Before the amendments made to the Income Tax Law (ITL) on 1 July 2019, the arm’s-length principle was in a decree of transfer pricing.
Even prior to the amendments, the transfer pricing rules applied for corporate income tax purposes. There were issues regarding the principle of legality, however they were not accepted by the Tax Administration (TA), the Administrative Tax Court (TFA), the Judicial Tax Court, and even the Constitutional Chamber of the Supreme Court recognised their application throughout these years, even if they were not included in the law, but a decree.
Regarding the formal obligations, the TA has not issued the regulations to make the taxpayers comply with the informative tax returns about transactions, functions, shareholders’ chart, and related entities outside of Costa Rica (CR).
The TA adjusted the prices between related entities and made a bracket for the comparable periods of 3 years.
The taxpayer appealed and said that the OECD rules do not include a range of comparable information and that the correct way should be to obtain the info and do the test for several years.
The TA has adjusted the prices between related entities about the sales and compared the CR entity’s net margin with the USA entity, making a bracket for the comparable periods of 3 years.
The taxpayer (agriculture sector) appealed and said that the TA did not take into account the weather – economic cycle issues in CR, e.g. if the weather in the USA was favourable for the plantations and not for CR, it would be understandable that CR’s entity would incur fiscal losses.
In fact, the ITL deems the fiscal losses as deductible expenses; the taxpayer can use them during the following 5 years, so the ITL has a broader recognition of the existence of economic/agriculture cycles.
The TA adjusted the expenses regarding payments of royalties. Previously, the intangible assets had been transferred to the entity that exploits the trade brand. The TA said the expense did not proceed based on the fact that the shareholder was the same for the two entities. In this case, they did not accept the transfer pricing rules.
The taxpayer appealed and argued the violation and lack of validation of the transactions between related entities and its eventual fiscal impact on joint transactions.
In this case, the relation among affiliated entities was deemed as tax fraud.
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