From PepsiCo to Costa Rica: The importance of properly documenting your operations

By Gabriela Páez

A recent ruling by a high international tribunal determined that the multinational PepsiCo should not have to pay an amount close to $29 million, since the agreements and the accounting and legal evidence reviewed pertained to the purchase of concentrate for beverage manufacturing, and not to the use of intellectual property or the well-known royalty. While this case was highly publicized because of its PepsiCo nature and the amount in dispute, the most important aspect was that the company was able to demonstrate that the payments constituted inventory purchases and not royalties for the use of its brand or know-how.

This international ruling sends a clear message to multinationals operating in Costa Rica: it's not enough for a contract to mention trademarks, patents, or shared services. What's truly decisive is what is actually paid, how that payment is supported, and whether there is sufficient documentation to reflect the economic reality of the related parties. PepsiCo's experience demonstrates that, in the event of an audit, the dividing line between inventories, intercompany services, intragroup credits, or royalties must be clearly delineated, justified, and documented.

Royalties vs. inventories

In Costa Rica, the Income Tax Law (Law No. 7092) defines royalties as capital income derived from the use of rights such as trademarks, patents, franchises, know-how, and other intangible assets. These royalties are subject to a 25% withholding tax, which corresponds to a single, definitive tax for non-resident beneficiaries.

The distinction between paying for inventories or intangibles is not a mere technicality, but a difference with profound fiscal implications. An inaccurate invoice or poorly drafted contract can turn the purchase of goods—a transaction that, in principle, is not subject to withholding tax due to entry into the country through customs and payment of duties—into a disbursement reclassified as a royalty and, therefore, subject to withholding. Therefore, it is essential that contracts precisely define the nature of each consideration, and that all payments be supported by invoices, purchase orders, and accounting records that demonstrate that they are indeed for tangible goods and not disguised payments for intellectual property rights.

Shared services and intercompany credits

In multinational groups, it's common for the parent company to bill for centralized services (accounting, human resources, technology, marketing) or to grant loans to its subsidiaries. However, if there is no evidence to support the market value of these services or the reasonableness of the interest rates, the Tax Administration may reclassify the payments as hidden royalties or dividends.

The OECD Transfer Pricing Guidelines are clear: all shared services must generate a real economic benefit for the subsidiary and be charged at market value (arm's length). Otherwise, the expense may be rejected as a deduction. The same applies to intragroup credits: without clear contracts, defined terms, and competitive rates, the debt may be considered capital and the interest nondeductible.

In Costa Rica, Article 81 of Law 7092 and its regulations require that transactions between related parties be valued according to the arm's length principle and that documentation supporting this determination be maintained (transfer pricing studies). These must include comparables, functional analysis, and evidence that the prices comply with the arm's length principle. In royalty payments, shared services, or intragroup financing, this study becomes the company's main shield. Without it, any transaction can be questioned, leaving the company exposed to adjustments, fines, and interest.

New obligation in Costa Rica

As of August 4, 2025, the General Directorate of Taxation reinstated the annual filing of the transfer pricing information return for certain taxpayers.

• Major National Taxpayers.

• Beneficiaries of the Free Trade Zone regime.

• Companies with transactions with related parties that add up to more than 1,000 base salaries (around 462 million colones or US$920,000) per physical year

  
  

This first declaration corresponding to the 2024 fiscal period must be submitted no later than November 30, 2025. This declaration can only be submitted through the system's virtual office in its new TRIBU-CR system, using the form issued in the annexes of resolution MH-DGT-RES-0026-2025.

Netting and cash pooling: common practices, but with tax risks

Parent companies often implement netting and cash pooling to simplify payments and centralize liquidity. Netting offsets multiple obligations between subsidiaries to settle them in a single net balance. Cash pooling concentrates funds in a main account at headquarters and optimizes financial returns; however, funds are sometimes extracted without knowing the exact balances receivable or payable between subsidiaries.

These practices entail tax risks. In Costa Rica, they must be supported by intercompany contracts that define roles, limits, interest rates, and terms. Otherwise, loans derived from pooling can be reclassified as capital contributions, which eliminates interest deductibility and generates transfer pricing adjustments; if they are outflows, they can even be classified as profit distributions.

The lesson from the PepsiCo case is overwhelming: what protects companies is not the form of contracts, but the economic substance of transactions and the documentation that supports them. For multinationals with a presence in Costa Rica, this means clear contracts, updated transfer pricing, solid accounting records, and treasury policies that withstand the scrutiny of the Tax Administration.