Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Costa Rica

Costa Rica has met the terms of reference (ToR) for the calendar year 2017 (year in review), except for applying the “best efforts approach” for the year in review to identify all potential exchange jurisdictions for all past rulings (ToR I.4.2.2), ensuring that information on all potential exchange jurisdictions is obtained for future rulings (ToR I.4.2.1) and 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). Costa Rica is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings, to continue its efforts to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings, 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.

Costa Rica can legally issue two types of rulings within the scope of the transparency framework.

In practice, Costa Rica has issued two past rulings; and for the year in review, Costa Rica issued no future rulings within the scope of the transparency framework.

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

Introduction

269.  This peer review covers Costa Rica’s implementation of the BEPS Action 5 transparency framework for the year 2017. 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

270.  Costa Rica can legally issue the two following 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. The resolution to authorise the issuing of APAs is pending. As no APAs have been issued to date, no determination has been made as to who would be responsible for issuing them. PE rulings are issued by each local tax administration and the Large Business Directorate, following prior coordination with and based on drafting provided by the transfer pricing unit. To date, Costa Rica has issued only PE rulings.

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

271.  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.

272.  The process for identifying past rulings was conducted as follows. Rulings were maintained in separate rulings files. In the case of PE rulings, they are kept by the local tax administrations or the Large Business Directorate, which send a copy of the ruling to the transfer pricing unit. In the case of APA rulings, they are going to be kept by the transfer pricing unit. Rulings were identified according to their name, as the title of each ruling (APA or PE) matches with the categories in the transparency framework. In order to identify past rulings, the transfer pricing unit manually analysed the files and searched for the date of issuance to determine if it was within the period of validity for past rulings.

273.  In order to identify potential exchange jurisdictions, information was obtained from the ruling. Information related to the jurisdiction of the head office (since Costa Rica only issued PE rulings) was already required to be provided by the taxpayer when applying for the ruling and was available to the tax administration. Information on the immediate parent company and ultimate parent company was not required to be provided in the ruling application. Costa Rica used the “best efforts approach” in order to identify these jurisdictions, which involved searching the taxpayer’s file. This file contained information on the immediate parent company, but not on the ultimate parent company. Costa Rica still needs to use the “best efforts approach” to identify information on the jurisdiction of the ultimate parent company. 

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

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

275.  As was the case for past rulings, rulings are maintained in separate rulings files and identified according to their name. In order to identify future rulings, the transfer pricing unit, which is in charge of collecting both PE and APA rulings, analyses the files and searches for the date of issuance. A new procedure is being put in place, according to which this process is undertaken as soon as any new ruling is issued. In the year in review, as no future rulings were issued, the fact that this process was not in place has not had an impact in practice.

276.  In order to identify all potential exchange jurisdictions, the ruling application process will be amended together with the resolutions that regulate the issuance of APAs and PE rulings currently under review. The information on the immediate parent company and ultimate parent company will be obtained from the register of shareholders to be hold by the Central Bank. However, since this register is not yet in place, in the meantime the taxpayer will be required to provide this information when requesting the ruling. This process will be amended by the end of 2018.

Review and supervision mechanism (ToR I.4.3)

277.  Senior officers were instructed on the requirements of the transparency framework and supervised the process to ensure the relevant information was captured accurately.

278.  Costa Rica is currently putting in place a more formal procedure according to which the Exchange of Information (EOI) unit will be in charge of the review and supervision mechanism, including senior officers having oversight of the issuance of the tax rulings to ensure the relevant information is captured accurately.

Conclusion on section A

279.  Costa Rica has met the ToR for the information gathering process, except that Costa Rica did not apply the “best efforts approach” for the year in review to identify all potential exchange jurisdictions for all past rulings (ToR I.4.2.2) and does not yet ensure all potential exchange jurisdictions would be identified for future rulings (ToR I.4.2.1). Costa Rica is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings and to continue its efforts to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings. It is noted that Costa Rica identified the jurisdictions of the ultimate parent company in July 2018, by using the “best efforts approach”.

B. The exchange of information

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

280.  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.

281.  Costa Rica is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”) and (ii) double tax 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)

282.  For the year in review, the procedure to fill in the information was under revision. According to the new procedure, the transfer pricing unit will be in charge of filling in the template for both APA and PE rulings. The officers of the transfer pricing unit will be trained in order for them to deliver the templates already in the form of the XML schema to the EOI unit. Costa Rica has confirmed that their approach to the completion of the summary section of the template will use the internal FHTP suggested guidance, which will be an Annex to the new procedure.

283.  Costa Rica is working on a procedure to establish a time limit for the unit that issues the ruling to send the relevant information to the EOI unit. With respect to past rulings, the information was provided to the EOI unit in mid-2018, and which sent the templates to relevant jurisdictions via e-mail. With respect to future rulings, every time a new ruling is issued the transfer pricing unit will inform the EOI Unit.

284.  The EOI unit will revise the templates and send them to the Competent Authority for its signature, receive the signed templates from the Competent Authority and finally perform the exchanges via encrypted email with the relevant jurisdictions. The new procedure also envisages designating the head of the tax treaties unit to review the templates before the exchange. The EOI Unit will process the XML in the system and then have three months to send the information to the relevant jurisdictions.

285.  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 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	0	2	See below	Costa Rica exchanged information on the past rulings in July 2018.
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
	N/A	N/A	N/A	N/A
Total	0	2

 

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

286.  Costa Rica explained that the transmission delay for exchanges of information on the two past rulings is due to the implementation of the new procedure for the exchange of information process, and the time take to apply the “best efforts approach” to complete the missing information. Costa Rica confirmed that the identified rulings were exchanged in July 2018 and the two rulings were processed in the template format for the exchange of information.

Conclusion on section B

287.  Costa Rica has the necessary legal basis to undertake spontaneous exchange of information. In the year in review, Costa Rica was putting in place procedures to perform exchange of information, including filling the templates with the necessary information required on relevant rulings in the form of Annex C of the Action 5 Report (OECD, 2015) or the XML Schema, to provide them to the EOI unit without undue delay and to exchange them within the timelines required by the transparency framework. Costa Rica is 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 (ToR II.5).

C. Statistics (ToR IV)

288.  As no information on rulings was exchanged for the year in review, no statistical data can be reported.

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

289.  Costa Rica does not offer an intellectual property regime for which transparency requirements under the Action 5 Report (OECD, 2015) 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
For the year in review, Costa Rica did not apply the “best efforts approach” to identify all potential exchange jurisdictions for all past rulings.	Costa Rica is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings.
Costa Rica does not yet ensure that information on all potential exchange jurisdictions is always obtained for future rulings.	Costa Rica is recommended to continue its efforts to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings.
In the year in review, Costa Rica had not yet finalised the process to complete the templates and submit them to the Competent Authority and had not undertaken any exchanges of information.	Costa Rica is 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.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

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 bilateral agreements in force with Germany and Spain.