An amendment to section 1033.17(a)(17) of Puerto Rico’s tax law (the Puerto Rican Internal Revenue Code of 2011) allows Puerto Rican taxpayers to deduct related-party charges in full if they file a transfer pricing study (documentation) with their income tax returns.
Puerto Rico historically has disallowed 51% of intercompany charges. In order to deduct the full amount of intercompany charges, taxpayer companies may now file a transfer pricing study with their Puerto Rican income tax return. Companies may file the first Puerto Rican transfer pricing study for the fiscal year ending 31 December 2019. The due date for the tax return is 15 April 2020, if not extended.
The transfer pricing study must follow U.S. transfer pricing regulations if the group has U.S. operations. If the group does not have U.S. operations, the transfer pricing study can follow OECD guidelines.
Additional details have not been provided, and formal regulations are expected from the Puerto Rico tax authorities. For studies written in accordance with Reg. section 1.482 (i.e., U.S. Treasury regulations), taxpayers may expect that the content would be similar to the 10 principle documents under Reg. section 1.6662. More details about the specific content for the Puerto Rico transfer pricing studies are currently not known.
Taxpayers may want to consider developing the facts of their transactions from the perspective of the Puerto Rican taxpayer. The language for the transfer pricing studies is English, and it is not certain if Spanish language studies will be accepted. Studies written in other languages apparently would not be accepted.
The transfer pricing study may not be sufficient to prove the arm’s length nature of the transactions for purposes other than the 51% disallowance. The historical Puerto Rican transfer pricing rules under section 1047 of the Puerto Rico Internal Revenue Code are still in effect.
Bottom line—additional clarification is expected. In the meantime, taxpayers may want to consider developing their transfer pricing studies and documentation to meet the new requirements for including it as part of their tax returns.
For more information, contact a KPMG tax professional in Puerto Rico:
Rolando López | +1 (787) 622-5340 | firstname.lastname@example.org
Carlos A. Molina | +1 (787) 622-5311 | email@example.com
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