Transfer Pricing in the Dominican Republic
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.
Principle of Full Competence: Definition
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.
Application Scope of Transfer Pricing in the Dominican Republic
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:
- Non-resident related parties.
- Resident related parties.
- Individuals, legal entities or entities incorporated in countries or territories with low or no taxation (tax havens), as well as those with preferential tax regimes.
Definition of Related Parties in Dominican Republic
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:
- When one of the parties participates directly or indirectly in the management, control or capital of the other. It is understood as such when this person has the power to influence or determine the key decisions of the other person or entity.
- When both parties own the same natural or legal persons, who participate directly or indirectly in the management, control or capital of these.
- When there is a permanent establishment abroad.
- When a permanent establishment located in the country has a parent company resident abroad regarding to another permanent establishment of the same; or a natural person, legal entity or entity related to the same.
- When a natural person, legal entity or resident entity has exclusivity as agent, distributor or concessionaire of another for the purchase and sale of services, goods or rights.
- When a person, whether natural or legal, transfers 50% or more of the production to another person.
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.
Transfer Pricing Methods in the Dominican Republic
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:
- Uncontrolled Comparable Price Method
- Resale Price Method
- Added Cost Method
- Profit Sharing Method
- Net Transaction Margin Method
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.
Comparability Analysis in the Dominican Republic
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:
- The characteristics of the object of the transaction.
- The functions performed, as well as the assets and risks in the transactions.
- Contractual terms.
- The economic or market circumstances that affected the transaction.
- Business strategies.
In order to perform such analysis, Article 5 of the Regulations also states that the taxpayer must consider the following:
- Identify commercial or financial relationships among related parties, as well as the economically relevant conditions, taking into consideration those with the purpose the transaction among related parties is precisely delimited.
- Compare the economically relevant conditions or circumstances within the transactions with related parties and those with the possibility of being identified among those carried out by comparable independent parties.
- A local market study may be contributed, if necessary, with the purpose to establish the amount of how prices are agreed in similar situations among independent parties for the analysis and a publicly available information.
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.
Transfer Pricing Affidavit and Documentation in the Dominican Republic
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:
Informative Affidavit of Transfer Pricing
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.
Local File or Technical Transfer Pricing Study
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:
- Those whose operations with related parties, in the fiscal year under analysis, do not exceed in aggregate the sum of RD$10,000,000.00, adjusted annually for inflation, and who do not carry out transactions with residents in tax havens or preferential regimes.
- Those whose transactions are performed with related parties residing in the country, for the part performed exclusively with these parties, and provided that the prices agreed upon by these parties do not result in a lower taxation.
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:
- Those whose transactions with related parties, in the fiscal year under analysis, do not exceed a total amount of RD$12,193,981.70, adjusted annually for inflation, and who do not perform transactions with residents in States or Territories with preferential tax regimes of low or no taxation, non-cooperating jurisdictions or tax havens.
- Those who perform transactions with related parties residing in the country, for the part carried out exclusively with these parties, and provided that the prices agreed upon by these parties do not result in a lower taxation.
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.
Country by Country Report
The following shall be subject to file the Country-by-Country Report or CbC Report:
- Taxpayers being part of a multinational group, who have obtained consolidated income for accounting purposes equal or higher than the threshold to be indicated by the GDIT, that are the Ultimate Parent Company and reside for tax purposes in the Dominican Republic. This report for fiscal year 2022 must be filed in fiscal year 2023.
- It may also be filed by any member of a multinational group that is resident for tax purposes in the Dominican Republic, provided that in the country of residence of the Ultimate Parent Company there is no regulation of this report.
The taxpayer must have supporting information regarding transactions with related parties, such as invoices, contracts, accounting movements, transfer pricing policies, among others.
Sanctions for Transfer Pricing Non-Compliance in the Dominican Republic
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.
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