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Tax reform introduced – transfer pricing and tax havens

Several amendments to the income tax are introduced by Law No. 822 published in the Official Gazette of 17 December 2012 and in force as of 1 January 2013. The main amendments include the introduction of transfer pricing and tax haven provisions.

Tax haven provisions
Expense payments made by residents or PEs of non-residents to a resident of a tax haven, as expenses, are subject to final withholding tax at the rate of 17%.

Certificates of residence issued by authorities of tax havens are not valid to prove residence in that jurisdiction.

Tax havens are:

-   territories levying an income tax or a similar tax which is substantially lower than the income tax levied in Nicaragua on business and investment income; and
-   States or territories considered in the relevant tax period as non-cooperative jurisdictions by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

The Ministry of Finance may declare a State or territory as a non-tax haven where:

-   there is a tax treaty in force between Nicaragua and that State or territory, which includes an exchange of information provision, or there is a specific exchange of information agreement between the tax administrations; and
-   that States or territories that have been "positively analysed" by the Nicaraguan authorities at their own request.

Transfer pricing (TP) rules
TP rules are based on the arm's length principle. The rules cover related parties, transfer pricing methods, comparability analyses, adjustments by the tax administration, advanced price agreements (APAs) and reporting obligations at the request of the tax administration.

Transactions between related parties, including acquisitions or transfers without consideration, must be valued according to the arm's length principle. Transactions between residents and non-residents, and between residents and free zone residents are also covered by the TP rules.

The tax administration is empowered to make transfer pricing adjustments when the transactions are valued in a way that results in a lower taxation or a tax deferral. It may also re-characterise the transactions according to their economic substance.

The law provides detailed rules concerning related parties including:

-   where one person directs or controls another person or has a participation, directly or indirectly, of at least forty percent (40%) of its capital or voting power (a person also encompasses the individual's relatives);
-   where up to five persons direct or control the persons listed in the previous paragraph; or have a participation, directly or indirectly, of at least forty percent (40%) of their capital or voting power;
-   companies that are part of the same "decision unit" i.e. where one of the companies is a partner or has a participation interest in the other and they are related in a form specified by the law; and
-   a PE with respect to its head office.

The methods established are the CUP, resale price, cost plus, profit split and transactional net margin methods. The most appropriate method must be used.

The TP rules are also applicable to service fees between related parties. Besides, in order to be deductible as expenses, the service fees must be related to a service effectively performed and its result must be able to produce an advantage to the recipient.

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