When transfer pricing adjustments are made in Central America, the regulations adopt the so-called “correlative adjustment” principle, whose purpose is to avoid double taxation. Under this principle, an increase in a company’s taxable income or a reduction in its deductible expenses should be reflected, inversely, in the related company with which it carried out the transaction.
Thus, if company A’s income increases from 20 to 30, it is implicitly understood that company B—the counterparty—paid 20 when it should have paid 30. Consequently, A is taxed on the increase of 10, while B should be entitled to deduct that same 10 through a corresponding adjustment. If such an adjustment is not made, double taxation is evident, since what constitutes additional income for one party must be additional expense for the other.
This mechanism works relatively well when both companies are located in the same country. However, everything changes when the transaction involves different jurisdictions, as the foreign company will find it difficult to get its tax administration to accept a reduction in tax revenue based on an adjustment decided unilaterally by the tax administration of the other country.
I- The role of the Mutual Agreement Procedure (MAP) in eliminating double taxation
For a foreign tax administration to agree to make a corresponding international adjustment, there must be a legal instrument that allows it to do so. This framework is precisely a double taxation agreement, whose Article 25 on the Mutual Agreement Procedure (MAP) enables the competent authorities of both countries to negotiate a solution that eliminates double taxation.
Through the MAP, the taxpayer concerned requests their tax authority to initiate negotiations with the tax administration of the other country. If both authorities reach an agreement (although they are certainly not obliged to do so), the corresponding adjustment is applied. If they do not succeed, some agreements provide for the possibility of submitting the dispute to international arbitration, under certain conditions.
However, for this mechanism to exist, it is essential to have signed a Bilateral Agreement, which is exceptional in Central America.
II- An extremely limited network of agreements
Costa Rica only has agreements to avoid double taxation with Spain, Mexico, Germany, and the United Arab Emirates. In the case of El Salvador, it only has a treaty with Spain.
This means that, in practice, any transfer pricing adjustment involving companies in other jurisdictions will inevitably result in double taxation, as there is no legal basis for demanding a corresponding international adjustment.
Even in the few cases where an applicable agreement does exist, the real chances of success are low. The OECD 2024 MAPs Report notes that Costa Rica has only initiated five procedures: four two years ago and one a year ago, with no acceptance or rejection to date. In other words, we have agreements, but no practical experience or track record to guide us in assessing the chances of success.
III- The technical quality of the adjustment: a determining factor
The probability of success of a MAP also depends on the technical correctness of the original adjustment. Even if the adjustment has been validated by a court in one country, if the foreign tax administration considers that it was applied incorrectly or with a purely revenue-raising approach, that it does not comply with the technical criteria of the OECD Guidelines or its own domestic legislation, it may—and normally will—refuse to recognize its effects.
For example, even if there were an agreement between Costa Rica and Guatemala, if the adjustment made in Costa Rica was based on poor analysis, misapplied methodologies, or conclusions not aligned with the OECD Transfer Pricing Guidelines, the Guatemalan tax authority would have grounds to reject the corresponding adjustment. No country is willing to sacrifice its own tax revenue to correct what it perceives as a technical error committed by another government.
IV- The contradiction between theory and reality in Central America
Although the OECD Guidelines recognize as one of their central objectives “establishing the appropriate tax bases in each jurisdiction and avoiding double taxation,” the reality in Costa Rica and the Central American region is the opposite, since most transfer pricing adjustments inevitably end up in double taxation scenarios.
Additionally, institutional and even judicial sensitivity to this problem is low. In many cases, adjustments are made without assessing the international effects or their relative viability and without taking into account that, in a context without agreements, double taxation is not the exception but will be the rule.
V- Is it worth initiating a mutual agreement procedure?
Given the legal tax structure in Central America, the limited network of agreements, the lack of administrative experience, and the low probability of success, the decision to initiate a MAP must be evaluated on a case-by-case basis, considering:
- Whether there is an agreement that allows it.
- The technical quality of the adjustment.
- The costs, deadlines, and complexity of the process.
- The likelihood of total or partial elimination of double taxation.
That said, given that transfer pricing adjustments are often for very large amounts, if possible, it is worth pursuing a MAP despite these difficulties, since failure to do so would make double taxation within the economic group inevitable.