Transfer Pricing in Dominican Republic
Transfer prices are those prices or values agreed for transactions carried out between related or affiliated parties. In the Dominican Republic, the regulatory framework is found in Articles 281, 281 bis, 281 ter and 281 quater of the Tax Code, modified by Law No. 253-12.
Also, the Dominican legislation in this matter has the Regulation 78-14 or also called “Transfer Pricing Regulation”, published in 2014.
By means of this Regulation, different changes were introduced in the transfer pricing rules of the Dominican Republic, such as definitions, formal obligations, scope and scope of the rules contained in the Tax Code.
Principle of Full Competition: Definition
Also known as the “arm’s length” principle, transfer prices are based on the fact that the prices or values agreed between related parties are in accordance with market value, i.e., as agreed by independent parties. This principle is regulated in the transfer pricing legislation of the Dominican Republic, in article 281, of the Tax Code of this country.
This article states that the operations carried out by a resident in the Dominican Republic with its related parties must be agreed upon according to the prices that would have been agreed upon by the independent parties, in comparable situations.
Scope of Application of Transfer Pricing in the Dominican Republic
The rules of transfer pricing or market value, in the Dominican Republic, must be applied according to Article 1, of Regulation 78-14, to taxpayers resident in that country who carry out operations with:
- Related non-resident parties.
- Related parties resident.
- Individuals, legal entities or entities constituted in countries or territories with low or no taxation (tax havens), as well as those with preferential tax regimes.
Definition of Related Parties in the Dominican Republic
According to Article 2 of the Transfer Pricing Regulations, it shall be understood that two or more parties are related to a taxpayer resident in such country, when they are under one of the following assumptions:
- When one of the parties participates directly or indirectly in the management, control or capital of the other. It is understood as such when such person has the power to influence or determine the key decisions of the other person or entity.
- When both parties have the same natural or legal persons, who participate directly or indirectly in the management, control or capital of these.
- When a permanent establishment is held abroad.
- When a permanent establishment located in the country has a parent company resident abroad with respect to another permanent establishment of the same; or a natural person, legal entity or related entity.
- When a natural person, legal entity, or resident entity has exclusive rights as an agent, distributor or concessionaire of another for the purchase and sale of services, goods or rights.
- When an individual or legal entity transfers to another 50% or more of its production.
Likewise, parties related or linked to those who are domiciled, located or incorporated in countries or territories with low or no taxation (“paraísos fiscales”) or in preferential regimes will be considered. 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 between related parties comply with the principle of free competition, the transfer pricing regime in the Dominican Republic has established five valuation methods.
According to paragraph VII of Article 281, of the Tax Code, these are the following:
- Non-controlled 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 operation, in accordance with Article 6 of Regulation 78-14.
Comparability Analysis in the Dominican Republic
In accordance with paragraph VII, of Article 281 of the Tax Code, in order to analyze whether two operations are comparable, the following factors will be taken into account:
- The characteristics of the object of the operation.
- The functions performed, as well as the assets and risks in the transactions.
- The contractual terms.
- The economic or market circumstances that affected the operation.
- The business strategies.
- Transfer Pricing Statement and Documentation in Dominican Republic.
According to Article 18 of the Transfer Pricing Regulations, taxpayers who carry out transactions with related parties shall have the following obligations to inform and document their operations:
Transfer Pricing Information Statement
Taxpayers covered by the transfer pricing rules must file an “Informative Statement of Operations between Related Parties” or DIOR, with the Internal Revenue Service (DGII).
The contents of such return must specify, among others, the identification of the taxpayer, information of the related party, cases of connection, detail of the transactions with related parties and the method of valuation of the latter.
The above mentioned declaration must be presented on an annual basis, with a deadline of 180 days after the closing date.
Transfer Pricing Study
As indicated in paragraph IV, of Article 18 of the Regulations, those taxpayers who are subject to the transfer pricing regime must have a study or report indicating the valuation process of the prices agreed between related parties.
The content of this study will contain the organizational structure of the group and the legal entities comprising it, identification of the related parties with whom transactions were carried out, details of such transactions, agreements; comparability analysis, methodology used, among others.
With respect to the time period for the preparation of this report, the standard indicates that it must be ready at the time of submission of the information statement. However, it will only be submitted to the DGII when required.
Likewise, the following taxpayers will be exempted from preparing and submitting such study:
- Those whose operations with related parties, in the fiscal year under analysis, do not exceed in total the amount of RD$10,000,000.00, adjusted annually for inflation, and who do not carry out operations with residents in “paraísos fiscales” or preferential regimes.
- Those who carry out transactions with related parties resident in the country, for the part carried out exclusively with them, and provided that the prices agreed upon by them do not result in lower taxation.
Fines for Noncompliance with Transfer Pricing in the Dominican Republic
According to Article 281 ter of the mentioned Tax Code, it states that in case of noncompliance with transfer pricing obligations, as to the established term or when false information is provided, a violation of formal duties will be incurred and the company will be sanctioned according to the fines indicated in Article 257 of the mentioned Code.
The aforementioned article establishes that the failure to comply with formal duties entails a fine of 5 to 30 minimum wages.
In the event of a breach of the submission of information to the Tax Administration, in addition to the fine established in the previous paragraph, a penalty 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, corresponding to twice the amount of the omitted tax, will be applied.
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