This law was published on November 9, 2012, “Law No. 253-12,” modifying Article 281 of the Tax Code of the Dominican Republic. This change establishes that transactions carried out by a resident and related individuals, legal entities, or entities, whether residents, foreigners, or located in territories with preferential tax regimes, must be agreed upon based on the prices or amounts that would have been agreed between independent parties in similar business circumstances, i.e., considering the principle of effective independence.
Transfer Pricing Dominican Republic
Transfer Pricing Income Tax Law? Additionally, on March 6, 2014, Regulation 78-14, containing the Transfer Pricing Regulation, was published, repealing General Rule No. 04-2011, issued by the General Directorate of Internal Revenue (DGII) on June 2, 2011. Through this decree, significant changes were introduced to the legislation, expanding the technical level, scope, and reach of the Dominican regulation on transfer pricing.
Learn how the Transfer Pricing regulation works and the supporting documentation for transfer pricing.
At Contadores Dominicanos, we have trained professionals to advise you on DGII transfer pricing matters.
Definition of Related Parties in the Dominican Republic
According to the transfer pricing regulation 78-14 in Article 2, related parties are considered individuals, legal entities, or entities, in respect of which any of the following conditions are verified, provided that one of them is a resident or is located in the Dominican Republic:
- When one of the parties participates directly or indirectly in the management, control, or capital of the other.
- When the same individuals, legal entities, or entities participate directly or indirectly in the management, control, or capital of these parties.
- When an individual, legal entity, or entity owns permanent establishments abroad, concerning these.
- When a permanent establishment located in the country has a parent company resident abroad in relation to another permanent establishment of the same or a related individual, legal entity, or entity.
- When an individual, legal entity, or entity resident enjoys exclusivity as an agent, distributor, or concessionaire of another for the sale of goods, services, or rights.
- When an individual, legal entity, or entity receives or transfers fifty percent or more of its production to another.
- When one entity assumes the costs of another for the exploitation and generation of income or the losses of another concerning market, production, or financial risks.
Tax Authority Behavior in the Dominican Republic
One of the sectors with the most transfer pricing audits in recent years by the DGII has been the hotel industry, especially so-called “all-inclusive” hotels; during the period 2007-2010, the authority conducted 73 audits, within which it determined adjustments for a total amount of $472 million USD, of which $85 million were eliminated losses and the rest in cash payments. Based on the above, different rates were proposed according to the category and geographical locations of taxpayers, leading them to opt for Advance Pricing Agreements (APA) to have certainty over their intercompany commercial agreements for a determined period.
Penalties for Non-Compliance with Transfer Pricing in the Dominican Republic
Penalties for non-compliance with transfer pricing regulations are established in the Tax Code (Law No. 11-92). This code contemplates generic fines and specific fines for failure to comply with obligations, including:
- When submitting the Annual Income Tax Return, taxpayers who do not have sufficient information and analysis to evaluate their transactions with related parties (DIOR and study, as applicable), in accordance with the provisions of the Dominican Republic Tax Code, would be in violation of a formal obligation within the established deadlines. Also, according to Article 281ter of the cited Code, when false or incomplete data is provided, the taxpayer is subject to penalties under Law 495-06, which modifies Article No. 257 of the Tax Code, establishing a fine of five to thirty minimum wages, as well as a sanction of 0.25% of the declared income in the previous fiscal period in cases of non-compliance.
- Furthermore, if a tax adjustment to the prices is confirmed, the sanctions provided for in Article No. 250 will be imposed, consisting of a pecuniary penalty of up to twice the amount of the omitted tax, without prejudice to the closure sanction, if applicable.
Documentation and Disclosure Requirements in the Dominican Republic
Informative Return in the Dominican Republic
Taxpayers subject to the transfer pricing regime must annually submit the DIOR form through the Virtual Office no later than 180 days after the end of the fiscal year (60 days after submitting the Income Tax Return), as established in Article 18 paragraph I of Decree 78-14.
The DIOR form is used to report annually the details of each intercompany transaction carried out by local companies with foreign capital with:
- Their related parties abroad,
- Individuals, companies, or entities residing or domiciled in low-tax jurisdictions or tax havens, and
- Their related or linked parties benefiting from the Free Zone Regime.
It is important to note that, according to Article 18 paragraph V of Decree 78-14, those taxpayers who have conducted transactions with their related parties and are exempt from preparing the transfer pricing study must submit the DIOR with the information outlined in Article 18 paragraph VI of Decree 78-14.
Supporting Documentation (Study) in the Dominican Republic
Article 18 paragraph IV of Decree 78-14 establishes that taxpayers subject to the transfer pricing regime must have a study or report on the valuation process of the transfer prices agreed upon in transactions carried out with their related parties available at the time of submitting the Informative Return of Related Party Transactions, to be made available to the DGII when required.
The points that must be included in this transfer pricing study are established in the cited paragraph, among which we can highlight:
- The organizational structure of the group and the entities that integrate it at the national and/or international level.
- Identification of the related parties with whom the transactions were conducted.
- Details and amounts of intercompany transactions.
- Description of the functions, assets, and risks assumed by the taxpayer in the development of its activities.
- Analysis of intercompany transactions.
- Determination of the price or market range.
- Among others.
Taxpayers subject to transfer pricing legislation in the Dominican Republic are individuals, legal entities, or resident entities that conduct transactions with:
- Related parties abroad;
- Local resident related parties;
- Individuals, companies, or entities residing or domiciled, constituted, or located in States or territories with preferential, low, or zero-tax regimes or tax havens, whether or not the latter are residents.
According to Article 18 paragraph V of Decree 78-14, the following taxpayers will be excluded from the obligation to prepare the transfer pricing study:
- Those whose transactions with related parties do not exceed in total, in the fiscal year under analysis, the sum of $10,395,697.20 Dominican pesos (amount issued through notice RNC: 401-50625-4 by the DGII), adjusted annually for inflation, and who do not conduct transactions with residents of tax havens or preferential tax regimes.
- Those conducting transactions with resident related parties, for the part of the transactions conducted exclusively with these, provided that the prices agreed upon in the transactions between the parties do not result in lower taxation in the country or a tax deferral.
Safeguarding the Transfer Pricing Study in the Dominican Republic
The Tax Code, in Article 44, paragraph f, and Article 55, paragraph h, mentions the requirement to keep orderly records and provide them as a means of tax compliance oversight for a period of no less than 10 years.
Language of the Documentation in the Dominican Republic
According to the Tax Code, the information must be presented in Spanish.
Small and Medium-Sized Enterprises in the Dominican Republic
The legislation of the Dominican Republic does not contemplate any consideration for small and medium-sized enterprises.
Deadline to Prepare the Documentation in the Dominican Republic
Transfer pricing documentation must be prepared before the deadline for submitting the informative return.
Deadline to Submit the Documentation in the Dominican Republic
Taxpayers subject to the transfer pricing regime in the Dominican Republic must have a transfer pricing study available at the time of submitting the DIOR, which is 180 days after the end of the fiscal year.
Statute of Limitations in the Dominican Republic
According to the Tax Code, the statute of limitations for supporting documentation is 10 years from the date the return is submitted.
Transfer Pricing Methods in the Dominican Republic
Article 7 of Decree 78-14 establishes that, for the purposes of transfer pricing documentation, the applicable methods for determining the arm’s length price for transactions between related parties will be:
- Comparable Uncontrolled Price Method (CUP);
- Resale Price Method (RPM);
- Cost-Plus Method (CPM);
- Profit Split Method (PSM); and
- Transactional Net Margin Method (TNMM).
Comparables in the Dominican Republic
In the Dominican Republic, both internal and external comparables are acceptable. The latter may come from markets outside the country, provided that no local information is available.
BEPS Implementation in the Dominican Republic
In the short term, the Dominican Republic has not proposed any reforms to transfer pricing legislation. However, it is important to note that the Law states that for anything not provided for in the legislation, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the OECD Council, will be applicable. These guidelines were recently modified by the OECD as a result of the BEPS Actions, which have been a topic of discussion internationally.
