Costa Rica, the OECD and FATCA: What You Should Know

Now that Costa Rica has been formally invited to go through the process of becoming a candidate nation worthy of joining the Organization for Economic Cooperation and Development (OECD), financial advisors and legal professionals are starting to ponder how their clients will be impacted by this new chapter in our country’s fiscal history.

For Costa Rica, membership in the OECD will mean shedding her “Third World” label and joining a community of democratic and progressive nations. As recently reported by The Costa Rica Star:

“Costa Rica is getting closer to joining a forum of nations that are committed to uphold democracy as well as sound practices that reflect positively on their handling of economic policy. Should Costa Rica be accepted, she will become the first Central American nation to join OECD, and one of the few in Latin America.”

On the surface, joining the OECD seems like a great development for our country; all the same, it is important to remember that Costa Rica will also mean abiding by international laws regulating the global Automatic Exchange of [Financial] Information, which is in the implementation process as an OECD Common Reporting Standard (CRS). This, in turn, means greater scrutiny and compliance in relation to the United States Foreign Account Tax Compliance Act (FATCA).

During the administration of former President Laura Chinchilla, Costa Rica made significant strides in FATCA compliance; in fact, our country was faster than Canada in implementing this measure. Judging by the interest in the OECD CRS by the global news media, it is not unreasonable to think that Costa Rica will do her best to comply with these financial monitoring and reporting mandates.

Unlike jurisdictions such as Antigua, Belize, Panama, and the Cayman Islands, Costa Rica has never been fully considered an offshore financial center, nonetheless, there used to be a time when our banking and corporate registration systems offered a certain balance of flexibility and conservative mindset. The days of North American and European expats waltzing into a bank to open an account while still clutching their luggage from the airport are pretty much over, and the same goes for the privacy and confidentiality that Sociedades Anónimas (similar to stock corporations) used to provide.

FATCA can be thought of as the spearhead of a new global financial paradigm; an Orwellian world where bank accounts and assets are constantly monitored under the pretense of catching tax dodgers. That may be true insofar as alleged tax evasion cases such as this one reported in 2012 at the Hotel Cocal and Casino in Jaco Beach, a coastal resort that is known as being a prime sexual tourism destination in Costa Rica; however, as the saying goes, FATCA is not just for fat cats.

As it stands, some U.S. taxpayers in Costa Rica believe that they are exempt from FATCA by virtue of earning less than $90,000 per year. This is not the case; we have previously reported that:

FATCA creates a number of reporting requirements. One is Internal Revenue Service (IRS) Form 8938, Statement of Specified Foreign Financial Assets, which must be filed along with other documents such as the traditional IRS Form 1040. The other is Treasury Department Form 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). In some cases, both forms must be filed. Here is some useful information, but to find out more you should really visit the IRS page on these forms.

Subject to TD 90-22.1 FBAR:

U.S. persons, who include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold, which is $10,000 at any time during the calendar year.

Subject to IRS Form 8938:

Specified individuals, who include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold, which is $50,000 on the last day of the tax year or $75,000 at any time during the tax year.

It is important to note that the amounts above are aggregate, which means that you are required to file even if you have several accounts in Costa Rica with balances less than $10,000. If the accounts add up to $10,000 or more, you may be subject to FBAR. If they add up to $50,000, you are subject to FBAR. Withdrawing money from the accounts prior to the last day of the tax will not exempt you from filing; you must keep in mind that banks in Costa Rica are expected to send your information to the IRS, and this information is similar to the account statements you are used to getting.

The crux of the matter is that Costa Rica, in her wish to join the prestigious OECD club, will certainly yield to CRS and FATCA, which means that bank account holders in our country will enjoy less privacy and will be subject to increased monitoring from regulators overseas.

In a recent article by Michael Kevin of the Cayman Compass digital newspaper, we find the following observation:

“the OECD’s common reporting standard and FATCA will collect much more taxpayer income data and they will be much wider than existing individual exchanges of tax information on request on the basis of bilateral agreements.”

“The common reporting standard will become the new global standard for the exchange of information for tax purposes. This does not mean that the method of exchange of information on request will cease in the future. But automatic exchange of information is the standard against which all jurisdictions will ultimately be assessed”

Why would the Treasury Department be interested in the account information of a U.S. taxpayer who lives in Costa Rica and earns $10,500 per year working at call center? That call center employee barely makes enough to support his or her family in Costa Rica, but not enough to be taxed by the IRS, so why is this of interest to the U.S.?

Writing for The New American, Alex Newman recently commented:

“The reality is that, using the information collected, a lot more will be done than catching tax cheats. Besides the worldwide violation of individuals’ financial privacy, the plan will provide the platform to implement a global taxing authority.”

The creation and administration of such a global revenue and taxation agency may be a bit of hyperbole, but the preceding statement (worldwide violation of individuals’ financial privacy) is certainly a concern, and this is what Costa Rica can look forward to getting into as she joins the OECD.