Transfer Pricing in Nicaragua

Concept and Regulation in Nicaragua

The Transfer Pricing regime in Nicaragua was introduced by Law No. 822, or Tax Concertation Law, published in La Gaceta No. 241 on December 17, 2012.

Although Article 303 of this Law stated that its entry into force would be on January 1, 2016, due to the publication of Law No. 922 in December 2015, its entry into force was extended.

So, this regulation on the matter started to be in force as of June 30, 2017.

Transfer Pricing and the Arm’s Length Principle

It concerns those prices or values agreed for related party or intercompany transactions.

The Arm’s Length Principle states that prices governing related party transactions must be at market value, i.e., similar to those of independent parties.

This principle is also included in the Nicaraguan Transfer Pricing legislation, in Article 96 of the Law, which states that related party transactions must be valued according to the prices agreed upon by independent third parties in comparable transactions.

On the other hand, Article 97 of the Law mentions that the General Directorate of Revenue has the authority to verify that the related party transactions have been valued according to the Arm’s Length Principle and may adjust accordingly.

Application Scope of Transfer Pricing in Nicaragua

Article 95 of the Law establishes the objective scope of the Transfer Pricing application, which includes the following:

  • Performed transactions between a taxpayer resident in the country and non-resident-related parties.
  • Performed transactions between a resident and those operating under the free trade zone regime.

Such transactions, as indicated in the aforementioned article, will affect the determination of income tax in the tax reporting period.

According to Article 94 of the Law, the following are considered related parties:

  • A company directly or indirectly controlling or owning at least 40% of the capital of another company.
  • Two companies with five or fewer persons directly or indirectly controlling or owning at least 40% of the capital stock.
  • Two corporate members of the same business unit.
  • The contracting parties or associates directly or indirectly own more than 40% of the result, or the contract profit, in a business collaboration contract or a joint venture, respectively.
  • The person resident in the country regarding its exclusive agent or distributor resident abroad.
  • The person resident in the country regarding its permanent establishments abroad.
  • The permanent establishment in the country regarding its parent company abroad.

It should be noted that, for the first case indicated above, an individual will also own the indicated amount in the capital if the ownership of this corresponds, directly or indirectly, to the spouse or person related in kinship, either by blood up to the fourth degree or affinity up to the second degree.

Transfer Pricing Methodology in Nicaragua

In order to determine whether the values agreed upon in related party transactions comply with the Arm’s Length Principle, Article 100 of the Law states the following methods:

  • Comparable Uncontrolled Price Method.
  • Cost Plus Method.
  • Resale Price Method.
  • Profit Split Method.
  • Transactional Net Margin Method.

In addition, any of the first three methods mentioned above, whichever is the most appropriate, should be employed as the first option.

If these cannot be applied due to the complexity of the transactions or lack of information, either of the last two may be applied.

Transfer Pricing Affidavit and Documentation in Nicaragua

According to Article 103 of the Law, taxpayers must have the Income Tax Return and the documentation of related party transactions available when filing.

Such documentation or Technical Transfer Pricing Study shall consider the information related to the taxpayer and the business group to which it belongs, as well as the description and analysis of the transactions subject to the rules on this matter.

The taxpayer must only file this information when the Tax Administration requests it for ten business days. The Tax Administration may request additional information for which it will grant 90 days when appropriate.

According to Article 104 of the Law, taxpayers must have sufficient information and analysis to assess their related party transactions within 45 days after the request.

Currently, there are no established regulations or additional provisions to indicate the form of the information statement.

Transfer Pricing Non-Compliance Penalties in Nicaragua

The Nicaraguan legislation has not established specific infractions or non-compliance penalties with the formal requirements of such a regime.

Conversely, if the Tax Administration were to make a Transfer Pricing adjustment, it would be committing the contravention indicated in Article 137 of the Nicaraguan Tax Code, for which the fine is 25% of the adjustment.

Likewise, Article 138 of the Tax Code establishes that the Tax Administration may directly intervene in the management of the business or close the premises where the infraction is committed for a maximum of 6 business days.

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