Transfer Pricing in Costa Rica
Transfer pricing in Costa Rica has as a normative background the Interpretative Guideline N°20-03.
However, it was not until 2013, with the publication of Decree 37898-H, that a more extensive regulation was issued on the subject, which indicated the scope of application, rules of engagement, formal obligations, among others.
Likewise, in September 2016, Resolution No. DGT-R-44-2016 was issued by the General Directorate of Taxation (DGT) establishing the guidelines for the transfer pricing information return.
Subsequently, in 2018, the transfer pricing rules were incorporated to the Income Tax Law (LISR), by means of Law No. 9635, and in 2019 they were incorporated to its Regulations, by means of Executive Decree No. 41818.
In turn, in order to comply with the guidelines set forth by the Organization for Cooperation and Development (OECD) in Action 13 of the BEPS Plan (Base and Erosion and Profit Shifting) on transfer pricing documentation, Resolution No. DGT-R-001-2018 was issued in that year, establishing the obligation to Report Country by Country.
In addition to the above, in 2019 Resolution DGT-R-49-2019 was issued, by which the taxpayer who carries out transactions with related parties must have an informative report from the local company and a corporate information report.
Principle of Full Competition: Concept
The principle of free competition or “arm’s length” is understood to mean that the prices agreed between related parties are at market value, that is, the prices of the transactions are determined as if they had been made by independent parties.
In the case of the legislation on transfer pricing in Costa Rica, this is currently regulated by Article 81 bis of the LISR.
This article states that, taxpayers who carry out transactions with related parties must determine their income or deductions according to the principle of free competition, that is, as if they had entered into the transaction with independent parties.
Definition of Related Parties in Costa Rica
According to Article 68, of the Regulations of the LISR, individuals are considered to be related parties as legal entities and other entities that are resident or non-resident in Costa Rica, provided that they participate directly or indirectly in the management, control or capital of the taxpayer.
Likewise, they are also considered related when the same persons participate in a direct or indirect manner in the same way as indicated above.
In relation to this, the aforementioned article states that they will be specifically considered parties related to:
- Individuals or legal entities that are in any of the following situations:
- When the person directs, controls or possesses another, directly or indirectly, in 25% or more of its capital or voting rights.
- When five or less persons direct or control both legal entities, or possess in a joint manner, directly or indirectly, at least 25% of the capital stock or voting rights.
- When legal entities constitute the same decision unit. It will be understood as such whenever it is in some of the following cases:
- They have the majority of voting rights.
- They have the power to appoint or dismiss the majority of the members of the administrative body.
- May have, according to agreements with other partners, the majority of the right to vote.
- Have the majority of the administration with their rights to vote exclusively.
- Both the dominant legal entity and the dominated one have the same members in their administrative organs.
- When two or more legal persons form each one of them, a unit of decision with respect to a third legal person.
- They will also be constituted as related parties:
- When one of the contracting parties or associates participates in more than 25% in results or profits, in the case of a business collaboration contract or a joint venture.
- The distributor or exclusive agent of the same, resident abroad, as to the person resident in the country.
- An exclusive distributor or agent resident in the country of an entity resident abroad and the latter.
- The permanent establishment abroad, with respect to the person resident in the country.
- A permanent establishment located in the country and its parent company resident abroad, another permanent establishment of the same or a person related to it.
In addition, the law states that a link will be presumed when operating with a person or entity that has as its residence in a non-cooperative extraterritorial jurisdiction, understood as those who are in one of the following situations:
- Jurisdictions that have a rate that is more than 40% lower than the rate established for profit tax in Costa Rica.
- Jurisdictions with which Costa Rica does not have an agreement to avoid double taxation or to exchange information with the Tax Administration of the country.
Transfer Pricing Method in Costa Rica
According to Article 70 of the Regulation, in order to analyze that the prices agreed between related parties are in accordance with the principle of free competition, the following transfer pricing methods are established:
- Non-Controlled Comparable Price Method.
- Added Cost Method.
- Resale Price Method.
- Profit Sharing Method.
- Net Transaction Margin Method.
It also indicates that in the case of commodities, the use of a methodology based on international valuation in the commodities markets is allowed.
Comparability Criteria in Costa Rica
Article 60, of the SRA regulations, states that in order to carry out the comparability analysis, the following criteria must be taken into consideration:
- Characteristics of the operation to be analyzed.
- Functions, activities and risks of the transaction.
- Contractual terms.
- Economic or market circumstances.
- Business strategies.
- Identification and analysis of prices of comparable transactions.
Documentation and Informative Declaration of Transfer Pricing in Costa Rica
The transfer pricing legislation in Costa Rica provides in the Regulation of LISR, articles 72 and 73, an informative affidavit of transfer pricing and supporting documentation, respectively.
Transfer Pricing Information Statement
Article 72 of the aforementioned Regulations states that those taxpayers who comply with any of the following situations will be obliged to file an information return with the Directorate General of Taxation:
- Those who carry out transactions with related parties and are in the category of large national taxpayers or large territorial companies, as well as those persons or entities in a free zone.
- Those who carry out operations with related companies and that separately or jointly exceed the amount equivalent to 1,000 base salaries in the corresponding year.
In turn, in January 2018, Resolution No. DGT-R-001-2018 established the obligation to submit the Country by Country Report for those entities or multinational groups that have global and accumulated gross revenues equal to or greater than 750 million euros or its equivalent and that are in any of the following situations:
- Is a top level dominant entity of a multinational group, which is a tax resident of Costa Rica.
- In case a substitute parent entity is authorized to file the report.
According to Article 5 of the Resolution mentioned above, such report must be submitted until December 31st of the year following the year in which the transactions with related parties were carried out.
Transfer Pricing Documentation
According to Article 73 of the Regulations, taxpayers subject to transfer pricing rules must have documentation on the valuation of their transactions, which must be available to the Tax Administration.
Likewise, Resolution DGT-R-49-2019 issued measures on the information to be documented, whereby the taxpayer must have an informative report from the local company (Local Report) and a corporate information report (Master Report), this in line with BEPS Action 13 on transfer pricing documentation.
Such information is annual and, as mentioned, must be available to the DGT.
Sanctions for Noncompliance
According to Article 83 of the Costa Rican Tax Standards and Procedures Code, the total or partial failure to provide information within the term set forth by law or regulation leads to a penalty equivalent to (2%) of the gross income of the offending party, in the profit tax period, prior to that in which the violation occurred, with a minimum of three base salaries and a maximum of one hundred base salaries.
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