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May 14, 2021

Puerto Rico issues guidance for complying with the requirement to submit a transfer pricing study

The Puerto Rico Treasury Department (PRTD) has issued guidance (Administrative Determination (AD) 21-05) for complying with the requirement to submit a transfer pricing study to claim expenses paid to related entities that do not carry out operations in Puerto Rico or have a home office located outside of Puerto Rico (intercompany charges) on the income tax return.


Under Section 1033.17(a)(16) and (17) of the Puerto Rico Internal Revenue Code of 2011 (PR Code), as amended, taxpayers cannot deduct 51% of intercompany charges on the income tax return. The limitation does not apply to income derived from operations covered by a decree, resolution or a tax exemption grant.

For tax years beginning after 31 December 2018, the 51% limitation does not apply if the taxpayer files a transfer pricing study with its income tax return, including an analysis of the operations carried out in Puerto Rico. The transfer pricing study must be prepared in accordance with the requirements established in Section 482 of the United States Internal Revenue Code (IRC).

AD 21-05

Under AD 21-05, the 51% limitation will not apply for tax years beginning 31 December 2018, if the deduction is based on a transfer pricing study that is issued and available when the income tax return is filed. The transfer pricing study must be prepared in accordance with the provisions of Section 1033.17(a)(16) or (17) and Section 1040.09 of the PR Code, as well as IRC Section 482 and Treas. Reg. Sections 1.482-2 through 1.482-9.

AD 21-05 does not require the taxpayer to submit the transfer pricing study with the income tax return. The taxpayer, however, must file Form 6175, “Certification of Compliance with Sections 1033.17(a)(16) and (17) of the Code,” (Certification) to certify that it has obtained a transfer pricing study and that the study was prepared in accordance with the provisions of AD 21-05 and Sections 1033.17(a)(16) or (17) of the PR Code. The person who signed the income tax return must sign the Certification under penalties of perjury. The Certification should contain the following information about the transfer pricing study:

  • The transfer pricing study is available at the time the income tax return is filed and complies with Sections 1033.17(a)(16) or 1033.17(a)(17) of the PR Code.
  • The taxpayer must file the Certification with the PRTD within 30 calendar days of a request and will include the issuance date of the transfer pricing study and the name of the entity that prepared the study.
  • The taxpayer will indicate the method of apportionment or assignment of gross income, deductions, credits or grants on the return that are reasonably based on the transfer pricing study. 

Additionally, AD 21-05 allows taxpayers to reasonably rely on a certified transfer pricing study for previous years, provided the taxpayer’s facts and circumstances and relevant transactions in the tax year have not substantially changed since the certification of the transfer pricing study. If the facts and circumstances have substantially changed, AD 21-05 allows the taxpayer to make the necessary adjustments to the transfer pricing study, in accordance with Treas. Reg. Sections 1.482-2 through 1.482-9, so that the results represent the best method for establishing that the transactions took place at arm’s length based on the information available on the date of filing the income tax return.

Section 6030.03 of the PR Code imposes additions to tax for certain offenses, including deficiency due to negligence and willful disregard of the rules and regulations. Taxpayers, however, that have a transfer pricing study prepared in accordance with Treas. Reg. Sections 1.482-2 through 1.482-9 and Section 1040.09 of the PR Code reduce the risk of being subject to additions to tax, provided the transfer pricing study is available at the time the income tax return is filed and the taxpayer has submitted the Certification.


The PR Code was amended to limit the ability to claim the full amount of intercompany charges in 2013 by Act 40-2013. The 51% limitation provision was intended to curb perceived abuses taking place in the context of intercompany charges. Although the PR Code allowed taxpayers to request a waiver from the limitation for years before 2019, in practice the process was cumbersome, and waivers were rarely granted. The transfer pricing option is a welcome change and a comparatively more streamlined process to stay outside the reach of the 51% limitations.

AD 21-05 is the first administrative guidance issued by the PRTD on this transfer pricing option, and:

  • Outlines the manner in which taxpayers and their tax advisors can document compliance with the transfer pricing requirement to claim 100% of intercompany charges.
  • Clarifies that the transfer pricing document itself does not have to accompany the income tax return.
  • Allows taxpayers to reasonably rely on transfer pricing studies prepared for previous years if the facts and circumstances and relevant transactions have not substantially changed since the Certification of the transfer pricing study.

Although the PRTD has not issued guidance on what is deemed a substantial change in facts and circumstances, allowing taxpayers to use a transfer pricing study from a previous year will help reduce time, complexity and cost associated with Puerto Rico tax compliance.

Additionally, Form SC 6175 requires the “Name of the CPA or consulting firm that prepared the Transfer Pricing Study.” This statement appears to assume that the transfer pricing study is prepared by a CPA or consulting firm, which is not a requirement in either the 51% limitation statute or AD 21-05. It is possible that some transfer pricing studies are being prepared in-house. At this early stage, we believe this is an editing oversight, but nonetheless this is an aspect that we will be closely monitoring as additional guidance is issued on this topic.

Taxpayers should analyze and document their intercompany transactions and file that documentation with the Puerto Rican tax authority.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Puerto Rico LLC, State and Local Taxation Group, San Juan


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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