Transfer Pricing in Puerto Rico

The legal framework

Puerto Rico imposes its own income tax under its own statute; US federal law does not govern the local charge. The operative instrument is Act No. 1 of 31 January 2011, the Internal Revenue Code for a New Puerto Rico, codified at 13 L.P.R.A. and administered by the Departamento de Hacienda de Puerto Rico through the Área de Rentas Internas. Puerto Rico is an unincorporated US territory, is not an OECD member and does not appear on the OECD/G20 Inclusive Framework composition list updated 5 December 2025.

Two provisions carry the domestic load. Section 1040.09 (13 L.P.R.A. § 30179) is the section 482 analogue: where two or more organisations, trades or businesses are owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion or allocate gross income, deductions, credits or allowances between them to prevent tax evasion or to reflect income clearly. The text never uses the words arm's length.

The standard enters by cross-reference instead. Section 1033.17(a)(17) disallows 51% of expenses paid or payable to a related party that does not do business in Puerto Rico, or to a foreign corporation's out-of-island home office, where the charge is attributable to the Puerto Rico trade or business and bears no local tax or withholding; paragraph (a)(16) applies the mirror rule to pass-throughs. Act 257-2018 supplied the escape: from taxable years beginning after 31 December 2018 the disallowance does not apply if the taxpayer holds a transfer pricing study prepared in compliance with US IRC section 482, which the Secretary may reject only on a preponderance of the evidence that it fails the section 482 rules, regulations and interpretations. In substance, the US regulations are Puerto Rico's transfer pricing law.

As enacted, section 1033.17(a)(16)(F) allowed an OECD-based study where no group member operated in the United States. Act 40-2020, section 17, restated paragraphs (16) and (17) by reference to section 482 alone, and the current consolidations — English revised 18 June 2026, Spanish revised 28 May 2026 — contain no occurrence of OECD or OCDE. Decree holders sit outside section 1033.17 under the carve-out in subparagraph (a)(17)(C), generally read to cover Act 60-2019 grants, but section 1040.09 still reaches them. A second rule reaches manufacturing decrees only: section 2062.01(l) of Act 60-2019 sits in Subtitle B, Chapter 6 (Manufactura) of the Incentives Code and disregards charges for movable property and services that are not charges arising between persons outside the controlled group operating freely and in good faith at arm's length.

Methods, comparables and benchmarking

Because compliance is measured against section 482, the method hierarchy is American. The best method rule in Treasury Regulation section 1.482-1(c) governs selection and the comparability factors in 1.482-1(d) govern the analysis. The arm's-length range governs the outcome, and where no comparables meet the standard in 1.482-1(e)(2)(iii)(A) — the ordinary case here — the range is narrowed by a valid statistical method, for which the interquartile range under 1.482-1(e)(2)(iii)(B) is the accepted measure. Because section 482 comes across whole, so does the median adjustment in 1.482-1(e)(3): a result outside the range is moved to the median, not to the nearer edge.

Comparables are the practical difficulty. US mainland companies are routinely accepted. What the Code and Administrative Determination 21-05 insist on is an analysis of the operations conducted in Puerto Rico, which in most engagements makes the Puerto Rico entity the tested party — consistent in any event with Treasury Regulation section 1.482-5(b)(2). There are no prescribed profit level indicators and no safe-harbour margins.

Nor has Hacienda taken a position on Amount B. The IRS announced in Notice 2025-04 that it would add the simplified and streamlined approach as a section 482 method for years beginning on or after 1 January 2025. Whether Puerto Rico's cross-reference to section 482 rules, regulations and interpretations carries the approach across is untested, and a taxpayer electing it locally should expect to argue the point.

Documentation: what Hacienda expects

The single deliverable is a section 482 study. There is no master file, no local file and no monetary threshold anywhere in the regime: the trigger is the existence of a deductible cross-border related-party charge.

The study is not filed. Administrative Determination 21-05 (11 May 2021) requires it to be issued and in the taxpayer's hands before the return goes in, and delivered to the Department within 30 calendar days of a request; DA 21-08 (20 September 2021) confirmed that what must be produced is the study itself rather than the certification form, and moved the signature to the taxpayer. What is filed is Form AS 6175 / Modelo SC 6175, certifying under penalty of perjury that a study was obtained, stating its issuance date, and naming the preparer.

Calendar-year returns are due 15 April, fiscal-year returns on the fifteenth day of the fourth month, with an automatic six-month extension on timely request. DA 21-05 allows reliance on an earlier certified study where the facts, circumstances and transactions have not substantially changed.

Section 1033.07(a)(1)(F) requires a study to be attached to the transferor's return where depreciable property is acquired from a related party. Section 1061.15(a)(5) obliges related groups doing business in Puerto Rico to file combined or consolidated US GAAP statements with a columnar schedule for each affiliate. Country-by-country reporting has not been implemented; Puerto Rico entities of US groups appear instead on the parent's Form 8975 above the USD 850 million threshold.

Audits, penalties and the enforcement climate

There is no transfer-pricing-specific documentation penalty and nothing resembling the US section 6662(e) penalty shield. The sanction is economic: no compliant study, 51% of the charge disallowed, deficiency assessed. On top of the deficiency, section 6030.03 adds 20% where any part is due to negligence, intentional disregard, a substantial understatement — for corporations, one exceeding the lesser of 10% of the tax required to be reported or USD 1,000,000 — a substantially incorrect valuation, or lack of financial substance; 40% where a valuation is 200% or more of the correct figure; and 100% for fraud. Interest runs at 10% a year from the payment date, with surcharges of 5% for payment 31 to 60 days late and 10% beyond that. The only statutory relief is section 6030.08, which waives penalties attributable to erroneous written advice given by the Department in reply to the taxpayer's own written request.

The assessment window is four years from filing, six where more than 25% of gross income is omitted, and open-ended for a false or fraudulent return or no return at all. Successive written waivers can extend it indefinitely.

Commentary from the introduction of the rules records no transfer-pricing-specific audits, while 2026 practitioner material asserts dedicated examination resources. What is documented is pressure from the incentives side: DDEC audited 1,798 decrees in 2025, issued over 300 deficiency notices, revoked four decrees, and announced automated sanctions and expanded reporting across 15 programme categories for 2026.

Dispute resolution and advance certainty

Puerto Rico offers no advance pricing agreements — unilateral, bilateral or multilateral. The limited exclusion ruling that once took related-party expenses out of the 51% rule for up to three years is closed to new applications for years beginning after 31 December 2018.

The substitute is the final agreement under section 6051.07: a written closing agreement with the Secretary on liability for any tax and any period, final and conclusive absent fraud, deceit or misrepresentation of a pertinent fact.

There is no treaty network, and US bilateral treaties do not reach the island: the US Model Convention defines United States to exclude Puerto Rico and the other possessions. There is, however, a mutual agreement procedure with the IRS. Article 6 of the Tax Coordination Agreement between the United States of America and the Commonwealth of Puerto Rico — signed for Puerto Rico on 31 December 1988 and for the United States at Washington on 26 May 1989, in force on signature under Article 8 — is headed 'Mutual Agreement Procedure on Potential Double Taxation'. Internal Revenue Circular Letter 06-04 sets out how to request Puerto Rico competent authority assistance.

Domestically, an adjustment arrives as a notice of deficiency. The taxpayer has 30 days to request reconsideration and an administrative hearing; on a final determination, 30 days to sue in the Court of First Instance, on payment or a bond capped at the tax plus a year's interest at 10%. No reported decision construes section 1040.09 or the section 1033.17 requirement; the nearest authority, Wal-Mart Puerto Rico v. Zaragoza-Gómez, 834 F.3d 110 (1st Cir. 2016), struck down the related-party AMT on dormant Commerce Clause grounds and concerned a levy since superseded.

Pillar Two and what changes in 2026

Puerto Rico has not enacted Pillar Two. Hacienda ran a public consultation on the GloBE Rules in 2024, taking the position that the island is not required to implement them. House Bill 1908 passed the House and lapsed when the session closed on 30 June 2024. For decree holders the practical consequence is that top-up tax on low-taxed Puerto Rico income is collected elsewhere in the group, with no local mechanism to retain it.

The structural response so far has been Act 52-2022, which lets decree holders replace the decree's income tax and royalty withholding framework with an alternative rate — commonly 10.5% — extending the decree term by 15 years and taking the controlled group out of the Act 154 4% excise tax. The July 2025 amendments (Acts 64 and 65, approved 17 July 2025, and Act 72, approved 20 July 2025) standardised filing dates and made technical changes across the Code, the General Corporations Act, the Municipal Code and the Incentives Code, but left sections 1033.17 and 1040.09 untouched.

How practitioners should respond

Three points follow. First, build the file to US standards. The statutory condition is compliance with section 482 and the regulations and interpretations under it, so an OECD-shaped report invites a challenge to whether the condition was satisfied at all. Where a group runs a global master file, produce a Puerto Rico study that stands alone on the local operations and cross-refers to the master file, not the reverse.

Second, treat the issuance date as a hard control. Form 6175 states when the study was issued, under penalty of perjury; a study dated after the return is a certification problem, not merely a documentation weakness. Diarise the 30-day production window and keep the study, the supporting financials and the affiliate-level data in the columnar format section 1061.15 will call for.

Third, price the absence of relief into the position. No APA, no penalty shield, no MAP beyond the bilateral channel with the IRS under the 1988/1989 Tax Coordination Agreement, the burden of proof on the taxpayer, and a 51% disallowance that bites automatically on the face of the return. Certainty in Puerto Rico is bought at the front end, in the quality of the section 482 study, or afterwards in a closing agreement under section 6051.07 — with correlative relief from the IRS the only cross-border remedy, and none at all where the counterparty sits outside the United States.