Do I need a transfer pricing study to file my entity’s tax return?

CPA Isabel M. Hernández-Campins explains Puerto Rico’s requirements for deducting intercompany expenses.

For many years, the Puerto Rico Treasury Department has sought ways to oversee the expenses charged or allocated to entities in Puerto Rico by related entities outside the territory. In Puerto Rico, it is very common to have entities operating as subsidiaries or branches of foreign entities, where the Parent Company or Home Office is in the United States or elsewhere.

Like most countries’ tax authorities, the Treasury Department has embraced the use of transfer pricing rules to assess the reasonableness of those intercompany charges. 

Any entity operating in Puerto Rico that incurs expenses paid or accrued to a related party outside of the territory is subject to a 51% disallowance of those expenses, unless it has a valid transfer pricing study. In this case, the entity may deduct 100% of the expenses, provided they are reasonable. 

Not all transfer pricing reports are valid for this purpose. The study must comply with various requirements established in the Puerto Rico Internal Revenue Code of 2011, as amended. The requirements are:

• Compliance with Section 482 of the United States Internal Revenue Code of 1986, as amended, and related regulations.
• Inclusion of the Puerto Rico operation, and completion before filing the entity’s tax return. 

The purpose of the study is to show that the intercompany charges comply with transfer pricing rules and are at arm’s length — in other words, that the charges reflect what an unrelated entity would charge the Puerto Rico operation for similar services.

The Treasury Department has issued Form 6157, Certification of Compliance with Sections 1033.17(a)(16) and (17) of the Puerto Rico Internal Revenue Code of 2011, as amended — Transfer Pricing Study Availability. 

This form must be filed with the Puerto Rico income tax return by entities deducting intercompany charges to certify that the entity has a transfer pricing study in place. It also certifies that the study was issued before filing the tax return, includes the Puerto Rico operation and was prepared in accordance with Section 482 of the United States Internal Revenue Code of 1986, as amended. 

The form also requires the name of the firm that prepared the study. When the tax return is filed, Form 6157 must be uploaded through SURI (Spanish acronym for Internal Revenue Unified System, the Treasury Department’s electronic platform) to claim the full deduction of expenses paid or accrued to related entities outside of Puerto Rico.

If you need assistance evaluating your intercompany transactions, please contact your CPA.