Capturing Deductions in Puerto Rico for Related-Party Payments

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In an unanticipated response to taxpayer requests, the Puerto Rico Treasury Department (“PRTD”) has removed administrative hurdles to deduct 100 percent of expenses paid to related parties. Section 1033.17(a)(17) of the Puerto Rican Internal Revenue Code of 2011 (“PRIRC”) previously provided that taxpayers could deduct only 49 percent of the expenses paid to affiliates when computing net income for a Puerto Rican taxpayer. Acknowledging the need to enhance tax parity among types of taxpayers, however, PRTD has subsequently amended this section of PRIRC to eliminate the 51 percent limitation for tax years beginning after December 31, 2018 if the taxpayer:

• Prepares a transfer pricing study validating the arm’s length character of the transaction(s) based on the standards of U.S. Internal Revenue Code (“IRC”) Section 482 and the regulations thereunder (“U.S. transfer pricing regulations”); and
• Completes the transfer pricing study for transactions occurring in a given year contemporaneously with the filing of the tax return that reflects such transfer prices.

Note that the study does not have to be submitted with the return. Rather, PRTD provides a process for Certification of Compliance through Sections 1033.17(a)(16) and (17) of the PRIRC whereby the person that signs the relevant income tax return must sign a Certification of Compliance containing the following representations:

• That, at the time of filing the return, a transfer pricing study is available that meets the requirements established in Sections 1033.17(a)(16)-(17) of the Code, as applicable;
• That, the Certification will be filed with the Department within (30) calendar days after being required, and for these purposes it must include the date of issuance of the transfer pricing study and the name of the entity that prepared said study; and
• That, the method of apportionment or allocation of gross income, deductions, credits or concessions in the return are reasonably based on said transfer pricing study.

Gaining 100 Deductibility Just Got Easier

While helpful, the comprehensive informational requirements outlined in the U.S. transfer pricing regulations for complaint transfer pricing documentation required taxpayers to expend meaningful administrative resources each year to be able to deduct 100 percent of expenses paid to related parties.  On May 11, 2021, PRTD issued Administrative Determination No. 21-05 (“DA 21-05”) in response to taxpayers’ requests to simplify compliance with amendments to PRIRC Section 1033.17(a)(16)-(17).

DA 21-05 meets this administrative burden head-on. Specifically, if facts and circumstances have not changed and the relevant transactions in the taxable year have not changed substantially from the time of Certification of Compliance, DA 21-05 provides that the bulk of the transfer pricing study can be rolled forward and be reasonably relied on for the necessary transfer pricing analyses for the current year. For example, the financial analyses should be updated annually to reflect and support the current year’s operations and intercompany expense deductions. If the facts and circumstances in a taxable year have changed substantially, however, the transfer pricing study should be updated accordingly prior to claiming Certification of Compliance.

Next Steps

The obvious benefits from the updates to the PRIRC is that Puerto Rican taxpayers can now reduce taxable income by preparing a complete transfer pricing study to claim 100 percent of the deductions on intercompany expenses. AD 21-05 provides clear administrative guidance from the PRTD to take advantage of the amendments and avoid the 51 percent limitation on intercompany expenses.

We’re Here to Help

While navigating the transfer pricing regulatory environment can be complex, Bennett Thrasher’s Transfer Pricing practice has the expertise and resources to assist with preparing appropriate transfer pricing documentation for Puerto Rican taxpayers and any other jurisdictions. For more information on how our team can help your business take full advantage of this opportunity, please contact Ben Miller by calling 770.396.2200.

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