Global Tax Alert (News from Americas Tax Center and Transfer Pricing) | 17 May 2017

Costa Rican Tax Authority issues new transfer pricing regulations

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On 21 April 2017, the Costa Rican Tax Authority published, in the Official Gazette, Resolution DGT-R-16-2017 (the Resolution), which adds the master file and local file to the existing transfer pricing documentation requirements, in accordance with Action 13 of the Base Erosion and Profit Shifting (BEPS) Plan of the Organisation for Economic Co-operation and Development (OECD).

Costa Rican taxpayers that have transactions, during the relevant fiscal year, with associated enterprises must prepare a master file and a local file and retain it for four years. Taxpayers will only need to submit this information if requested by the tax authorities. If requested, taxpayers will have 10 business days to submit this information. The content of the master file and local file is largely consistent with the recommendations of the OECD’s BEPS Action 13.

The Resolution entered into force on its date of publication and should apply as of the current tax year (i.e., 2017).

Transfer pricing documentation requirements have been in effect in Costa Rica since 2013, per the Resolution N° 37898-H, published in September 2013. This Resolution is supplemented, but not replaced, by Resolution DGT-R-16-2017, and continues to be in effect.

Master file

Under the Resolution, the master file must contain a chart illustrating the legal and ownership structure of the multinational enterprise (MNE) and geographical location of operating entities. It also must provide the important drivers of the MNE’s business profit, i.e., microeconomic factors that contribute the most to the development of the business.

Additionally, the master file must include a description of the supply chain for the group’s five largest products or services, plus any other products or services amounting to more than 5% of the group’s turnover. The Resolution requires the master file to include a listing with a brief description of the most important service arrangements between members of the MNE group, including research and development (R&D) services. The description should include the capabilities of the MNE group’s companies that provide these services. In addition, the MNE group should include a description of the transfer pricing policies for allocating the cost of services in order to determine the prices charged for services between the members of the MNE group.

The Resolution also requires the master file to include:

  • A description of the main geographic markets for the group’s products and services
  • A functional analysis describing the principal contributions to value creation by individual entities within the group, i.e., key functions performed, important risks assumed, and important assets used
  • A description of business restructurings, acquisitions and divestitures of the MNE group occurring during the fiscal year
  • A general description of the MNE’s overall strategy for the development, ownership and exploitation of intangibles, including the location of principal R&D facilities and the location of R&D management
  • A listing of the MNE group’s intangibles or groups of intangibles that are important for transfer pricing purposes and indication of their legal ownership
  • A list of important agreements between the MNE group members related to intangibles, including cost contribution arrangements, research service agreements and license agreements

Further, the master file must contain:

  • A general description of the MNE group’s transfer pricing policies related to R&D and intangibles
  • A general description of other relevant aspects of transactions involving intangibles between the MNE group members during the fiscal year concerned, including the entities, countries and compensation involved
  • A general description of how the group is financed, including important financing arrangements with unrelated lenders
  • The identification of any members of the MNE group that perform a central financing function for the group, including the country under whose laws the entity is organized and the entity’s place of effective management
  • A general description of the MNE’s transfer pricing policies related to financing arrangements between associated enterprises

The master file also must contain the MNE’s annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management and tax purposes. In addition, the master file must include a list and brief description of the MNE group’s unilateral, bilateral or multilateral advance pricing agreements (APAs), mutual agreement procedures (MAPs) and any other rulings relating to the allocation of income among countries.

Local file

Under the Resolution, the local file must include a description of the management structure of the local entity, a local organization chart, and a description of the individuals to whom local management reports and the country in which such individuals are based. The local file also must provide a detailed description of the business strategy pursued by the local entity, including an indication of whether the local entity has been involved in or affected by a business restructuring or a transfer of intangibles, in either the present year or the prior year. In addition, it must include an explanation of the effect of the restructurings and transfers on the local entity.

Additionally, the local file must include:

  • A list of the key competitors
  • The transaction amount for each type of operation and each country (of the counterparty) with whom the transaction is conducted, with the level of detail considered necessary (e.g., a breakdown by product or product group)
  • A comparability analysis, including elements such as: (a) product characteristics, (b) functional analysis, (c) economic circumstances, (d) contractual clauses, and (e) business strategies, according to the OECD guidelines, for each type of operation
  • An indication of the transfer pricing method selected for the transactions listed
  • An indication of which associated enterprise is selected as the tested party for purposes of the transfer pricing analysis and an explanation of the reasons for this selection
  • A summary of the assumptions made in applying the transfer pricing methodology
  • An explanation of results of a multi-year analysis
  • A list and description of selected comparable uncontrolled transactions (internal or external), and any relevant information regarding the methodology and justification of the selection or rejection of comparables, as well as the sources of information used

The local file also must contain:

  • A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled party, or both
  • A justification of the selection of the transfer pricing method and the financial indicator applied
  • A summary of financial information used in applying the transfer pricing methodology
  • A copy of existing unilateral, bilateral and multilateral APAs and other rulings to which the local taxpayer is not a party but which are related to controlled transactions of the local taxpayer
  • A copy of the audited financial statements of the local entity, for the corresponding tax period (the provisions of Resolution DGT-R-026-2015 of 18 August 2015 apply)
  • A description and justification of the use of information from audited financial statements in applying the transfer pricing methods and financial indicators selected
  • A summary of relevant financial data for comparables used in the analysis and the sources from which that data were obtained

Further, the local file must include specific information on whether foreign related parties are in the process of being audited or have been subject to a transfer pricing audit, or are encountering any tax disputes relating to transfer pricing with the competent authorities or courts. Likewise, information on the status of the controversy must be provided. If competent authorities issued resolutions or corresponding courts issued a final decision, a copy of the corresponding resolutions must be kept.

In addition, the local file must contain all supporting information and documentation that is relevant to each type of operation and each related party.

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

Ernst & Young, S.A., San José
  • Rafael Sayagues
    +506 2208 9880
  • Paul A. De Haan
    +506 2208 9800
Ernst & Young Limited Corp., Panama City
  • Luis Eduardo Ocando
    +507 208 0144
  • María José Luna
    +507 208 0147
Ernst & Young LLP, Latin American Business Center, New York
  • Ana Mingramm
    +1 212 773 9190
  • Enrique Perez Grovas
    +1 212 773 1594
  • Pablo Wejcman
    +1 212 773 5129
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
  • Jose Padilla
    +44 20 7760 9253

EYG no. 03255-171Gbl