Dominican Republic modifies transfer pricing regulations

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1 4 April 2014 Global Tax Alert News from Transfer Pricing and Americas Tax Center EY Americas Tax Center The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Services/Tax/Americas-Tax- Center---borderless-clientservice Dominican Republic modifies transfer pricing regulations The Dominican Republic (DR) will publish Executive Decree No in the next few days, which will make changes to the transfer pricing regulations. In general, the Decree implements the modifications made by Law No enacted on 9 November The new provisions apply to both cross-border and domestic intercompany transactions performed by Dominican taxpayers, and will be enforced retroactively affecting fiscal years ended 31 December 2013 and onwards. Below are the key provisions included in the Decree. Arm s-length principle The following transactions must comply with the arm s-length principle: Transactions between a resident and a nonresident related party Transactions between a resident and a resident related party Transactions between a resident and an individual, corporation or entity domiciled in a tax haven Transfer pricing adjustments will only apply if the intercompany transaction results in a tax deferral or reduction of the taxable income. In this regard, the Dominican Tax Authority (DTA) will assume there is a reduction of taxable income or a tax deferral when the intercompany transaction, as originally priced, results in: (i) a compensation of carry-forward losses, (ii) base erosion in favor of another jurisdiction, or (iii) arbitrage of tax rates among residents. Adjustments If an intercompany transaction does not comply with the arm s-length principle, the DTA may perform the following adjustments: Primary adjustment Corresponding adjustment Secondary adjustment

2 Related parties Article 281 of the Tax Code provides the requirements that must be met for an entity to be a related party. The Decree clarifies the scope of related party, specifically for the exclusive distributor and supplier provisions, among others. Management fees General guidelines are set forth in the Decree regarding the allocation of management fees between related parties. To deduct allocated management fees, taxpayers must file with the DTA the agreement supporting the allocation of such expenses. The agreement must include specific information, such as a list of participants, expenses covered by the agreement, term of the agreement, criteria to quantify the participation share of each participant and the value of each participant s contribution. The information must be filed with the DTA before the allocation of the fees. If the related party is a tax haven resident or under a preferential tax regime, approval of the DTA must be obtained before the allocation of the fees. This approval should be issued by the DTA within three months. Cost contribution arrangements General guidelines are set forth in the Decree regarding cost contribution arrangements (CCA) held between related parties. If an expense allocation results from a CCA, taxpayers must file with the DTA the corresponding agreement before the beginning of each fiscal year. The agreement must include specific information, such as a list of participants, activities or projects to be covered, term of the agreement, criteria to quantify the participation share of the expected benefits, form and value of initial contributions, reasonable division of responsibilities and obligations, and compensatory payments, among others. If the activities within the scope of the CCA do not represent an effective benefit, the DTA is empowered to perform the necessary adjustments. Comparables Detailed provisions are set forth regarding the type of comparables to be chosen during the selection process. The Decree details the elements that should be considered in making adjustments during the comparability period. Methods Article 281 of the Tax Code establishes the following methods to assess the arm s-length standard: Comparable Uncontrolled Price Method Resale Price Method Cost Plus Method Transactional Net Margin Method, Profit Split Method Transparent Market Concept (The Sixth Method) The Decree provides further guidance regarding these methods and establishes the Best Method Rule. The Sixth Method Guidance is provided for the analysis of intercompany transactions related to the import and export of commodities. The concept of transparent market is defined. The intermediary figure is regulated. Services The Decree introduces the conditions that must be met in order to prove the arm s-length nature of services. Advance pricing agreements (APAs) General provisions for APAs are established in Article 281 of the Tax Code. The Decree provides the following information requirements and timelines for requesting and approving an APA: APAs should be requested within the first three months of the corresponding taxpayer s fiscal year. APAs can be requested for financing transactions with third parties to exceed the thin capitalization rules. The Decree establishes the information that must be included in the APA request. 2 Global Tax Alert Transfer pricing and Americas Tax Center

3 The DTA must issue a response within the first 24 months after the request was filled. If no response is issued, the request will be presumed to have been denied. Rules are introduced to renew or modify an existing APA. The APA rules will also apply to bilateral and multilateral arrangements. Safe harbors The DTA will issue further regulation regarding safe harbors through a General Norm. Once issued, interested taxpayers must inform the DTA before the start of the fiscal year if they are going apply a safe harbor. Transfer pricing information return All taxpayers within the scope of the regulations must file an information return (DIOR) within the first 180 days after the end of fiscal year. The Decree provides the information detail that should be included in the DIOR. Transfer pricing study The Decree includes the information that should be provided in the annual transfer pricing study. Under the Decree, certain taxpayers are exempt from preparing a transfer pricing study. According to the provisions, the following taxpayers are not obligated to prepare a transfer pricing study: Taxpayers whose total amount of intercompany transactions does not exceed RD$ 10 million and have no transactions with entities located in tax havens or under preferential tax regimes. Taxpayers conducting relatedparty transactions with entities resident in the DR (for the local transactions part only), provided that such intercompany transactions do not result in a tax deferral or reduction of the taxable income. It is recommended that a detailed analysis be performed by the taxpayer in order to determine if there are any indications of tax deferral or reduction of the taxable income. Nevertheless, taxpayers excluded from this documentation requirement are still subject to comply with the arm s-length principle and to file the DIOR. The DTA reserves the right to require any information it deems necessary to analyze the arm slength nature of the intercompany transactions performed. Tax havens The DTA will issue a list indicating the jurisdictions it does not consider tax havens. The list is expected to be issued in the next three months. Meanwhile, the DTA will treat as tax havens those jurisdictions listed in A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard, dated 2 April Once this list is issued, interested parties could request the DTA to further review a jurisdiction considered as a tax haven. Decree No also indicates who would be considered an interested party, as well as the review procedure. General Norm Decree revokes General Norm issued 2 June Global Tax Alert Transfer pricing and Americas Tax Center 3

4 For additional information with respect to this Alert, please contact the following: Mancera, S.C., Mexico City and Central America Jorge Castellón Ernst & Young, S.A., San José, Costa Rica Rafael Sayagues Ernst & Young Limited Corp., Panama Luis Eduardo Ocando María José Luna Ernst & Young Servicios Contables RL, S.A., Santo Domingo Jorge Novas EY Transfer Pricing Global Transfer Pricing, Germany Thomas Borstell, Americas, United States Purvez Captain, EMEIA, Germany Oliver Wehnert, Japan, Tokyo Kai Hielscher, Global Markets, United Kingdom John Hobster, OME, Amsterdam Victor Bartels, Asia Pacific, Singapore Luis Coronado, Global Tax Alert Transfer pricing and Americas Tax Center

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