Can the DGII (Dirección General de Impuestos Internos – General Directorate of Internal Revenue) Not Recognize Expenses for Related-Party Transactions?
Dominican tax regulations emphasize the non-deductibility of shared corporate expenses if certain parameters are not complied with, as described below:
Allocation of Corporate Expenses
According to the provisions of paragraph III of Article 281 of the Dominican Tax Code, when the corporate expenses allocated among related parties are not within the parameters of value or price determined by the market, the Tax Administration may not recognize them. Likewise, such expenses will be deductible for the related parties to which these are allocated as long as they file to the DGII the agreement supporting the contributions provided for each participant. Such agreement must contain, according to Article 3 of Decree 78-14:
- List of participants;
- Specific expenses covered by the agreement;
- Length of the agreement;
- Criteria for quantifying the percentage share in the corporate expenses corresponding to each participant.
- Value of the contributions of each participant.
The aforementioned agreement must be filed or notified to the DGII before the execution of the expenditure. Likewise, if such expenses are agreed with residents in tax havens, they must have the prior authorization of the Tax Administration also before the execution of the expenditure.
Cost Allocation Agreement
If the allocation of corporate expenses is based on a Cost Allocation Agreement, it must be filed to the DGII before the beginning of the fiscal year with the details requested in Article 4 of 78-14 of Transfer Pricing.
In addition, the agreement must clearly define the functions, assets, risks contributed, the costs and expenses incurred, and the profits under rationality criteria to be allocated among the related parties.
If the activities jointly financed by related parties do not generate effective profits for the resident participants and result in recurring losses of taxable income for over 3 or 5 years, as established, such expenses may not be considered deductible before the DGII.
Conclusion
Therefore, the available support provided by expert Transfer Pricing advisors is essential to avoid contingencies, such as the non-recognition of the expense before the Dominican Tax Administration.
