Transfer Pricing rules in the Dominican Republic are regulated in the Tax Code of such country and its regulations. This article provides a brief review of the legislation on this matter, such as the application scope of these rules, methods, formal obligations such as an informative affidavit and possible penalties for non-compliance.
Transfer Prices are those ones or values agreed for transactions performed among related parties. In the Dominican Republic, the regulatory framework is quoted in Articles 281, 281 bis, 281 ter and 281 quater of the Tax Code, as amended by Law No. 253-12.
Likewise, the Dominican legislation on the matter has Regulation 78-14 or also called “Transfer Pricing Regulation“, published in 2014, which has been recently amended in April 2021 through Decree No. 256-21.
By means of this decree, the regulations have been reformed in four aspects, such as the comparability analysis, the valuation methodology, the existence of the international intermediary and formal obligations in this area.
It is also known as the “Arm’s Length“ principle, which governs transfer pricing based on the principle that the prices or values agreed among related parties should be in accordance with market value, i.e., as agreed upon by independent parties.
This principle is regulated in the Dominican Republic in article 281 of the Dominican Tax Code.
It states that the transactions carried out by a resident in the Dominican Republic with the related parties must be agreed upon according to the prices that would have been stipulated among independent parties, in similar situations.
The market value rules in the Dominican Republic shall be to taxpayers residing in such country applied in accordance with article 1 of Regulation 78-14, who perform transactions with:
Pursuant to Article 2 of the Regulations, it is understood that two or more parties are related to a taxpayer resident in such country, when any of the following situations apply:
Likewise, linked or related parties are considered to be those domiciled, located or incorporated in countries or territories with low or no taxation (tax havens) or in preferential regimes. This is in accordance with paragraph I of article 281 of the Tax Code.
In order to determine whether the prices agreed among related parties comply with the arm’s length principle, five valuation methods have been established.
According to paragraph VII of article 281 of the Tax Code, these are the following:
It should be noted that the selection of any of these methods should take into consideration that it should be the most appropriate to reflect the economic reality of the transaction, in accordance with article 6 of Regulation 78-14.
According to paragraph VI of Article 281 of the Tax Code, in order to analyze whether two transactions are similar ones performed to third ones, the following factors shall be taken into account:
In order to perform such analysis, Article 5 of the Regulations also states that the taxpayer must consider the following:
Regarding the delimitation of the actual transaction among related parties, establishing the economically relevant characteristics of the transaction will be necessary. For this purpose, the economic context of the sector in which the company operates and the factors that may affect any company in this sector must be known.
Additionally, it is specified when the economically relevant characteristics of the transaction differing from those established in the written contracts and documentation provided by the taxpayer, the precise delimitation of the real transaction must be made based on the conduct of the parties, in accordance with article 2 of the Tax Code.
According to Article 18 of Regulation 78-14, taxpayers who perform transactions among related parties or with residents in tax havens will have the following requirements of information and documentation of their transactions:
Taxpayers covered by the Application Scope of the Transfer Pricing rules must file an “Informative Affidavit of Transactions among Related Parties” or IATR, with the General Directorate of Internal Taxes (GDIT).
As for the content of such affidavit, the identification of the taxpayer must be specified, among others, the information of the related party such as tax registration and domicile, cases of relationship, details of transactions with related parties and method of valuation of the latter.
The aforementioned affidavit must be filed on an annual basis, with a filing deadline of 180 days after the closing date. Nonetheless, it is important to consider that as from the amendment to the regulation, it is stated that it will be filed at the time of filing the Income Tax Affidavit, which will be applicable as from fiscal year 2022.
Additionally, it has been indicated along the referred amendment that all those taxpayers with which any of the cases of linkage of article 2 of the Regulation are verified will also be required to IATR, not being necessary that they have performed transactions with their related parties during the period.
Those taxpayers who are subject to the Transfer Pricing regime must have a study or report indicating the valuation process of the prices agreed among related parties until 2020, according to paragraph IV of Article 18 of the Regulation.
Regarding the deadline for the elaboration of this report, the regulation indicated that it must be ready at the time of filing the Informative Affidavit. But the filing will only occur when the GDIT requires it.
The following taxpayers are exempted from elaborating and filing such study:
Now, with the recent amendment to the above paragraph, taxpayers subject to this regime, as of fiscal year 2021, must file a Local File or Transfer Pricing Study, within 180 days after the filing of the GDIT, explaining the valuation process or evaluation of the prices agreed among related parties and containing information of the local entity, of such operations and financial information.
Nevertheless, the following are also exempted:
This report is incorporated in the legislation of the Dominican Republic since the fiscal year 2021, for those taxpayers who in relation to the related parties are in the case of linkage according to numeral 1, of article 2 of the Regulation and that are part of a Multinational Group.
This report shall contain the organizational structure of the group, description of the business or businesses of the corporate group, intangibles, financial activities of the group and financial positions of the group, and shall be filed within 180 days after the filing date of the GDIT.
It should be noted that taxpayers who comply any of the aforementioned exclusion requirements will be exempt from the Local File.
The following shall be subject to file the Country-by-Country Report or CbC Report:
The taxpayer must have supporting information regarding transactions with related parties, such as invoices, contracts, accounting movements, transfer pricing policies, among others.
According to article 281 ter of the mentioned Tax Code, it is stated that in case of non-compliance with the obligations in the matter, in terms of the established term or when false data is provided, a violation of the formal duties will be incurred and will be sanctioned according to the fines indicated in article 257 of the mentioned Code.
The aforementioned article establishes that failure to comply with formal duties entails a fine of 5 to 30 minimum salaries.
In case of information filing non-compliance to the Tax Administration, in addition to the fine established in the preceding paragraph, a sanction of 0.25% of the income declared in the previous fiscal period may be applied.
If a transfer pricing adjustment is confirmed, the fine established by Article 250 of the aforementioned Code, for tax evasion, will be applied, corresponding to twice the amount of the omitted tax.
The activation of the vehicle circulation tax is being evaluated to increase revenue collection.
Communicate the beginning of the suspension of the RNC to taxpayers (both individuals and legal entities) who have not filed any tax return.