The fact that most people do it doesn't make it right. That's not a very good argument.

Shea

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