Costa Rica’s transfer pricing regulations do not formally align with the OECD Transfer Pricing Guidelines (OECD Guidelines). However, in practice, Costa Rica relies on these Guidelines for the purposes of interpretation, and as a reference for good practice. Currently, the transfer pricing regulations are regulated by the means of the Income Tax Law (ITL) and the Regulation to the Income Tax Law (Regulation).
Arm’s Length Principle
As per the Costa Rican legislation, the arm’s length principle requires that transactions between related parties—whether they are residents or nonresidents—must be priced as if they were agreed upon by independent parties in similar conditions. If prices differ from what would be agreed between unrelated parties, the tax authority can make adjustments.
Related Party Definition
Article 68 of the Regulation has instituted the criteria that define when individuals or entities are considered related for tax purposes. Specifically, two parties are considered related when one of them controls or directs the other, holds at least 25% of the share capital or voting rights, or when both parties are under common control by a third party. Additionally, transactions with parties in other jurisdictions that have lower income tax rates, or those which lack information exchange agreements with Costa Rica are also considered related-party transactions.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Costa Rica are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
In Costa Rica, the selection of the transfer pricing methods is based on the “most appropriate principle”. Also, the law allows for the usage of other methods, in addition the these five.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Costa Rica has regulated this aspect in the Regulation, while the OECD Guidelines as outlined in Chapter III are used as Guidance.
The analysis considers factors such as the characteristics of the products or services, the functions, assets, and risks of each party, the contract terms, the economic and market conditions, and business strategies. Prices from similar transactions inside the company (internal comparables) or outside (external comparables) can be used for the comparison. A transaction is comparable if either there are no major differences, or reasonable adjustments can be made to fix those differences.
Documentation Requirements
Transfer pricing documentation requirements in Costa Rica are based on the three-layer approach which requires multinational groups to submit the following documentation to the Costa Rican tax authority:
- Corporate File;
- Local File, and
- Country-by-Country (CbC) report.
The Corporate File (similar to the OECD Master File) gives a general overview of the multinational group’s operations. It must include the group’s structure, main business activities, value chain, R&D functions, intangible assets, financing arrangements, consolidated financial statements, and details of APAs or mutual agreements. It should also show where key personnel and operations are located and outline the group’s policies on intangibles and financing.
The Local File (similar to the OECD Local File) focuses specifically on the Costa Rican entity. It must describe the local company’s business activities, details of each related-party transaction, a functional analysis of the roles and risks of the entity, the selected transfer pricing method, and financial data. It should also include any comparability adjustments made, the reasons for using multi-year analysis, audited financial statements from the last three years, and justification for the comparables selected. Both files must be updated annually and made available to the tax authority upon request.
CbC Reporting is mandatory for multinational enterprise (MNE) groups with a consolidated annual income of at least €750 million. The report must be filed by the ultimate parent entity domiciled in Costa Rica, or by a surrogate parent entity if appointed. If the parent company is located abroad and files the CbC report in a country that has an exchange agreement with Costa Rica, there is no obligation to file the report locally.
The CbC report itself must be submitted electronically by December 31 of the year following the reportable fiscal year. The report must include detailed information on the group’s income, taxes, and business activities by jurisdiction, a list of all constituent entities with their functions, and any additional information that may help explain the data.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Taxpayers can request an Advance Pricing Agreement (APA) from the tax administration to set the value of related-party transactions in line with the arm’s-length principle. Once approved, an APA is valid for five tax years and may be renewed for additional five-year periods.
Mutual Agreement Program (MAP) is available under Costa Rica’s tax treaties resulting from cross-border disputes. Taxpayers can request a MAP when they believe taxation is not in accordance with a treaty, typically within three years from the first notification of the issue. Costa Rica generally follows OECD standards for MAP, including allowing access even when domestic remedies are used simultaneously.
Penalties
Costa Rica does not have special penalties for transfer pricing. Instead, general penalties apply.
Taxation at a Glance
The Costa Rican tax system is based on the territoriality principle; it means that only income generated within Costa Rican territory and from Costa Rican sources is subject to income tax. The taxation policy is based on Law No. 7092/1988 (the “Income Tax Law”) and Executive Decree No. 43198-H /2021 (the “Income Tax Law Regulations”).
The official name of the Costa Rican tax authority is the Dirección General de Tributación, managed by the Ministry of Finance. The official currency is the colón.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 30% |
VAT | 13% |
Withholding tax on dividends to non-residents | 5/15% |
Withholding tax on interest to non-residents | 5.5/15% |
Withholding tax on royalties to non-residents | 25% |
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