Transfer Pricing in the Costa Rican Jurisprudence

April 22, 2024

In 2003, the General Directorate of Taxation of Costa Rica published Guideline No. 20-2003, which addresses the tax treatment of Transfer Pricing under the current market value. Although it had not been formally introduced into its local regulations, the Constitutional Chamber decided that this guideline was not unconstitutional but merely a matter of legality as long as administrative discretion allowed the application of these OECD Transfer Pricing regulations.

Resolved Cases

According to the First Chamber of the Supreme Court of Justice, over the last 19 years, 10 cases of Transfer Pricing adjustments have been resolved. Likewise, according to the information obtained from the Judicial Observatory, the Administrative and Civil Tax Court (prosecution before the Chamber) has an average of 12,918 cases, of which 3,839 are resolved.

In 9 of these 10 cases, the State was favored, i.e., the sued company won one thereof. In this regard, there is a 30% trend of cases won by the actors, i.e., an unfavorable trend for the taxpayer.

Transfer Pricing Statements

Since 2013, Transfer pricing statements have been issued. We have the cases of Compañía Nestlé Costa Rica S.A. (1356-2013) and Colgate Palmolive Costa Rica S.A. (475-2013). The former filed an unconstitutionality action, discarding both.

One case was presented for 2015, 2016, 2017, and 2020 respectively. Only during 2018 two cases were resolved in February and March. All of them involved multinational companies.

GlaxoSmithKline vs. Tax Administration

This year, Ruling No. 383-2022 was issued on February 24. In this case, GlaxoSmithKline challenged the legality of a tax adjustment of the tax periods 2004 and 2005 after issuing the Guideline. The company questioned the method employed by the Tax Administration to determine the difference in the margins it charged related parties at 28.22% and the independent margins at 28.533%. In the audit, the company supported these margin differences with affiliates due to factors such as advertising, promotion, and others.

The company also argued that the Tax Administration did not employ the correct method according to the OECD guidelines and was obligated to investigate what factors supported the margin difference. Furthermore, the company filed a report supporting that third-party transactions were not comparable to the business performed with related parties due to several factors, such as brands, economic conditions according to the country, and purchasing power, among others.

Conversely, the First Chamber determined the report referred to variables and information excluded from the records, given that the company did not want to give access to this data when the tax auditor requested it. In the administrative process, the company stated that advertising affected the difference and could not add other factors later when it did not disclose them initially.

Reca Química S.A. vs. the Tax Administration

This Ruling No. 1586-2017 in favor of the company is based on the Tax Administration’s audit for the tax periods 2003 and 2004. During these periods, the company sold with a 5% margin to related parties, generating losses with these sales of 38% of its total business. Conversely, the company sold with a gross margin of 10% to third parties.

Here, the First Chamber ruled in favor of the plaintiff, given that the Tax Administration had mistakenly motivated the 10% adjustment on a presumed basis determination without complying with the legal requirements established for that type of tax determination. They warned that the adjustment should have been applied according to one of the methods set by the OECD and not on a presumed basis.

Source: La Repú 06/07/22