Andean States: TP methodologies step up formalisation

Colombia is living in a time of instability as the country lost its decade-old investment grade status for issuing long-term sovereign debt because of the deterioration of the public finances, a rising government debt level and the government’s capacity to credibly place debt on a downward path in the coming years. Therefore, the national government inevitably faces pressure to balance its fiscal ledgers, by intensifying its audit activities, particularly in connection with transfer pricing (TP) activity.

Colombia has had formal TP regulations in place since 2003, but over the last decade many multinational enterprises have experienced some kind of TP controversy, such as enquiries or audits by the National Tax and Customs Directorate (Dirección de Impuestos y Aduanas Nacionales, or ‘DIAN’).

In the past, most of the TP audits were led by the DIAN under a centrally-driven approach, focusing on specific inter-company transactions such as services, purchase and/or sale of finished products under traditional distribution and manufacturing business models, and those carried out with related parties located in a free trade zone within Colombia. Nevertheless, over the last few years, a decentralised model has been applied, in which the Cali, Medellin and Baranquilla local TP bureaus have initiated and led different audits based on their knowledge in specific industry segments within their geographic inspection area.

Additionally, the tax authority is learning from the experience of other tax authorities in the region by adopting best practices and using them in its inspection activities. Finally, the DIAN has started an investing plan in the use of data analytics to identify risk cases, which may improve its levels of effectiveness in the selection of the entities to be audited, and to eliminate its former masse audit model.

As the audits are advancing from the application of the TP methodology and the selection of comparable companies to more complex transactions, such as those related with intangible assets (royalties, know-how, technical assistance), inter-company loans, derivatives, etc., it has become necessary to promote the use of advance pricing agreements (APAs).

APAs constitute effective negotiation and controversy resolution tools that may reduce the exposure to TP litigation. In addition, APAs may also serve to increase the foreign direct investment in Colombia in order to ensure that a specific TP policy would not be subject to challenge during the APA five-year term (it will also avoid potential penalties or assessments that may affect the cash flow of the entity).

For the multinational enterprises with activities in Colombia, APAs will allow the application of their standardised inter-company policies in a certainty business and tax environment, to improve the cooperation and communication with the local tax authority, and to avoid long and expensive TP audit processes that may result in an adjustment in its policies for one or more years.

From the above, the tax authority should actively promote the negotiation of APAs (unilateral or bilateral) in order to increase the level of certainty and confidence of the local and foreign investors in the country in the mid and long term.

Despite the current context, the tax administration has been quite active in terms of TP audit processes in Peru, particularly in the mining sector. Among the recurring subjects of audit in this industry, it is possible to mention the determination of the selling price of commodities to related companies located abroad or located in non-cooperating countries or territories with low or no taxation.

Another recurring issue corresponds to the cost or expense for the reception of services, especially those received from related companies domiciled abroad; which are recurring transactions in the mining sector and are part of the risk indicators that the tax administration evaluates in taxpayers.

Given the importance of the aforementioned transactions, the Regulation of the Income Tax Law, in the chapter related to TP, incorporated into its structure articles directly related to the export of goods with known prices (Article 113-A , also known as the ‘sixth method’); and with the receipt of services (article 118-A, also known as the ‘benefit test’). These changes have been laying the foundations for the approaches that the tax administration is adopting in TP audits in the mining sector. Although the administration is performing audits of fiscal years prior to the entry into force of these regulations, in practice it has been used criteria based on said regulations, for audits applicable to fiscal years 2015 and 2016.

Regarding the exports of goods with known price (commodities), there are two main topics that are typically reviewed in a TP examination: (i) the supporting documentation of the transactions. That is, to preserve and present extensive information corresponding to contracts, addenda, flow charts, description of activities, settlements, description of the components that make up the price of the product, among others; and (ii) the determination of the controlled price and the TP method applied for its evaluation. All this to determine whether the sale value of the goods caused fiscal loss.

Regarding intra-group services, the audits focus not only on validating whether the service was agreed at market value, but also on the taxpayer certifying that it is obtained an economic or commercial benefit from receiving the services, which implies demonstrating that there was no duplication in receiving them, as well as showing that the services did not constitute shareholder activities. Likewise, extensive documentation is required to demonstrate the effective provision and nature of the service, the costs and expenses of the provider, allocation keys and other information that supports the calculation of the value of the service.

Taking into account the latest trends in audits for the mining sector, it is important that Peruvian taxpayers pay attention not only to the fulfilment of formal TP obligations, but also to adequately support its transactions, with supporting documentation and with accounting and financial information that allows to prove the determination of its transfer pricing.

In recent years, it has been commonplace for taxpayers that receive an objection writ from the Venezuelan tax authority (SENIAT) challenging their transfer prices, to file a notice of disclaimer refuting the terms of the challenge.

Once the SENIAT responds to such a disclaimer and makes the resolution of the indictment, usually within a two-year term, the taxpayer must make the payment of the adjustment determined by the SENIAT. Common practice has also seen companies take the defense process to the next stage via an administrative appeal.

Based on the above, and considering that the first step before receiving an objection writ from the SENIAT consists of the request and review of formal duties, it is important to mention that in early 2020, the Organic Tax Code (OTC) was published, which modified the fines related to TP duties. In this sense, fines were significantly increased. This generated that the taxpayers have a greater responsibility in the compliance of their fiscal obligations.

In addition to the recent fines established in the OTC, there are more consequences for not keeping the documentation.

Firstly, the tax administration could calculate profit margins/prices that might differ from those calculated by the company. Without the TP documentation, the company might not be able to support its transfer prices.

Secondly, not having the proper supporting transfer documentation available to the tax authority, may make the company liable to further revisions by the tax administration.

If the TP documentation is not available, the public accountant responsible for auditing the company might include this situation in its auditor’s report. Thus, being unable to assess the contingencies that could affect the financial statements of the company during the period under analysis, a decision regarding the inclusion of an uncertainty paragraph could be taken in the said report.

Furthermore, for a taxpayer unable to produce TP documentation, it may indirectly affect other administrative processes of the company, in particular when the company has to interact with government agencies, such as the financial regulatory agency or the labour ministry. Such interactions may require the auditor’s report and should include an opinion without exceptions, in order to verify that the taxpayer has complied with the various accountancy practices. Not having the TP documentation could generate an exception in the public accountant’s opinion, which would be explicitly disclosed in the external auditor’s report.

More recently, in 2020, the initial year of the COVID-19 pandemic, an active attitude was also observed by tax administration officials, who requested from various entities, from the interior of the country and the capital city, the formal duties of TP disclosure (Informative Return or PT99 Form and Transfer Pricing Report), as well as the supporting work papers.

In conclusion, TP specialists from the SENIAT are actively participating in tax audits of foreign-based companies. In the most recent tax reviews conducted by the SENIAT, it is evident that the underlying purpose of recent examinations extends beyond the traditional, more limited reviews and that the SENIAT have routinely included a review of formal TP obligations.

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Bruno Urrieta Farías

Partner Deloitte Colombia T: +57 1 4262303 E: burrieta@deloitte.com Bruno Urrieta Farías is a partner based in Colombia, who is responsible for the national TP practice. He is also a member of Deloitte’s technology, media and entertainment and telecommunications (TMT) tax practice, and has worked closely in compliance and planning projects with some of the major players in the Mexican and South American advertising, media and entertainment markets. For 19 years, Bruno has assisted multinational groups with operations in different industries, including mining, manufacturing, real estate and retail, among others. He advises on the design, implementation and/or defence of their TP policies. Additionally, he has a broad experience coordinating regional TP documentation and planning projects for multinational groups that have operations in South and North America. Bruno holds degrees from National Autonomous University of Mexico and the Panamerican University. Before joining Deloitte Colombia, he was part of the Mexican TP practice, where he participated in different projects for some of the largest Mexican multinational and national groups and subsidiaries of US and Canadian companies.

Iliana Salcedo

Partner Deloitte Venezuela T: +58 212 206 8778 E: isalcedo@deloitte.com Iliana Salcedo is a partner based in Venezuela. She has more than 20 years of experience providing tax technical advisory in TP matters. She is part of Deloitte’s Andean region TP practices. Iliana has wide experience in the preparation and review of TP documentation in different industry sectors, including automotive, pharmaceutical, basic materials, mining, chemicals, and services, among others. She has been actively involved in the development of projects for documenting and designing TP policies, strategies and structures for multinational groups. Iliana is also experienced in defence preparation in TP audits in Venezuela. She is a speaker in different TP regime-related conferences across the Andean region.

Gloria Guevara

Gloria Guevara Partner Deloitte Peru T: +51 1 211 8585 E: glguevara@deloitte.com Gloria Guevara is a partner responsible of the TP practice in Deloitte Peru. She has over 16 years of experience with Deloitte, during which she has advised multinational companies and key local groups operating in diverse industries such as mining, oil and gas, energy, and manufacturing, among others. Gloria has extensive experience advising her clients on strategic planning design and TP policies. She has actively participated in high level complexity TP issues – valuation of intangibles, valuation of mining properties, and residual profit split application – as well as diverse audit defenses regarding this field. She has also advised clients in the telecom industry for the negotiation of an APA with the national tax administration. Gloria is a graduate of the Pontifical Catholic University of Peru and has further postgraduate qualifications from the University of Lima and Adolfo Ibáñez University.