DOMINICAN REPUBLIC Law and Practice Contributed by: Luis Miguel Pereyra, Pereyra & Asociados
• Royalties: The withholding tax on royalties paid to a non-resident is 27% (based on the corporate income tax rate). • Branch remittance tax: A permanent establishment of a foreign company must withhold 10% on cash dividends paid to its head office. The tax system incorporates measures that establish a large web of withholding agents, including finan - cial institutions, as well as tools for mandatory elec - tronic monthly reporting of purchases, sales or pay - ments (amongst other things). The tax authorities can promptly detect breaches of withholding obligations by any withholding agent, or failure to properly report transactions subject to withholding taxes, by cross- checking. 4.2 Key Treaty Jurisdictions for Inbound Investment The Dominican Republic is a signatory of only two double taxation treaties (Canada, 1976; and Spain, 2011). The treaty with Canada only covers income tax, while that with Spain deals with income and capital gains taxes. Generally, there is no distinction between the use of a treaty or the country of residence for local investment in domestic corporate stock or debt. Such usage depends on the focus of investment (mining, banking, hospitality, etc), not on the nationality of the investor. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices Historically, the use of treaty entities by non-treaty- country residents was not challenged, to the extent permitted by the applicable treaty. However, in 2022, the tax authorities issued a regulation (norma ) proce - dure for granting the benefits of international agree - ments to avoid double taxation. However, this was later revoked due to complaints of overreach, but it nonetheless signalled that the tax authorities are aim - ing for greater control and stricter criteria with respect to the enforcement of treaties, including the use by non-treaty-country residents of treaty country entities. 4.4 Transfer Pricing Issues for Inbound Investors The main drawback in relation to transfer pricing is that it can result in an excessive administrative burden, for
both taxpayers and tax administrations, when assess - ing a large number and variety of transactions across borders. This is due to historically limited resources complicating accurate assessment. Tax administrations and taxpayers have difficulty in obtaining sufficient information to apply the arms- length principle, as this often requires the assess - ment of uncontrolled and complex transactions, and assessment of the activities of associated companies. The tax authorities still struggle with the consistent application of relevant criteria, although improvements have been made by adjusting the regulations and through more consistent enforcement of the same. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements Local regulations allow related parties to make cost distribution arrangements, which must: • quantify each participant’s expected benefits; • apply accounting principles in a homogeneous manner to all participants for the determination of expenses and the value of contributions; • reasonably attribute the responsibilities and obliga - tions associated with the activity; • regulate accession or withdrawal procedures; and, • make compensatory payments or payments that allow the terms of the agreement to be adjusted to reflect changes in economic circumstances. The reasonableness of cost distribution is paramount, as the authority could challenge expenses if the activities that are being jointly financed by the related parties do not produce any benefit for the resident participants. This could result in recurring decreases in taxable income for a period of up to three years (which can be extended to five years, depending on the case). 4.6 Local Transfer Pricing Rules and OECD Standards As of 2011, transfer pricing regulations have been modelled based on OECD guidelines and enforce - ment standards, albeit with limitations. The growing influence of the OECD and the BEPS Plan on local regulations is obvious. In addition, the Dominican Republic has been a member of the OECD’s Global
123 CHAMBERS.COM
Powered by FlippingBook