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Changes in Transfer Pricing legislation, under new Income Tax Regulations

July 8, 2019

Tax Flash

The Ministry of Finance of Costa Rica published Executive Decree 41818-H on June 26, which modifies and incorporates new dispositions to the Income Tax Law regulations that came into force in July 1, 2019.

Among the modifications of this Regulation, Title V dedicated to transfer pricing rulings in Costa Rica was incorporated, containing changes over the previous transfer pricing legislation ruled by Decree 37898-H 2014. In addition, when the regulation enters into effect, Decree 37898-H will be repealed.

The aforementioned changes are explained below:

  • Article 68 of the Regulation changed some criteria related to the definition of related parties, defined in Article 4 of Decree 37898-H. The modifications are:
    • The Tax Administration will presume the existence of an intercompany relationship, when a taxpayer engages in transactions with a person or entity that is resident in a non-cooperating extraterritorial jurisdiction. The latter being defined as jurisdictions that have an equivalent income tax rate, lower by more than forty percent (40%) of the rate established in paragraph a) of Article 15 of Income Tax Law.
    • It will no longer be consider that an intercompany relationship exist, for locally residing entities and an exclusive distributor or agent, living abroad; and a local resident that operates as an exclusive distributor or agent, of an entity resident abroad.
  • Article 70 of the Regulation, which defines the methodologies for transfer pricing analysis, added to the rulings of Article 6 of Decree 37898-H, the following:
    • It defines a regulated price, as a fixed price established by a public authority, to which the taxpayer must comply, without the ability to modify it.
    • It clarifies that the methods set out in the Article, do not limit the authority of the Tax Administration for the use or implementation of other methods that science or technique develops for transfer pricing analysis.
  • Article 71 of the Regulation, which defines how to determine an arm’s length price, added to the rulings of Article 7 of Decree 37898-H, the possibility to establish it in comparison to a single comparable price or profitability margin.
  • Article 72 of the Regulation, which establishes the regulations for the Transfer Pricing Informative Return, added to the ruling of Article 6 of Decree 37898-H, that taxpayers engaged in domestic or cross-border transactions with related parties which separately or jointly exceed an equivalent amount of 1,000 (one thousand) base salaries (around CRC 446.2 million or USD $ 773,000, according to the current base salary of 2019); are also obliged to filed this return.
  • Article 73 of the Regulation changed the general guidelines for transfer pricing documentation defined in Article 9 of Decree 37898-H, eliminating the established guidelines and indicating that they will be determined by general resolution. Therefore, when the Regulation comes into force, the guidelines established by resolution DGT-R-16-2017, or any additional resolution that the Tax Administration published on this subject, should be taken as reference.
  • Article 74 of the Regulation changed some criteria related to the Advanced Pricing Agreements defined in Article 10 of Decree 37898-H, modifying the term of these agreements from 3 years to 5 years, and adding that it will be defined by resolution, the guidelines for bilateral and multilateral agreements.

We emphasize that the Transfer Pricing Study and the Informative Return are two individual formal duties. In this sense, there may be taxpayers who are required to prepare both documents, or else, those not obliged to file the informative return, but obliged to prepare a study that validates for intercompany transactions, their compliance with the arm’s length principle.

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