Harmful Tax Practices – 2018 Peer Review Reports on the Exchange of Information on Tax Rulings

Costa Rica

Costa Rica has met all aspects of the terms of reference (OECD, 2017[3]) (ToR) for the calendar year 2018 (year in review) except for having in place an effective review and supervision mechanism to ensure that all relevant information is captured adequately (ToR I.4.3) and ensuring that information on rulings is transmitted to the Competent Authority responsible for international exchange of information without undue delay (ToR II.5.5). Costa Rica receives two recommendations on these points for the year in review.

In the prior year report, Costa Rica had received three recommendations. For the year in review, two recommendations made in the prior year peer review report have been addressed and are removed. The other recommendation has not been addressed and remains in place. A new recommendation has been added.

Costa Rica can legally issue two types of rulings within the scope of the transparency framework. In practice, Costa Rica issued rulings within the scope of the transparency framework as follows:

• Six past rulings;

• For the period 1 April 2017 - 31 December 2017: three future rulings, and

• For the year in review: four future rulings.

No peer input was received in respect of the exchanges of information on rulings received from Costa Rica.

Introduction

This peer review covers Costa Rica’s implementation of the BEPS Action 5 transparency framework for the year 2018. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

Costa Rica can legally issue the following two types of rulings within the scope of the transparency framework: (i) cross-border unilateral advance pricing arrangements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles; and (ii) permanent establishment (PE) rulings. To date, Costa Rica has issued only PE rulings given the resolution that establishes the requirements taxpayers must provide has not been issue yet.

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

For Costa Rica, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2015 but before 1 April 2017; or (ii) on or after 1 January 2012 but before 1 January 2015, provided they were still in effect as at 1 January 2015.

In the prior year peer review report, it was determined that Costa Rica’s undertakings to identify past rulings and all potential exchange jurisdictions met all the ToR, except for identifying information on the jurisdiction of the ultimate parent company through the “best efforts approach” (ToR I.4.2.2). Therefore, Costa Rica was recommended to continue its work to complete its information-gathering process on past rulings as soon as possible. During the year in review, Costa Rica identified all potential exchange jurisdictions. In practice, the jurisdictions identified were the same as the jurisdiction of residence of immediate parent entity, ultimate parent entity, head office or jurisdiction of the PE that had been previously identified. Costa Rica has addressed this issue and therefore this recommendation is removed.

In the course of making efforts to identify the remaining potential exchange jurisdictions in the year of review, Costa Rica determined that the two past rulings identified in the prior year peer review report were in fact future rulings and identified a total of six past rulings not previously reported. All past rulings have now been identified. Costa Rica was also able to identify the potential exchange jurisdictions for these rulings.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

For Costa Rica, future rulings are any tax rulings within scope that are issued on or after 1 April 2017.

In the prior year peer review report, it was determined that Costa Rica’s undertakings to identify future rulings and all potential exchange jurisdictions met all the ToR, except for ensuring that information on all potential exchange jurisdictions is obtained for future rulings (ToR I.4.2.1). Therefore, Costa Rica was recommended to continue its efforts to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings.

In order to identify potential exchange jurisdictions, information is first obtained from the rulings. In practice, in most cases information is also publicly available, given that usually taxpayers requiring PE rulings are permanent establishments of companies listed on the stock exchange and subject to a regulatory framework which includes disclosing their head office details. For the year in review, the process described above allowed Costa Rica to identify all potential exchange jurisdictions. However, if any information on potential exchange jurisdictions was missing, Costa Rica would require the taxpayer to provide the information or would conduct a search for the information in possession of the local tax administrations, meaning the information would always be obtained. Therefore this recommendation is removed.

It is noted that Costa Rica is working to further strengthen the information gathering process for rulings, including through access to a shareholder register and draft resolutions on the issuance of rulings. This will be reviewed in the subsequent peer review.

During the year in review, in the course of making efforts to identify the remaining potential exchange jurisdictions, Costa Rica identified a total of three future rulings issued in 2017 and four future rulings issued in 2018 not previously reported. For all those future rulings, Costa Rica identified all potential exchange jurisdictions. For the sake of completeness, it is noted that for each ruling the immediate parent entity, ultimate parent entity, head office or PE are all resident in the same jurisdiction.

Review and supervision (ToR I.4.3)

In the prior year peer review report, it was determined that Costa Rica’s review and supervision mechanism was sufficient to meet the minimum standard. During the year in review, as noted above, additional rulings were found that had not previously been identified. Costa Rica remedied the issue after the year in review and completed the additional exchanges in 2019. Costa Rica is recommended to strengthen its review and supervision mechanism to ensure that the information gathering process is working effectively to ensure that similar issues are not encountered in future.

Conclusion on section A

For the year in review, Costa Rica has met the ToR for the information gathering process, except for having in place a review and supervision mechanism to ensure that all relevant information is captured adequately (ToR I.4.3). Costa Rica is recommended to strengthen its review and supervision mechanism to ensure that the information gathering process is working effectively.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

Costa Rica has the necessary domestic legal basis to exchange information spontaneously. Costa Rica notes that there are no legal or practical impediments that prevent the spontaneous exchange of information on rulings as contemplated in the Action 5 minimum standard.

Costa Rica has international agreements permitting spontaneous exchange of information, including being a party to the (i) Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011[4]) (“the Convention”), (ii) double tax agreements in force with three jurisdictions, and iii) tax information exchange agreements in force with two jurisdictions.1

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

In the prior year peer review report, it was determined that Costa Rica’s process for the completion and exchange of templates met all the ToR, except for having in place a process to complete the templates in the form required by the transparency framework and submit them to the Competent Authority and completing exchanges of information on rulings in accordance with the timelines (ToR II.5). Therefore, Costa Rica was recommended to continue its efforts to complete the templates for all relevant rulings and to ensure that the exchanges of information on rulings occur as soon as possible.

For the year in review, Costa Rica sought to ensure that the information exchanged was in the form of the template contained in Annex C of the 2015 Action 5 Report (OECD, 2015[5]), however in practice this did not happen in all cases and for four future rulings, corrected templates were required to be sent in 2019.

In terms of process, Costa Rica clarified that the Transfer Pricing unit is responsible for completing the template for PE rulings. Several levels of review and supervision are performed by the deputy director of the Transfer Pricing unit and the director of International Taxation. Once the template is approved by the General Tax Administration Director, it is transmitted to the EOI unit which will perform the exchanges via encrypted email with relevant jurisdictions.

During the year in review, Costa Rica experienced some delay in the process of completing and exchanging the templates mainly due to issues in the information gathering process identified in part A above and the lack of a procedure for the timely transmission of templates to the Competent Authority after a ruling is issued. Costa Rica is currently working on a procedure to ensure that templates for future rulings are transmitted to the Competent Authority within two months from the date of their issuance. However, once templates were received by the Competent Authority, they were exchanged with the relevant jurisdictions within the agreed three month period, and on average after two days of the Competent Authority having received them.

For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2018	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2018	Reasons for the delays	Any other comments
0	6	See below.	Costa Rica exchanged all information on its past rulings in June 2019.
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	7	0	See below.	Costa Rica exchanged all information on its future rulings by June 2019.
Total	7	6

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	N/A	N/A	N/A

Costa Rica explained that the transmission delay is due to the delayed identification of tax rulings in scope (as noted in section A above) and the absence of a procedure aimed at ensuring that that templates rulings were timely transmitted to the Competent Authority.

Conclusion on section B

Costa Rica has the necessary legal basis for spontaneous exchange of information. Costa Rica has met all of the ToR for the exchange of information except for ensuring that information on rulings is transmitted to the Competent Authority responsible for international exchange of information without undue delay.

Costa Rica is recommended to continue its efforts to ensure that information on rulings is transmitted to the Competent Authority without undue delay (ToR II.5.5).

C. Statistics (ToR IV)

The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Ruling related to a preferential regime	N/A	N/A
Cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	N/A	N/A
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	N/A	N/A
Permanent establishment rulings	De minimis rule applies	N/A
Related party conduit rulings	N/A	N/A
De minimis rule	5	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	N/A	N/A
Total	5

D. Matters related to intellectual property regimes (ToR I.4.1.3)

Costa Rica does not offer an intellectual property regime for which transparency requirements under the Action 5 Report (OECD, 2015[5]) were imposed.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
Costa Rica experienced difficulties in ensuring that all relevant information is captured adequately and identified additional past and future rulings that were not previously captured.	Costa Rica is recommended to strengthen its review and supervision mechanism to ensure that the information gathering process is working effectively.
Costa Rica experienced difficulties in ensuring that information on rulings is transmitted to the Competent Authority responsible for international exchange of information without undue delay.	Costa Rica is recommended to continue its efforts to ensure that information on rulings is transmitted to the Competent Authority without undue delay. This recommendation remains unchanged since the prior year peer review report.

Note

← 1.  Parties to the Convention are available here: www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm. Costa Rica also has double tax agreements with Germany, Mexico, and Spain and tax information exchange agreements with Argentina and the United States.