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Please click on each section to expand further:
- The Puerto Rico Internal Revenue Code (PR IRC) includes transfer pricing requirements for certain intercompany transactions.
- Puerto Rico law establishes that transfer pricing studies must be performed following the United States transfer pricing rules established in Section 482 of the United States Internal Revenue Code (US IRC) and its related regulations.
- Section 1033.17(a) of the PR IRC establishes a 51% disallowance on the amount of deductions that an entity can claim for income tax purposes of the expenses paid to related entities located outside Puerto Rico or on allocations of expenses made to the Puerto Rico entity. However, such 51% disallowance is not applicable to those entities that perform a transfer pricing study to support the charges from related entities and file a certification to that effect along with the income tax return.
- This transfer pricing requirement is in effect for taxable years beginning after December 31, 2018.
- Recent amendments to the PR IRC have disallowed the use of reports prepared under OECD rules. Only reports prepared under United States rules will be acceptable.
There are three keys types of intercompany transactions: (i) tangible property transfers, (ii) intangible property transfers and (iii) intercompany services. The acceptable methods vary depending on the type of intercompany transaction. Best method rule must be followed under the given circumstances.
The United States regulations offer six methods for establishing an arm’s length standard for transfers of tangible property:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Comparable Profits Method
- Profit Split Method
- Unspecified Methods
§1.482-4(a) lists the four methods available for the study of the intangible property transfers:
- Comparable Uncontrolled Transaction Method
- Comparable Profits Method
- Profit Split Method
- Unspecified Methods
In the case of controlled services transactions, §1.482-9 lists the seven methods available:
- Services Cost Method
- Comparable Uncontrolled Services Price Method
- Gross Services Margin Method
- Cost of Services Plus Method
- Comparable Profits Method
- Profit Split Method
- Unspecified Methods.
- Puerto Rico authorities do not require specific transfer pricing documentation other than in the cases stated above. Other entities that engage in transactions with foreign affiliates are expected to follow the arm’s-length principle. Adjustments could be imposed in case of an audit.
- The transfer pricing documentation should be prepared/completed contemporaneously and submitted with the company’s Puerto Rico income tax filing for taxpayers who are claiming exemption from the 51% disallowance on intercompany transactions.
- Puerto Rico has not implemented Country by Country Reporting.
- Transfer Pricing requirements in Puerto Rico are recent and no transfer pricing specific audits have taken place. Regular income tax audits for years have scrutinized intercompany transactions.
- No specific penalties have been legislated for failure to comply with the local transfer pricing requirements. However, the consequence would be the disallowance of 51% of intercompany charges if the Puerto Rico Treasury Department challenges the transfer pricing study.
- Regulations under Section 482 of US IRC stipulate that the best method rule must be used in selecting the appropriate transfer pricing method to perform an economic analysis of intercompany transactions.
- Under the method selected, it will be necessary to perform a search of potential comparable transactions or companies either internally or externally.
- Local, regional and global comparable companies are accepted.
- Once the comparable transactions or companies have been identified, an arm’s length range is determined, normally using an interquartile range of comparable results. If the transactions under study fall within the range they are treated as arm’s length transactions.
- Puerto Rico law and regulations do not provide for Advance Pricing Agreements.
- An exemption from transfer pricing requirements applies to all entities that enjoy tax exemption under any of the Puerto Rico Tax Incentives Programs.
- Form SC 6175 is a new Certification of Compliance that must be filed with the Tax Authority to certify that a transfer pricing study has been performed and provide some basic information
For further information on transfer pricing in Puerto Rico please contact:
Isabel Hernández |