San José, Costa Rica, since 1956

Costa Rica enforces laws to regulate transfer prices

As of Friday Costa Rica has new laws on the books to regulate the prices of goods and services traded between related companies.

The executive branch and the Finance Ministry published new Law #37898 in the official newspaper La Gaceta to set the rules for enforcement of transfer prices in the country. It will be adopted for the next fiscal year, meaning it will enter info force on Oct. 1.

The transfer price is the price agreed to between two related companies to exchange goods or services between each other. It will apply to all Costa Rican companies selling or buying goods or services to related companies both domestic and abroad.

The new law clarifies important issues such as the conditions to be met by the parties involved in a transaction that is considered “related.”

It also urges companies to conduct a diagnosis to determine which of their transactions requires modifications before filing tax declarations for 2013, and states that for next year all companies are obliged to have a formal study of all their transfer prices.

But the law published Friday does not include deadlines for submission of the study to the Tax Administration. Instead it states that an official date will be announced following a resolution from that agency in coming days.

Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits of related companies in different tax jurisdictions.

The new legislation will fill a legal loophole that created uncertainty for taxpayers, and it satisfies a need for clarification of tax policies for multinational companies.

The approved regulations define the jurisdiction of Costa Rica’s Tax Administration and specify the methods to compare prices and describe documentation required from taxpayers.

According to German Morales, a tax specialist at consulting company Deloitte, the publication of the new law allows for more certainty in an area that was ambiguous in Costa Rica, “so that it clarifies the rules, but also requires companies to prepare for this regulation that will enter into force for the fiscal year 2014.”

Following the adoption of the new law, Nicaragua is the only country in the region that does not have laws to regulate transfer prices.

El Salvador issued similar laws in 2009, Panama in 2010, and Guatemala earlier this year. Honduras will begin enforcing transfer price rules in 2014, and Nicaragua is scheduled to do so in 2016.

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