Concept and Regulation in Costa Rica
Transfer Pricing in Costa Rica regulates related party transactions. These must be conducted as those of independent parties.
The regulation begins its application according to the OECD guidelines with the Interpretive Guideline No. 20-03 and with the publication of Decree 37898-H in 2013, which outlined the application scope, linking rules, and formal obligations, among others.
Similarly, in September 2016, Resolution No. DGT-R-44-2016 was issued by the General Directorate of Taxation (GDT), establishing the guidelines for the Informative Affidavit in this matter. Currently, it is not defined when to file this information statement.
Resolution DGT-R-16-2017 of Documentation on March 30, 2017, indicates the minimum content for a Transfer Pricing study. It is the standard international information promoted by the OECD.
Subsequently, in 2018, the Transfer Pricing rules were incorporated into the Income Tax Law (ITL) through Law No. 9635, and eventually, they were incorporated into their Regulations in 2019 through Executive Decree No. 41818.
That year, Resolution No. DGT-R-001-2018 was issued to comply with the guidelines set forth by the Organization for Cooperation and Development (OECD) in Action 13 of the BEPS (Base and Erosion and Profit Shifting) Plan on the Supporting Documentation, establishing the Country-by-Country Report obligation for multinational economic groups.
In addition to the quoted above, Resolution DGT-R-49-2019 was issued in 2019, by which the taxpayer performing related party transactions must have an information statement from the local company and a corporate information report.
Through Resolution DGT-R-14-2021 of March 17, 2021, on the procedure for Advance Pricing Agreements on Transfer Pricing, the requirements and procedures for filing these requests were established.
Arm’s Length Principle Principle: Concept
The Arm’s Length Principle consists of prices agreed upon among related parties at market value, i.e., transaction prices determined as those by independent parties.
The Transfer Pricing Legislation in Costa Rica is currently regulated in Article 81 bis of the Income Tax Law.
Taxpayers performing related party transactions, according to the article above, must determine their income or deductions under the Arm’s Length Principle, i.e., as if they had entered into with independent parties.
Related Parties Definition in Costa Rica
According to Article 68 of the ITL regulations, individuals, legal entities, or other entities resident or not in Costa Rica can be considered related parties as long as they directly or indirectly participate in the management, control, or capital of the taxpayer.
There is a relationship in the ITL terms when taxpayers perform operations with a person or entity residing in a non-cooperative foreign jurisdiction, understood as those that meet the following conditions:
- Compared to Colombian tax rates, they are almost nil or nil.
- Those territories with a Profit Tax lower by more than forty percent (40%) of the rate established in subsection a) of Article 15of the ITL.
- Those territories with which Costa Rica does not have an agreement to exchange information or avoid double taxation with a clause for the information exchange in force.
A. Relation Criteria
Individual or legal entities within the scope when:
- The person directly or indirectly directs, controls, or owns 25% or more of the capitalor voting rights of the capital of another person.
- Five or fewer persons direct or both legal entities directly or indirectly controlor own jointly at least 25% of the capital stock or voting rights.
- Legal entities constitute the same decision-making unit. It shall be understood as such whenever one of the following cases occurs:
- They have the majority of voting rights.
- They have the power to appointor dismiss the majority of the members of the administrative body.
- They could have most of the voting rights under the agreements with other partners.
- The majority of the administration has exclusive voting rights.
- The dominant legal entityand the controlled one have the same members in their administrative bodies.
- Two or more legal entities form each one of them a decision concerned to a third legal person.
Likewise, an individual has a stake in the share capital or voting rights when the stake ownership directly or indirectly belongs to the spouse or person related by a direct or collateral line of consanguinity up to the fourth degree or by affinity up to the second degree.
B. The following are also considered related parties
- A business collaboration contract or shareholding association contract is when one of the contractors or associates directly or indirectly participates in more than 25% of the outcome or profit of the contract or the activities derived from the association.
- A person residing in the country and their permanent establishments abroad.
- A permanent establishment located locally and its head office resident abroad, another permanent establishment of the same or a person related to it.
Transfer Pricing Method in Costa Rica
Article 70 of the Regulation above established the following methods to analyze prices agreed upon among related parties are at the Arm’s Length Principle:
- Comparable Uncontrolled Price Method.
- Cost Plus Method.
- Resale Price Method.
- Profit Split Method.
- Transactional Net Margin Method.
Likewise, Decree 37898-H indicates that for the case of commodities, employing a methodology based on international valuation in commodity markets is allowed. The established methods do not limit the powers of the Tax Administration to use or implement other methods that science or technique develops to analyze operations related to Transfer Pricing.
Comparability Criteria in Costa Rica
Article 69 of the ITL regulations states that the following criteria must be considered to perform the comparability analysis:
- Characteristics of the operation to be analyzed.
- Transaction functions, activities, and risks.
- Contractual terms.
- Economic or market circumstances.
- Business strategies.
- Identification and analysis of comparable transaction prices.
Documentation and Informative Affidavit of Transfer Pricing in Costa Rica
The Transfer Pricing Legislation in Costa Rica provides in the ITL Regulation and Articles 72 and 73 a Transfer Pricing Informative Affidavit and supporting Documentation, respectively.
Transfer Pricing Informative Affidavit
Article 72 of the aforementioned Regulations states that taxpayers who comply with any of the following situations will be required to file an Informative Affidavit with the General Directorate of Taxation:
- Those large national taxpayersor large territorial companies performing related party transactions and those persons or entities in free trade zones.
- Those performing related party transactions and exceeding the amount equivalent to 1,000 base salariesseparately or jointly in the corresponding year.
In January 2018, Resolution No. DGT-R-001-2018 established the requirement to file the Country-by-Country Report for those multinational entities or groups with global and accumulated gross revenues equal to or exceeding 750 million euros or its equivalent and that are in any of the following situations:
- Being a top-level dominant entityof a multinational group, which is a tax resident of Costa Rica.
- If a substitute dominant entityis authorized to file the report.
According to Article 5 of the aforementioned Resolution, such a report must be filed up to December 31 of the year following the related transactions.
Supporting Documentation
According to Article 73 of the Regulations, taxpayers subject to Transfer Pricing rules must have Documentation on their transaction valuation, which must be available to the Tax Administration.
Likewise, through Resolution DGT-R-49-2019, measures were issued on the information to be documented, which the taxpayer must have an information statement of the local company (Local Report) and a corporate information report (Master File), according to BEPS Action 13 on Supporting Documentation in this matter.
This information is annual and, as mentioned above, must be available to the DGT.
Non-Compliance Penalties
According to Articles 82 and 83 of the Costa Rican Code of Tax Rules and Procedures, partial or total non-compliance to provide information within the term established by the Law or Regulation entails a penalty equivalent to (2%) of the gross revenues of the offending party in the profit tax period before occurring the infraction with a minimum of three base salaries and a maximum of one hundred base salaries.
