A recent report published by the United Nations’ Economic Commission for Latin America and the Caribbean (CEPAL) calculated that Latin American countries have lost more than US$98 billion in tax revenues simply due to transfer pricing manipulation.
Latin American countries are paying close attention to such reports, leading to changes in their local regulations or approaches to audits related to transfer pricing.
As an example, at the end of last year, the Mexican Income Tax Law included articles related to the (OECD) Base erosion and profit shifting (BEPS) initiatives, establishing the obligation of certain taxpayers to produce additional documentation related to the country-by-country report, Master and Local Files. Mexico’s new requirements will cover the 2016 taxable year, and companies will be required to submit appropriate information by the end of 2017.
Also at the end of last year, the Chilean Internal Revenue Service (SII) published new tax disclosure requirements for 2016 that are similar to those set out in the BEPS country-by-country report. This new tax disclosure will require large taxpayers in Chile to submit an informative report including information on the following: corporate reorganization, financial instruments and/or derivative contracts, pre-tax profits, capital assets and international transactions.
In a recent interview, the SII stated it was seeking to collect US$265 million related to transfer pricing adjustments. The SII has opened 255 transfer pricing audits to achieve this. In order to increase the collection of additional tax revenue, the SII drafted a proposed regulation to increase significantly the penalties related to the transfer pricing disclosure form.
Other examples of increased oversight of transfer pricing appear in Central America, where El Salvador’s Tax Authority published on a website the summary of audits including the adjustments proposed and collected. Most of the audits were related to transfer pricing.
The most recent example is Ecuador, where a Presidential Decree (973) included changes in the tax regulation, specifically the addition of article 86, which allows the tax authority to establish technical and methodological measures for preventing the abuse of transfer pricing. This provides the legal foundation for adapting BEPS initiatives into Ecuador’s transfer pricing regulations.
Additionally, this decree includes a paragraph in article 279 that states that transfer pricing documentation cannot be prepared by the same entity that provided any of the following services: tax advice, representation services, preparation of their financial statements; or acting as an expert witness on a tax court case. The Ecuadorian changes are the first reaction by a Latin American tax authority towards the European Commission’s reform of the audit market, which seeks to limit the services that auditors can provide regarding specific tax compliance services as their transfer pricing documentation. Ecuador’s deadline requiring provision of transfer pricing documentation concerning 2015 is June 2016.
It is clear that companies should be prepared to face more scrutiny regarding transfer pricing throughout Latin America. The tax authorities of several countries are increasing their documentation requirements as well as increasing the number of audits they are conducting.
Companies will need to react quickly to this new environment by establishing a specific strategy for the region. We are seeing an increasing number of clients seeking to produce regional documentation from a centralized perspective, allowing them to maintain consistency with their global policies while acknowledging the specific cultural, language and legal frameworks of Latin America. Companies should be revisiting their independence related to the production of documentation in Latin America and also considering other strategies, such as the negotiation of advance pricing agreements in the region.