Transfer Pricing Gains Momentum in Latin America
May 23, 2016
By Henric Adey
Latin America has moved to the forefront regarding new transfer pricing regulations and requirements. Why? The United Nations’ Economic Commission for Latin America and the Caribbean (“CEPAL”) data estimates Latin American countries have lost approximately $98 billion in tax revenue due to manipulative transfer pricing. This has led many countries to change their local regulations or approaches to transfer pricing audits.
Several countries are implementing the Organisation for Economic Co-Operation and Development’s action items relating to transfer pricing, which are published under its base erosion and profit shifting (“BEPS”) initiative.
In late 2015, Mexico passed regulations requiring certain taxpayers to produce additional documentation related to the country-by-country (“CbC”) report (i.e., the Master and Local Files). Mexico’s requirements will cover the 2016 taxable year, and companies must submit the appropriate information by the end of 2017.
The Chilean Internal Revenue Service (“Servicio de Impuestos Internos” or “SII”) published new tax disclosure requirements for 2016 that are similar to those in BEPS action item 13, CbC reporting. This new tax disclosure requires significant Chilean taxpayers to submit a report including information on corporate reorganization, financial instruments and/or derivative contracts, pre-tax profits, capital assets and international transactions.
The SII announced that it seeks to collect US$265 million related to transfer pricing adjustments. As such, the SII opened 255 transfer pricing audits and is aggressively probing existing transfer pricing structures. The SII also drafted proposed regulation to significantly raise penalties related to the transfer pricing disclosure form.
Ecuador’s Presidential Decree 973 included transfer pricing changes to its tax regulations. Article 86 gives the tax authority additional measures to prevent tax evasion through transfer pricing and provides the legal foundation for adapting BEPS initiatives into Ecuador’s transfer pricing regulations.
Article 279 of Decree 973 states that transfer pricing documentation cannot be prepared by a provider of tax advice, representation services, or financial statement preparation; or someone acting as an expert witness on a tax court case. These changes represent a Latin American tax authority’s initial reaction to the European Commission’s audit market reforms. Article 279 limits the services that auditors can provide regarding specific tax compliance services, including the preparation of transfer pricing documentation. Ecuador set a June 2016 deadline for preparing 2015 transfer pricing documentation.
Clearly, companies operating in Latin America face increased compliance and audit scrutiny. Reacting quickly to the new Latin American transfer pricing landscape is paramount. By developing regional transfer pricing documentation from a centralized perspective, companies can maintain consistency with their global policies. It also allows them to acknowledge Latin America’s specific cultural, language, and legal frameworks. For additional information, visit the Transfer Pricing webpage.