Global Tax Alert (News from Transfer Pricing) | 30 July 2013

Costa Rica introduces transfer pricing regulations

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Through a presidential decree expected to be published shortly, Costa Rica will introduce transfer pricing regulations applicable to individuals or business entities that conduct related party transactions.

The key considerations of these new regulations are expected to be the following:

  • The regulations will apply to any arrangement between associated entities involving goods, services or intangible assets.
  • The regulations will apply to transactions conducted by taxpayers with related entities resident abroad and within Costa Rica.
  • The new rules provide the definition of the arm's length principle and related parties; regulate the criteria taxpayers must follow to perform a comparability analysis; and establish the transfer pricing methodology to apply when assessing the arm's length principle.
  • An annual transfer pricing information return and transfer pricing documentation are required for taxpayers.
  • The decree will be in effect upon publication in the Official Gazette. Further regulation is expected in order to complement the decree and to indicate the applicable fiscal year.

Related party definition

The regulations will establish that an entity is considered a related party when:

  • One of the parties (individuals or legal entities) manages or controls the other party, or holds directly or indirectly, at least 25% of the shares or the voting rights of the other party.
  • Five or less individuals or legal entities manage or control both parties or jointly hold, directly or indirectly, at least 25% of the shares or the voting rights of both parties.
  • Both parties belong to the same decision-making unit or business group.
  • An individual possesses, through a relation by marriage or relation by blood, directly or indirectly, a participation in shares or voting rights.
  • A party domiciled in Costa Rica is the local exclusive distributor or agent of a non domiciled party, and vice versa.
  • A domiciled party conducts transactions with its permanent establishments abroad.
  • A permanent establishment located in Costa Rica conducts transactions with its parent entity abroad, another permanent establishment abroad or a related party of the same parent company.

It will be presumed that an individual or entity will fall into the related party definition when it is domiciled in a jurisdiction with not enough authority (according to such country's legislation) to exchange relevant fiscal information with the Costa Rican Tax Authorities.

Transfer pricing methodology

The regulations will require application of the most appropriate transfer pricing method. The specified methods are:

  • Comparable uncontrolled price method
  • Cost plus method
  • Resale price method
  • Profit split (and Residual profit split method)
  • Transactional net margin method

In addition, the regulations will allow a method referred to as “valuation of goods with international quotations” to be applied as an alternative to the comparable uncontrolled price method.

What are the implications of the new regulations?

The competent authority will be empowered to adjust prices when taxpayers do not comply with the arm's length principle.

Transfer pricing documentation obligations will be mandatory for taxpayers conducting cross-border and local transactions under the related party definition. Taxpayers will be required to document their transactions with related parties on an annual basis. The regulations will set out a general framework required for the supporting documentation. Taxpayers will have to prepare and maintain the transfer pricing documentation in Spanish. However, the documentation will only need to be filed with the tax authorities if there is a formal request.

The Transfer Pricing Information Return will be an annual obligation for taxpayers under the following situations: (i) taxpayers conducting cross-border and local related-party transactions, and (ii) taxpayers categorized as “grandes contribuyentes” (large taxpayers) or individuals or entities under the Free Zone Regime.

The regulations also will include provisions for Advance Pricing Agreements (APAs). Taxpayers will be able to request an APA for a three-year period.

What should companies be doing now?

Companies doing business in Costa Rica should review and inventory all their existing intercompany transactions and assess transactions that fall under the new regulations to determine whether they are within the scope of the rules and whether they comply with the arm's length principle.

They should also assess what new intercompany transactions are being anticipated in the future for which transfer pricing support will be required.

Companies should have the required transfer pricing documentation to support their related party transactions.

For additional information with respect to this Alert, please contact the following:

Mancera, S.C., Mexico City
  • Jorge Castellón
    +52 55 5283 8671
Ernst & Young, S.A., San José
  • Rafael Sayagués
    +506 2208 9880
Ernst & Young Limited Corp., Panama City
  • Luis E. Ocando
    +507 208 0144
  • María José Luna
    +507 208 0147

EYG no. CM3680