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August 3, 2022
2022-1175

OECD's Forum on Harmful Tax Practices concluded that the Costa Rican free trade zone regime is not harmful

  • Costa Rica modified its free trade zone regime to comply with the Action 5 base erosion and profit shifting (BEPS) standard.
  • The modifications clarify that income from intellectual property does not qualify for the tax benefits under the free trade zone regime.

On July 27, 2022, the Organization for Economic Co-operation and Development (OECD) released an update on the Forum on Harmful Tax Practices' peer review of Costa Rica's free trade zone regime in which it concluded the regime is not harmful. The Forum on Harmful Tax Practices (FHTP) conducted the peer review under Action 5 (harmful tax practices) of the OECD/G20 BEPS Project.

This conclusion comes after Costa Rica made modifications to its free trade zone regime to address the potentially harmful features pointed out in the FHTP's conclusions published on January 24, 2022.

Background

On January 24, 2022, the OECD released an update on the results of the peer reviews of jurisdictions' domestic laws under Action 5 (harmful tax practices) of the OCED/G20 BEPS project, undertaken by the FHTP.

The updated results showed that the Costa Rican free trade zone regime was "in the process of being amended" because there were potentially harmful features to be addressed.

To address the potentially harmful features identified by the FHTP, Costa Rica's government published, in the Official Gazette on May 11, 2022, a Foreign Trade Ministry Agreement to clarify that the FTZ regime is not intended to provide benefits to any intellectual property (IP) income.

According to the agreement, income obtained from activities developing IP assets and from the acquisition of those assets for their economic use within the free trade regime is excluded from the free trade zone regime benefits. Additionally, income from royalties and capital gains, as well as any other income from the sale of IP assets, the sale of products and the use of processes related to the economic use of IP assets (i.e., embedded IP income) is excluded from the benefits of the free trade zone regime.

Updated peer review results

In April 2022, the FHTP updated its conclusions for several tax regimes, including the free trade zone regime.

According to the updated conclusions, the Costa Rican free trade zone regime status is "not harmful (amended)."

Thus, the Costa Rican free trade zone regime is currently in compliance with the Action 5 BEPS standard.

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Contact Information
For additional information concerning this Alert, please contact:
 
Ernst & Young, S.A., San José, Costa Rica
   • Rafael Sayagués (rafael.sayagues@ey.com)
   • Randall Oquendo (randall.oquendo@cr.ey.com)
   • Daniel Quesada (daniel.quesada@cr.ey.com)
Latin American Business Center, New York
   • Lucas Moreno (lucas.moreno@lan.ey.com)
   • Ana Mingramm (ana.mingramm@ey.com)
   • Pablo Wejcman (pablo.wejcman@ey.com)
   • Enrique Perez Grovas (enrique.perezgrovas@ey.com)
 

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