By José Rafael Monsalve, Transfer Pricing Economist and International Tax Advisor, Dominican Republic
On October 5, the Dominican Republic established specific regulations for the country-by-country report – a decade after transfer pricing documentation obligations entered into force – through General Rule 08-2021.
The general rule is aligned with the model legislation included in the OECD’s base erosion and profit shifting (BEPS) 2015 final report under Action 13 on transfer pricing documentation and country-by-country reporting. The OECD guidance addresses issues such as purpose, scope, definitions, filing obligations, notifications, use and confidentiality, formal duties, final provisions, and repeal. Also, the annex contains the template of the country-by-country report (form) and specific instructions.
Transfer pricing background in Dominican Republic
The arm’s length principle was first introduced in the Dominican Republic in 1992 (Law 11-92) and some improvements were included in a Tax Rectification in 2006 (Law 495-06). However, due to a lack of more specific regulations providing guidance on its application and on gathering the relevant data, enforcement was difficult for the tax administration.
In July 2011, a general rule on transfer pricing (General Rule 04-2011) entered into force that established applicable rules for operations carried out between related parties. This regulation outlined applicable rules for transactions between related parties, including formal documentation requirements through the preparation of a transfer pricing report and an informative return known as DIOR (Declaración Informativa de Operaciones entre Partes Relacionadas).
The 2011 rule also established the foundations for the application of the arm’s length principle (e.g., comparability analysis, methods, arm’s length range), aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
After a tax reform took place in 2012 and the tax code was modified (Law 253-12), General Rule 04-2011 was replaced with a transfer pricing regulation (decree 78-14) extending the scope of the transfer pricing rules to apply to domestic taxpayers (in addition to foreign companies) and also to domestic transactions.
According to Dominican tax administration data, since 2011 transfer pricing assessments have reached a total amount of approximately DOP 17 billion (equivalent to approximately USD 300 million) through almost a hundred audits.
Country-by-country report general rule
According to the general rule, the ultimate parent entity of a multinational group that is resident for tax purposes in the Dominican Republic and has consolidated revenue equal to or greater than DOP 38.8 billion (equivalent to approximately USD 680 million) shall file a country-by-country Report starting with fiscal year 2022. The report is due no later than 12 months after the last day of the fiscal year of the multinational group.
The general rule also describes circumstances in which a constituent entity that is not the ultimate parent entity shall file the report. These include when the ultimate parent entity is not obligated, the jurisdiction of the ultimate parent entity does not have a qualified competent authority agreement in effect, or the tax administration has been notified of a systematic failure or the filing through a surrogate parent entity.
Constituent entities that are tax resident in the Dominican Republic shall notify the tax administration of the identity and tax residence of the reporting entity no later than three months before the fiscal year-end. If this requirement is not complied with, all constituent entities of the multinational group resident for tax purposes in the Dominican Republic will be designated responsible to file the report.
The general rule also specifies that the tax administration shall use the report for purposes of assessing high-level transfer pricing risks and other base erosion and profit shifting related risks and where appropriate for economic and statistical analysis.
Non-compliance with the requirement of this general rule generates penalties up to 30 minimum wages and/or 0.25% of gross revenue of the previous fiscal year of the taxpayer.
Transfer pricing regulation alignment with BEPS action plan
The issuance of the general rule on the country-by-country report is the result of the modification in April 2021 of the transfer pricing regulation (decree 78-14) through decree 256-21. This decree incorporated into the documentation requirements the three-tiered approach (by modifying article 18 on Information and Documentation obligations) and established that the materiality threshold and assumptions for the filing of the country-by-country Report would be established through a general rule.
This modification of the transfer pricing regulation also included the accurate delineation of the transaction process (by modifying article 5 on comparables), updated the profit split method (by modifying article 2 on methods), and revised the definition of intermediary (by modifying article 10 effective existence of intermediary). These changes were made to adopt part of the recommendations of the BEPS action plan related to the alignment of transfer pricing outcomes to value creation.
The implementation of this regulatory framework will help the Dominican tax administration to prevent tax avoidance and base erosion and to increase transparency, tax revenue, and compliance.
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