Costa Rica has recently joined the list of jurisdictions following the global trend of greater scrutiny over corporate compliance; a trend which has gained pace over the last decades in many countries, and flows from key legislation such as the US FCPA and the UK Bribery Act. Multinationals and their local subsidiaries or affiliates, being part of their same economic group, must abide by these rules in the countries where effective, such as Costa Rica and other Latin American countries. Implementation of these much more stringent measures across Latin America is a result of the light being shone on bribery scandals with international reach, such as the Odebrecht case.
Costa Rica became the first Central American country to enact solid anti-corruption legislation and regulations aimed to counteract and prevent certain crimes, such as money laundering, bribery and fraud. This is partially thanks to the accession process for OECD membership, which included a three-year review of the country’s corporate governance policies and practices . Costa Rica was invited to become the 38th member of the OECD earlier this year. Specifically, Law No. 9699 on the Liability of Legal Entities for Domestic or Cross Border Bribery and Other Crimes, became effective on June 11, 2019, while its Regulations (Executive Decree No. 42399), became effective on August 26, 2020.
The Law regulates the liability of legal entities with respect to certain white-collar crimes, such as bribery, money laundering and corruption, etc., imposing a range of penalties from economic fines, loss of benefits, subsidies or incentives previously obtained from the government, including the cancellation of concessions, permits or contracts, to the dissolution of the legal entity. This corporate liability is independent from any personal liability associated with any indicted individuals, as a result of the same proceedings.
Moreover, the Regulations seek to promote and provide guidance towards the implementation of an optional model of organization, crime prevention, management and control of legal entities, in order to more easily detect and mitigate crimes committed inside corporate organizations. The Regulations also identify due diligence procedures for conducting transactions, projects and other corporate activities. A benefit to developing such a ‘model’ structure within a corporate organization, i.e., a comprehensive compliance program, is the program’s mitigating effect in the event that a company is charged with a criminal violation of the Law notwithstanding the compliance program being in place. The existence of such a structure can reduce the ultimate penalty imposed by up to 40%.
The report with the results of the review made by the OECD of Corporate Governance in Costa Rica will be released on October 2, 2020, as can be checked in the following link: Corporate Governance in Costa Rica
Tax and Corporate Compliance
Tax evasion is the “younger sister” of white-collar crimes such as bribery, money-laundering and corruption, as tax crimes could derive from imitation of risky conduct inside organizations, and thus be a harmful consequence of corruption practices. The punishment for tax fraud in Costa Rica is 5 to 10 years’ incarceration, and only be imposed on individuals (e.g., the legal representative of an entity). Nonetheless, economic penalties may also be laid upon the legal entity committing tax fraud.
In this sense, the OECD ‘Inclusive Framework on Base Erosion and Profits Shifting (BEPS)’, which aims to prevent multinationals from implementing tax strategies which ‘exploit gaps and mismatches in tax rules’ including when such strategies may be legal but are held to be unfair, has motivated many countries to enact legislation against tax evasion, such as general and specific anti-abuse rules and transparency obligations, relating to information disclosure about beneficial ownership, for example; and Costa Rica is no exception.
On December 30, 2016, Law No. 9416 to Fight Against Fiscal Fraud became effective. The Law introduced many newly-regulated elements, for example: i) the Tax Administration’s access to customers’ information in possession of financial institutions (e.g., banks), ii) the mandatory use of electronic invoicing to increase control over taxpayers’ transactions, iii) the mandatory acceptance of payments with debit and credit cards, and iv) the obligation of all legal entities in Costa Rica to periodically report information about their shareholders or ultimate beneficiaries to a Transparency and Final Beneficiaries Registry (“TFBR”), which is managed by the Central Bank and has been functional since 2019 (although its 2020 compliance was postponed for 2021 due to the COVID-19 pandemic).
This TFBR is an intersection point between Corporate Compliance and Tax Compliance in Costa Rica, because it is aimed not only to support tax control and audit procedures by the Tax Administration, but also to help the Costa Rican Institute on Drugs perform its risk management duties and related controls against money-laundering and terrorism financing. This clearly helps to facilitate cooperation between authorities, at the domestic and international levels. By way of example, in case of an Exchange of Information Request received from another jurisdiction, by virtue of an International Tax Treaty in force, this request could lead to obtaining valuable information about criminal activities being carried out elsewhere by a corporation. For this reason, in the event that TFBR reporting obligations are not complied with, very burdensome economic penalties are applicable in Costa Rica upon the non-compliant legal entity.
Another intersection point between corporate and tax compliance relates to the violation of General Anti-Abuse Rules (GAARs)[1].A GAAR generally allows the Tax Administration to deny any ‘ill-gained’ tax benefit where such benefit derives from a transaction which has no commercial substance and only the purpose of achieving the tax benefit. Accordingly, where a certain economic operation appears to be OK on the surface, but underneath it turns out to be, for example, a bribery-disguise along with a tax-fraud scheme, then that may ultimately result in corporate and tax liabilities.
Therefore, it is of the utmost importance that corporations develop comprehensive and substantive compliance programs, in order to prevent not only criminal behaviors as regulated by criminal legislation (such as the Law on Liability of Legal Entities for Domestic or Cross Broder Bribery and Other Crimes), but also to comply with formal and substantial tax rules. For example, having a worldwide-applied Transfer Pricing policy included as part of a corporate compliance program, could make the difference to preventing the tax authorities from aggressively interpreting, within a tax audit procedure, that there a is some sort of an international tax-fraudulent strategy in place.
Since tax systems are highly regulated, tax compliance procedures may help corporations, in practice, to avoid and reduce criminal risks, as well as provide overall legal protection to a legal entity from heavyweight economic penalties. Once such a corporate compliance program is implemented, it must be effectively communicated internally, by means of having all employees and personnel properly trained, so it becomes part of the corporate culture across the whole organization.
- Although in Costa Rica there is no GAAR provided in the law, as internationally conceptualized, the Tax Code does provide for the ‘Economic Reality Doctrine’, which is in practice a way of applying the ‘Substance over Form’ principle.
