Transfer Pricing 2024 Comparisons

Article 81 bis of Law 7092 and Articles 74 to 83 of the Income Tax Law Regulations, Decree 43198-H, incorporate the arm’s length principle and regulate the application of transfer pricing rules in Costa Rica.

In accordance with the referred Law and Regulations (more specifically Article 82 of the Regulations), taxpayers must have the information, documentation and analysis of transfer prices that support the calculation of the consideration agreed between related parties. The documentation and information related to the calculation of transfer prices must be kept during the term provided for in Article 109 of the Tax Code.

Additionally, taxpayers that qualify as large taxpayers and/or that are under the free trade zone regime, or that exceed the accumulated amount of intercompany transactions of 1,000 base salaries in the corresponding year, must file an annual informative form of the transactions they carry out with related parties, in accordance with Article 81 of the aforementioned Regulations.

The Costa Rican tax administration issued Guideline No 20-03, published in 2003, many years before the matter of transfer pricing was formally included in tax legislation. This Guideline enabled the tax authority to assess transactions between related parties. The authorities made tax adjustments when the analyses concluded that the transactions between related parties did not observe the market price (not a full application of the arm’s length principle). This approach was confirmed by the Constitutional Court, which stipulated that as long as international procedures (such as the OECD Guidelines) were followed, such procedure was in accordance with the law.

Further rules were included in the Income Tax Regulations in 2013. In 2016, a resolution incorporated the obligation to prepare and file the transfer pricing return. A second resolution issued in 2017 (amended in 2019) detailed the terms by which the local and master files are to be prepared.

In 2019, an important tax reform amended the Income Tax Law, among other topics. Article 81 bis was included, referring to transfer pricing obligations and finally resolving the discussions on the legal status thereof. In 2021, a decree amending the Income Tax Regulations entered into force. The current Costa Rican transfer pricing rules are aligned with the OECD Guidelines.

Related parties are considered to be those established in Article 2 of the Income Tax Law, as well as those residing abroad or in the national territory, that participate directly or indirectly in the management, control or capital of the taxpayer or of both parties, or that for any other objective reasons exercise a systematic influence in their decisions regarding the price. Also, transactions involving non-cooperative jurisdictions must be analysed.

One of the following conditions must be met:

• one party directs or controls the other or owns, directly or indirectly, at least 25% of its share capital or voting rights;
• five or fewer people direct or control both legal entities, or jointly own, directly or indirectly, at least 25% of the share capital or voting rights of both persons, when dealing with legal entities that constitute the same decision-making unit; or
• two or more legal entities each form a decision-making unit with respect to a third legal entity, in which case all of them will form a decision-making unit.

For these purposes, a natural person is also considered to have a participation in the share capital or voting rights, when the ownership of the participation, directly or indirectly, corresponds to the spouse or person linked by family relationship (online, direct or collateral), by consanguinity up to the fourth degree or by affinity up to the second degree.

Related parties will also be considered to be:

• in a business collaboration contract or a joint association contract, when any of the contracting parties or associates participate, directly or indirectly, in more than 25% in the result or profit of the contract or the activities derived from the association;
• a person residing in the country and its permanent establishments abroad; and
• a permanent establishment located in the country and its parent company residing abroad, another permanent establishment thereof, or a person related to it.

Local legislation provides for the following transfer pricing methods:

• comparable uncontrolled price method;
• cost-plus method;
• resale price method;
• profit split method;
• transactional net margin method; and
• international market prices for commodities (transfer pricing sixth method).

Costa Rica does not allow a taxpayer to use methods not specified by law.

The law does not establish a hierarchy of methods. The taxpayer must choose the best method and justify it.

Article 80 of the Income Tax Regulations states that in appropriate cases (ie, where there are two or more comparable observations), the interquartile range will be determined using the series of the identified comparables. If the price or margin of the analysed transaction is outside the range contained between the first and third quartile, the value or price is not considered as arm’s length, and the median is established as the arm’s length price.

Reasonable adjustments can be made to eliminate the material effects of differences in comparability.

The Income Tax Law rules that royalty expenses cannot exceed 10% of the taxpayer’s income despite compliance with transfer pricing rules.

There are no special rules for hard-to-value intangibles.

There are no specific rules on this topic. However, in an analysis of substance over form, the tax authority assesses:

• the basis of calculation;
• the distribution drivers;
• the documentation; and
• in particular, the value added and its relationship with taxable income.

A taxpayer may amend a tax return after receiving a transfer pricing adjustment in a related entity. It is not automatic and is not initiated by the tax authority.

Costa Rica has a small double tax treaty network with Spain, Germany, Mexico and the United Arab Emirates. Additionally, Costa Rica is member of the Organisation for Economic Co-operation and Development (OECD) and has a contractual and moral obligation to comply with the related recommendations issued to it.

Costa Rica is also a signatory to the Convention on Mutual Administrative Assistance in Tax Matters, and is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes.

Taxpayers may request an advance pricing agreement from the tax administration in order to determine the valuation of transactions between related persons, prior to their execution. Such request must be accompanied by a proposal from the taxpayer based on the value of the transactions that would have been agreed upon by independent parties.

Programmes are administered by the tax authority, the Dirección General de Tributación, Ministerio de Hacienda.

Costa Rica has not yet signed any APA with a taxpayer, so there is no experience in this regard.

There are no limits, and any transaction or taxpayer can be eligible. It is important to note that when a consensus between the taxpayer and the tax administration is not reached, the process stops, and no appeal is allowed.

An APA application can be filed at any time.

Currently, no APA user fees are charged.

An APA covers five years, which are determined by two alternatives:

• as the tax period in which the application is filed and the following four tax periods; or
• that the five fiscal periods begin in the fiscal period following the date of filing the application.

An APA cannot have retroactive effect, and could only cover the current and future fiscal years.

The penalty for not submitting the information requested by the tax authority in time is 2% of the prior year’s revenue with a minimum of three base salaries and a maximum of 100 base salaries.

Taxpayers are required to prepare all files and reports contemplated by the OECD Transfer Pricing Guidelines.

Costa Rica transfer pricing rules are fully aligned with the OECD Transfer Pricing Guidelines.

Costa Rica transfer pricing rules are based on the standard arm’s length principle.

Costa Rica is member of the OECD/G20 Inclusive Framework on BEPS and has also agreed to the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Costa Rica has adopted and included specific rules in the Income Tax Law – ie, BEPS Actions 4, 8, 9, 10 and 13, related to transfer pricing.

Costa Rica has not yet adopted a position on the OECD’s BEPS 2.0 initiatives involving Pillar One and Pillar Two, and there is no public discussion yet on this topic. The adoption of BEPS 2.0 is seen as having a particular impact on free trade zone companies.

There are no specific rules in this regard; however, the tax authority may require all supporting documentation, including a local file, to validate the relevant transaction from a transfer pricing point of view.

Costa Rica does not consider the UN Practical Manual on Transfer Pricing when setting transfer pricing rules.

There are no transfer pricing safe harbours in place.

Costa Rica does not have specific rules governing savings arising from operating entities in the country.

Costa Rica does not have any notable unique transfer pricing rules or practices.

There is no obligation to co-ordinate, and in fact there is no co-ordination between transfer pricing and customs valuation.

The conclusion of a tax audit may lead to a transfer pricing adjustment against the taxpayer. In such case, the taxpayer has the right to challenge the tax adjustment following the administrative procedure, and to subsequently take the matter to court, if necessary – ie, they may renounce the administrative procedure and challenge the tax adjustment immediately at the judicial level. It is not mandatory for any taxpayer to pay the disputed amounts before challenging the matter either at the administrative level or before court.

Taxpayers are normally inclined to challenge any tax adjustments first by following the administrative procedure. This is mainly because there are no judicial courtrooms specialised in tax matters or transfer pricing issues. Consequently, the administrative tax procedure carried out before the tax authority and the Ministry of Finance provides some technical comfort that is worth exploring.

The administrative procedure grants the taxpayer with the possibility of filing a reversal recourse against the tax adjustment. This recourse is studied and resolved within the tax authority. If the reversal recourse is rejected, the taxpayer may file an appeal to ensure further review of its case. The appeal will be studied and resolved by a higher resolution body, within the Ministry of Finance (and which is independent of the tax authority). This higher resolution body within the Ministry of Finance issues the final ruling on the matter, at the administrative level. If the ruling is against the taxpayer, the tax authority may initiate collection efforts against the taxpayer.

The party affected by the resolution issued by the Ministry of Finance (ie, the losing party – either the taxpayer or the tax authority) may decide to file a lawsuit and continue challenging the tax adjustment before court.

Once the matter is addressed at court, the case is assigned to a tribunal. Three judges will review the case and issue a judicial ruling. The ruling issued by the tribunal may be appealed, and the appeal must be filed before the Supreme Court of Justice, which is the highest court tier within the domestic judicial system. Contrary to ordinary courtrooms, the Supreme Court of Justice has magistrates that are either tax experts or are knowledgeable on tax matters, granting taxpayers a final opportunity to obtain a technical review of the case. There is no court specialised in transfer pricing issues, which means that transfer pricing disputes will be subject to the same procedure mentioned above. 

There are few judicial precedents on transfer pricing in Costa Rica. Very few cases have gone all the way to the Supreme Court. Most cases have been ruled in favour of the tax authority, mainly arguing that the taxpayer did not provide enough proof to reject the tax auditor analysis. From a technical perspective, these cases have not been profoundly analysed.

Special reference is made to a ruling of the Constitutional Court validating the use of the OECD Transfer Pricing Guidelines, as soft law, before the relevant rules were included in the Income Tax Law. The following should be noted.

• No 20-03: tax treatment of transfer pricing, according to the arm’s-length principle by the Dirección General de Tributación (tax authority). It was established that the application of the transfer pricing regulations involved technical regulations and such application was in accordance with the legal system.
• No 1365-2013: Nestlé Costa Rica SA. The company alleged unconstitutionality of the transfer pricing rules; the company lost the case.
• No 475-2013: Colgate Palmolive Costa Rica SA. The company alleged unconstitutionality of the transfer pricing rules; the company lost the case.
• No 383-2022: on the most appropriate transfer pricing method and application according to the OECD Guidelines.

There are no restrictions on outbound payments relating to uncontrolled transactions.

There are restrictions on outbound payments relating to controlled transactions. The limitation applies to technical or financial assistance and for royalty charges, which cannot exceed 10% of the taxpayer’s gross income.

Expenses of a local entity that are incurred with a non-cooperating country or “tax haven” are considered transactions with related parties. Such countries are:

• Bosnia-Herzegovina;
• North Korea;
• Cuba;
• Iraq;
• Norfolk Island;
• Kyrgyzstan;
• North Macedonia;
• the Maldives;
• Montenegro;
• Oman;
• Palestine;
• East Timor; and
• Uzbekistan.

No APAs have yet been signed with taxpayers. Transfer pricing outcomes may be published maintaining the confidentiality of the process.

The use of “secret comparables” is prohibited by law.