Worldwide: A Transfer Pricing Overview For Central America

Last Updated: 30 April 2018
Article by Lyndsey Wheeler

In Central America, there are two countries in particular that are engaging with the new transfer pricing landscape. Costa Rica, which is looking to become a full member of the OECD, and Panama, which is under pressure from the OECD to adopt these changes due to its status as a financial centre.

Central America, lying between Mexico and South America, comprises Panama, Costa Rica, Nicaragua, Honduras, El Salvador and Guatemala. These countries sit adjacent to the Dominican Republic.

It's a fast-growing region that is attracting increasing levels of foreign direct investment (FDI). According to the International Monetary Fund, the economic forecast for the region is robust, helped by stronger than expected remittances flows, improved financial conditions and good harvests.

Like other regions around the world, it's also adjusting to the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting (BEPS) initiative, which has resulted in new regulations designed to tackle international tax avoidance.

In July 2017, the OECD updated its transfer pricing guidelines for multinational enterprises (MNEs) and tax administrations to align with the recommendations from the BEPS project. The new guidelines introduced a three-tiered approach to transfer pricing documentation for taxpayers with intercompany transactions. This includes the preparation of three documents – a master file, local file and Country-by-Country (CbC) report.

In Central America, there are two countries in particular that are engaging with the new transfer pricing landscape. Costa Rica, which is looking to become a full member of the OECD, and Panama, which is under pressure from the OECD to adopt these changes due to its status as a financial centre.

Costa Rica

Costa Rica is one of the most attractive countries in which to do business in the region. It offers Central America's strongest social and political environment and a stable banking infrastructure, which combines to create a solid proposition for investors and MNEs.

The country is advancing quickly in terms of transfer pricing regulation. Last year, the Costa Rican Tax Authority published a resolution adding the master file and local file to the existing transfer pricing documentation requirements, in accordance with the BEPS plan.

Costa Rican taxpayers that have transactions with associated enterprises must prepare a master file and a local file and retain it for four years. This information will only need to be submitted if requested by the tax authorities and, if requested, taxpayers will have 10 business days to submit the information.

Companies operating in Costa Rica should pre-empt any requests and make sure that they collect the relevant information, should it be needed. There will be a fine of up to US$80k for companies who don't file when requested.

The content of the master file and local file is largely consistent with the recommendations of BEPS Action 13.

The master file must contain information on the legal and ownership structure of an MNE and the geographical location of its operating entities. It must also include details of the supply chain for the MNE's five largest products or services, in addition to any other products or services amounting to more than 5% of the group's turnover. There must also be an overview of the transfer pricing policies for allocating the cost of services to determine the prices charged in transactions between members of the group.

The local file must include, amongst other things, a detailed description of the management structure of the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the country in which they are based.

To fully understand the requirements, it's advisable to work with a local partner that offers expertise in the area.


Panama has evolved from a maritime trading hub into a top international banking and professional services centre. The country has a strong economy and world-class infrastructure. It also has a stable, democratically-elected government pushing to attract business from foreign companies.

Panama was the first country in Central America to introduce transfer pricing legislation, with the legal framework created through tax reform in 2010.

Whilst Panama is not a member of the OECD, the OECD's transfer pricing guidelines are generally used to inform national transfer pricing regulations. However, it's worth noting that if the OECD guidelines interfere, or conflict, with national regulations, then the national regulations will prevail.

In 2017, Executive Decree No.390 prompted changes to transfer pricing legislation in Panama. The information required has increased and become more specific.

MNE's need to carefully analyse the changes and provide the additional information and data for transfer pricing documentation purposes. If a taxpayer fails to comply, then a penalty of up to 1% of the total amount of intercompany transactions may be imposed.

The wider region

Other countries across the region are implementing policies internally which reflect OECD best practice, but they haven't formally subscribed to the BEPS initiative.

This is largely due to concerns about BEPS Action 5 conflicting with their preferential tax arrangements that currently provide a big draw for FDI. However, it's clear that these countries will need to revisit and review their existing tax arrangements as the business world aligns to the new BEPS regulation.

Governments need to ensure that the taxable profits of MNEs are not shifted out of their jurisdiction, and that the tax base reported by MNEs operating in the country reflects the level of economic activity undertaken.

The OECD is helping these countries by providing clear guidance on the proper application of the 'arm's length' principle, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises. It is also providing financing and aid for countries that don't have the necessary skills and infrastructure to implement these changes.

TMF Group

Our experts operate across Central America and monitor developments in local reporting requirements linked to the BEPS initiative. Speak to us to find out how we can help you to stay ahead of the compliance curve and succeed in your business venture.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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