Law on the Regulation of Transfer Pricing

Purpose.- The purpose of these provisions is to regulate commercial and financial operations carried out between related or affiliated parties, valued in accordance with the principle of free or full competition.

Scope of Application.- The scope of application shall encompass any operation carried out between natural or legal persons domiciled or resident and related or affiliated with natural or legal persons not resident or not domiciled, and those covered by special regimes that enjoy fiscal benefits.

Definition of Terms.- The following shall be understood as: 1) Permanent Establishment: A fixed place of business where a natural or legal person resident or domiciled in a State carries out all or part of its activity in Honduras. Similarly, a person resident abroad shall be considered to have a permanent establishment in Honduras when acting in the national territory through a natural or legal person who is an independent agent, if such person does not act within the ordinary course of its activity. For these purposes, an independent agent is considered not to act within the ordinary course of its activities when it falls within any of the following circumstances: a) Maintains inventories of goods or merchandise with which it makes deliveries on account of the foreign resident; b) Assumes risks of the foreign resident; c) Acts subject to the general control of the foreign resident; and, d) Receives remuneration that is fixed independently of the results of its activities. The following shall not be considered to constitute a permanent establishment: i) The use or maintenance of facilities solely for the purpose of storing or displaying goods or merchandise belonging to the foreign resident; ii) The storage of goods or merchandise belonging to the foreign resident solely for the purpose of storing or displaying such goods or merchandise or for their transformation by another person; iii) The use of a place of business solely for the purpose of purchasing goods or merchandise for the foreign resident; iv) The use of a place of business solely for the purpose of developing activities of a preparatory or auxiliary nature for the activities of the foreign resident, whether of propaganda, supply of information, scientific research, preparation for loans, or other similar activities; v) The customs warehouse of goods or merchandise of the foreign resident in a general deposit warehouse nor the delivery of the same for import to the country; and, vi) Natural persons who do not act as agents or representatives of a legal entity. 2) Tax Haven: Countries with low or no taxation, with the exception of those with which Honduras has executed an agreement of operation or exchange of tax information; 3) Related or Affiliated Parties: For tax purposes, two or more natural or legal persons, domiciled or not, are considered related parties when:

• a)

  A natural or legal person participates directly or indirectly in the management, control, or capital of another person, duly documented and legalized;

• b)

  The same natural or legal persons participate directly or indirectly in the management, control, or capital of another person, duly documented and legalized;

• c)

  They are corporations that individually constitute a unit of decision, where one corporation is a shareholder of another, duly documented and legalized, in accordance with the provisions of Article 4 of this Law, and they find themselves in relation to it in any of the following situations: i) Possess the majority of voting rights. Have the power to appoint or remove the majority of members of the administrative body; ii) Be able to dispose, by virtue of agreements entered into with other shareholders, of the majority of voting rights; and, iii) Have exclusively designated with its votes the majority of the members of the administrative body;

• d)

  Commercial and financial operations are carried out directly or indirectly, understanding as indirect those aimed at reducing the taxable base of Income Tax, between taxpayers resident or domiciled in the national territory and persons located in another jurisdiction qualified as a tax haven;

• e)

  A natural or legal person resident in the country has permanent establishments abroad; and,

• f)

  It is a corporation related to another with the same directors or administrators; 4) Transfer Prices: The prices at which commercial or financial operations are recorded between related or affiliated parties; 5) Principle of Free or Full Competition: The principle that treats commercial and financial operations between related or affiliated parties as if such parties operated as independent enterprises in a comparable market situation, thus offering equitable tax treatment between multinational enterprises and independent enterprises.

Degree of Participation.- When participation between related or affiliated natural or legal persons is defined as a function of social capital or control of voting rights, such direct or indirect participation must be greater than fifty percent (50%).

Obligation for Tax Purposes.- Taxpayers of the Income Tax who are related parties and who carry out commercial and financial operations among themselves are obligated to determine for tax purposes their income, costs, and deductions, applying to such operations and operating results the prices and profit margins that would have been used in comparable commercial and financial operations between independent parties.

Powers of the Tax Administration.- The Executive Tax Revenue Directorate, in exercise of its powers of determination, verification, or taxation following the procedures established in applicable tax laws, may make adjustments to the costs, deductions, income, profit, or loss in the Income Tax return, by determining the price or value of commercial and financial operations in which the taxpayer has acquired or disposed of goods and services, considering the following circumstances: 1) When commercial and financial operations are agreed upon at a lower price than the market price or the acquisition cost is higher than the market price among independent parties, determined in accordance with the methods established in this Law; and, 2) When the sale of goods, services, or rights is carried out at a value lower than that of the market among independent parties, determined in accordance with the methods established in this Law.

Comparability Analysis.- For the purpose of determining the price or amount that independent parties would have agreed to in comparable operations under conditions of free or full competition, the conditions of operations between related or affiliated natural or legal persons shall be compared with other comparable operations carried out between independent parties. Two or more operations are comparable when there are no significant economic differences between them that affect the price of the good or service or the margin of the operation, or when such differences exist, they can be eliminated by reasonable adjustments. To determine whether two or more operations are comparable, the following factors shall be taken into account respectively to the extent that they are economically relevant:

• 1)

  The specific characteristics of the goods or services subject to the operation;

• 2)

  The functions assumed by the parties in relation to the operations subject to analysis, identifying the risks assumed and, where appropriate, evaluating the assets utilized;

• 3)

  The contractual terms from which, where applicable, the operations are derived, taking into account the responsibilities, risks, and benefits assumed by each contracting party;

• 4)

  The characteristics of the markets or other economic factors that may affect commercial and financial operations; and,

• 5)

  Commercial strategies, such as market penetration, maintenance, or expansion policies, as well as any other circumstance that may be relevant in each case. The comparability analysis thus determined and the information on comparable operations constitute the factors that shall determine the most appropriate method in each case. If the taxpayer carries out several commercial and financial operations of identical nature and under the same circumstances, it may group them to perform the comparability analysis provided that such grouping respects the principle of free competition. Two or more different commercial and financial operations may also be grouped when they are so closely linked or are so continuous that they cannot be appropriately valued independently.

Methods for Determining Value in Commercial and Financial Operations Under Conditions of Free or Full Competition.- In determining the value of commercial and financial operations under conditions of free or full competition, the natural or legal person shall submit to the Executive Tax Revenue Directorate the selected method, following the Principle of the Best Method in accordance with general market practices and customs and the specific circumstances of each case. The methods are as follows:

• 1)

  Comparable Uncontrolled Price Method: Consists of valuing the price of the good, service, or right resulting from an operation between related or affiliated parties with another operation of similar characteristics, using as a basis the price agreed between independent persons. Necessary corrections shall be made to obtain equivalence in accordance with the particularities of the operation and general market practices and customs;

• 2)

  Resale Price Method: Subtract from the sale price of a good, service, or right the gross profit margin of the reseller in its operations with unrelated independent third parties, or failing that, the usual gross profit margin in relation to activities applied by independent persons in comparable operations, with the ability to make necessary corrections to obtain equivalence;

• 3)

  Cost Plus Method: Increase the acquisition value or cost of a good, service, or right with the usual gross profit margin obtained by a taxpayer from its sales to unrelated or non-affiliated third parties, or that obtained by independent persons in comparable operations with respect to the cost of sale, with the ability to make necessary corrections to obtain equivalence;

• 4)

  Profit Sharing Method: Consists of assigning to each related party the profit from the operation in the proportion of commercial and financial operations carried out as if they were independent persons, considering assets, sales, expenses, specific costs, or other variables; When it is possible to assign, in accordance with any of the aforementioned methods, a minimum profit to each party based on the functions performed, the profit-sharing method shall be applied on the basis of the residual profit understood once this first assignment has been made. The residual profit shall be assigned in accordance with a criterion that adequately reflects the conditions that would have been agreed to by independent parties in similar circumstances taking into account the aforementioned provision;

• 5)

  Net Transaction Margin Method: Consists of fixing the price through the net profit margin that independent parties would have obtained in comparable operations. The net profit margin can be obtained based on variables such as sales, costs, expenses, and cash flows. It is applicable when operations are carried out in which there are benefits to transactions developed by the related or affiliated parties, when gross margins of operations cannot be identified, or when it is difficult to obtain reliable information on prices of any of the parties involved in the transaction; and,

• 6)

  The taxpayer may apply a method regarding transfer prices different from the methods mentioned above, provided that it can demonstrate that none of these methods can reasonably and reliably be applied to determine the conditions of free or full competition between related or affiliated parties, and that this other method generates a result compatible with the result that independent enterprises would have obtained in non-related or non-affiliated operations carried out in comparable circumstances. The taxpayer that resorts to the use of a method different from those described above must use a method that is in accordance with international standards and practice.

Method of Application.- From the application of any of the methods indicated in the preceding Article, a range of prices or profit margins may be obtained when there are two or more comparable operations. Operations are understood to be comparable when there are no significant differences in price, amount of consideration, or profit margin. These ranges shall be adjusted through the application of statistical methods, in particular the interquartile range that economic-statistical science establishes. If the taxpayer's prices or profit margins fall within these ranges, they shall be considered adjusted to the prices or margins of commercial and financial operations between independent parties. In the event that the taxpayer is outside the adjusted range, the price or profit margin in commercial and financial operations between independent parties shall be considered the median of such range.

Applicable Method in Goods Export Operations with International Quotation.- When it comes to export operations whose object is goods with international quotation in transparent markets, commodity exchanges, or similar, the exporter subject to Income Tax may choose to apply the comparable uncontrolled price method between independent parties, considered for the purposes of this Article, the quotation value of the merchandise in the transparent market, commodity exchanges, or similar, as of the date of commencement of shipment. This price may be modulated in accordance with the impact that is normally admitted by origin in Honduras.

Reclassification of Commercial and Financial Operations.- The Executive Tax Revenue Directorate shall respect the commercial and financial operations carried out by taxpayers. However, the Directorate, following investigation, is empowered to rectify the operation in accordance with its true nature if it could prove that the economic reality of the operation differs from its legal form, or that the agreements relating to an operation, valued globally, differ substantially from those that would have been adopted by independent enterprises and the structure thereof, as presented, prevents the Tax Administration from determining the approved transfer price.

Treatment Applicable to Services Between Parties.- Expenses for services received from a related or affiliated person, such as management, legal, accounting, financial, technical, or other services, shall be valued in accordance with the criteria of this Law.

Advance Pricing Agreements.- The Executive Tax Revenue Directorate may enter into Advance Pricing Agreements (APAs) with national or foreign Income Tax taxpayers, by means of which the values of the operation or operations, commercial and financial, that they carry out with other related or affiliated parties shall be determined, with a prior character to the carrying out thereof. For purposes of the Agreement, it is foreseen to a request accompanied by a proposal from the taxpayer, based on values that independent parties would have agreed to in similar operations.

Acceptance of APA Proposal.- The proposal referred to in the preceding Article may be approved, denied, or modified by the Executive Tax Revenue Directorate with the acceptance of the taxpayer, which, as translated into an agreement or APA, shall take effect with respect to operations carried out after the date of approval and shall have validity within the tax periods established therein, without exceeding five (5) fiscal years.

Elimination of Double Taxation.- In the case of adjustments to commercial and financial operations between related or affiliated parties, which has been made in another State and results in income higher than that effectively derived from the operation as a whole, the Executive Tax Revenue Directorate, prior to the request of the taxpayer resident in its territory, shall examine the appropriateness of the adjustment, and if it is determined that double taxation has occurred, it shall allow the adjustment for the amount of the tax collected as well as the accessory elements of the debt.

Coordination between Tax Authorities.- When agreements with other tax authorities empower the performance of audits within the scope of this regulation in a simultaneous and coordinated manner, they shall be executed while each authority maintains the proper independence of its jurisdiction.

Documentation and Information.- For the purposes of this Law, taxpayers shall submit to the Executive Revenue Directorate the tax return, information, and sufficient analysis to assess their transactions with related parties; this obligation shall be established without prejudice to any additional information that may be required upon request of the Executive Revenue Directorate.

Infractions.- The following constitute tax infractions:

• 1)

  Failure to provide, or provision with false data or manifestly incomplete or inaccurate information or documentation that may be required by the Tax Authority;

• 2)

  Declaring in any fiscal year a tax base lower than that which should have corresponded due to an agreed valuation different from that which independent parties with comparable circumstances would have agreed upon, unless documentation exists that proves or justifies the accuracy of what was declared; and,

• 3)

  Any other violation of the Provisions contained in this Law.

Penalties Regime.- The tax infractions described in the previous Article shall be penalized according to the following criteria:

• 1)

  The infraction described in numeral 1) of the previous Article shall be penalized with a fine of ten thousand United States Dollars (US$ 10,000.00), payable in its equivalent in Lempiras;

• 2)

  The infraction described in numeral 2) of the previous Article shall be penalized with a fine of fifteen percent (15%), calculated on the amount of the adjustment made by the Tax Authority. In the event that this conduct is accompanied by that typified in numeral 1) of the previous Article, the aforementioned sanction for both infractions shall be increased to thirty percent (30%) or twenty thousand United States Dollars (US$ 20,000.00), payable in its equivalent in Lempiras, whichever is greater.

• 3)

  The infraction described in numeral 3) of the previous Article shall be penalized with a fine of five thousand United States Dollars (US$ 5,000.00), payable in its equivalent in Lempiras.

Electronic Systems or Telematic Methods: The Executive Revenue Directorate is authorized to develop and apply different electronic systems or telematic methods that facilitate the audit and exchange of information of taxpayers.

Regulations.- The Ministry of State in the Office of Finance, in coordination with the Executive Revenue Directorate, shall issue special regulations for the correct application of this Law, within a term of sixty (60) days.

Effective Date: This Decree shall enter into force as of January 1, 2014, prior to publication in the Official Gazette La Gaceta. Given in the city of Tegucigalpa, municipality of the Central District, in the Session Hall of the National Congress, on the eighth day of the month of December of two thousand eleven. JUAN ORLANDO HERNÁNDEZ ALVARADO PRESIDENT RIGOBERTO CHANG CASTILLO SECRETARY GLADIS AURORA LÓPEZ CALDERÓN SECRETARY To the Executive Branch, Therefore: Be It Executed. Tegucigalpa, M.D.C., December 9, 2011. PORFIRIO LOBO SOSA PRESIDENT OF THE REPUBLIC THE SECRETARY OF STATE IN THE OFFICE OF FINANCE. WILLIAM CHONG WONG DECREE No. 237-2011 THE NATIONAL CONGRESS, WHEREAS: The National Congress of the Republic, by Decree No. 17-2010 dated April 21, 2010, in its Article 70, authorized the Executive Branch to subscribe to loan agreements that it deems necessary by virtue of the current state of emergency in Public Finances and that can be financed with external capital; approving for such purpose the corresponding loan agreement projects, without prejudice to their subsequent ratification by the National Congress once signed by the Executive Branch and the External Credit Agency in question. WHEREAS: The Financial Agreement No. 5021-HN, subscribed on December 7, 2011 between the World Bank (WB) in its capacity as Lender and the Republic of Honduras in its capacity as Borrower of financing in the significant amount of Fifty-Five Million One Hundred Thousand Special Drawing Rights (SDR 55,100,000.00), funds intended to finance the execution of the "First Programmatic Financing for Vulnerability Reduction for Growth Development", is covered under Article 70 of Decree 17-2010. WHEREAS: The objective of the Program is to support the Government of Honduras in its efforts to carry out sectoral reforms that include the consolidation of the basis for growth through the achievement of fiscal sustainability and the strengthening of public administration. WHEREAS: In accordance with Article 205, numerals 19), 30) and 36) of the Constitution of the Republic, it shall be incumbent upon the National Congress to approve or disapprove contracts and agreements that involve fiscal exemptions, incentives and concessions entered into by the Executive Branch. THEREFORE, IT DECREES:

To Approve in all and each of its parts the Financial Agreement No. 5021-HN, subscribed on December 7,