Global Transfer Pricing Conference

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1 Managing multiple stakeholders in the new economy Global Transfer Pricing Conference Critical transfer pricing development in Latin America

2 Today s presenters Juan Carlos Ferreiro Transfer Pricing Partner Argentina Raúl Sicilia Transfer Pricing Partner México José Rafael Monsalve Transfer Pricing Senior Manager InterAmericas 2

3 Agenda News and developments in InterAmericas Mexican update Experience and developments in South America Conclusions 3

4 News and developments in InterAmericas (Central America, and Dominican Republic) 4

5 Recent developments in InterAmericas New regulations in Panama and Costa Rica providing additional details for the implementation of the existing Transfer Pricing legislation Recent legislation in El Salvador (2010), Dominican Republic and Panama (2011), Guatemala y Costa Rica (starting in 2013), Honduras (starting in 2014), and Nicaragua (starting in 2016) Generally, filing of the informative return is required as a minimum Tax Authorities in InterAmericas are being trained quickly Many concerns from authorities and the taxpayers Need to measure and limit risk Multinational enterprises are restructuring their operations to obtain efficiencies, which causes different transfer pricing schemes 5

6 Transfer pricing summary in the region Country El Salvador Dominican Republic Panama Guatemala Costa Rica Honduras Nicaragua TP formal regulations State of being In force Arm s Length Principle Scope (transactions ) % on capital (Related Party) Local and international Local and international International International Local and international International International 25% 50% N/A 25% 25% 50% 40% Methods OECD Guidelines OECD Guidelines OECD Guidelines OECD Guidelines OECD Guidelines OECD Guidelines OECD Guidelines Sixth method No No No (*) No (*) Although the rule do not include the sixth method, it specifies that when market quotes are available, they must be used when the CUP is applied. 6

7 Transfer pricing summary in the region País El Salvador Dominican Republic Panama Guatemala Costa Rica Honduras Nicaragua Other methods No No No No N/A No No Informative Return No No Deadline 3 months after FYE 6 months after FYE 6 months after FYE With the income tax return To be defined N/A N/A Dictamen Fiscal No No No No No No APA No No Safe Harbor No No No No No No Elimination of double taxations Simultaneous tax assessments No No No No N/A No N/A 7

8 Mexican update 8

9 Mexican update The authority has a team of more than 60 high profile and well trained professionals Have had great success in collection, audits, trials and amnesty programs Regulations adopt OECD TP Guidelines 9

10 Mexican update Mexican authority looks to weaken the taxpayer s studies in many ways, although much of its resources are focused on companies involved in restructurings, financial operations and overseas service payments Focus on certain industries, companies with important overseas payments, companies with drastic changes in their results and companies with losses Regulations applied for failures to comply with formalities and economic substance, and occasionally both when it suits Studies evaluating low-risk results prepared in an "express" way weaken the arguments of the taxpayer and position the authorities to win a trial, which in many cases result in significant adjustments 10

11 Mexican update Multinational companies are restructuring their operations to gain efficiencies, causing different transfer pricing schemes, drawing the attention of the authorities Mexican authorities replicate sets of comparables, as well as statistical and capital adjustments They perform a detailed analysis of the annual reports (10-ks) of the sets of comparable companies in the U.S. in order to criticize comparability, specially focusing on rejecting observations with low returns They replicate functional analyses and look for internal comparables After strongly criticizing the samples of comparable companies, the Tax Administration uses their own samples to determine adjustments. However, they don t provide information that allows to replicate their results 11

12 Mexican update They carry out transactional analysis and do not necessarily allow grouping Look for samples with high returns but not necessarily comparables Tax Authorities are not afraid of not reaching an agreement and are willing to go into litigation They analyze segmented financial information and take advantage of non-rigorous analyses to discard the taxpayer s methodologies They use more sample periods applying different criteria (ea. single FY equal to the year being evaluated, two years or three consecutive years including the FY assessed) Exclude companies showing losses even though the losses are not repeated during the whole period (recurring or average losses) 12

13 The Mexican experience Formal BEPS approach is in place to attack restructurings BEPS Imposing migration gains and PE after migration, aimed at taxing profits for sales in Mexico Approach is based on proving lack of economic substance to the restructuring, they are performing their own functional analyses in arriving at these conclusions In some cases they are scrutinizing transactions previously blessed by the authority in other transactions Requiring taxpayers going back and creating more robust documentation and fortifying their positions Proposed legislation would invoke yet undefined powers to recharacterize transactions lacking economic business purpose Payments to low tax jurisdictions would result in non-deductibility 13

14 Experience and developments in South America 14

Introduction of regulations in the late 90s.

Stability in the regulatory framework: o With

15 Experience and developments in South America First wave of Transfer Pricing activities: o Introduction of regulations in the late 90s. Currently, the second wave of activities: o Focus on regulatory compliance. o Increase in audit activities. Stability in the regulatory framework: o With the exception of Central America where many countries introduced new transfer pricing regulations. 15

16 Experience and developments in South America Trends in South America: Formalistic for tax purposes with strict documentations requirements and sanctions for non-compliance Regulations primarily based on the OECD Guidelines - Few exceptions: Specific methodology for commodities. Strict deadlines for transfer pricing compliance Fiscal authorities in the region are sharing information: - Internally: with other local authorities, such as Customs - Externally: with fiscal authorities from different countries, simultaneous audit inspections 16

17 Experience and developments in South America Trends in South America: Significant increase in audit activities Gradually, fiscal authorities have acquired certain degree of sophistication and have specialized groups as part of the aggressive audit programs Bigger emphasis in the analysis of economic substance and purpose of the transactions between related entities Domestic intercompany transactions are within the scope of the transfer pricing regulations in some countries APA program expansion 17

18 Experience and developments in South America Trends in South America. Other important aspects: Generally, the use of U.S. o regional comparables is accepted Limited local comparables with reliable information could be found for certain countries Supporting documentation has been fundamental in the cases where court ruling has been in favor of the taxpayers Brazil. Minimizing the risk of double taxation 18

19 Conclusions 19

20 Conclusions Development of specialized teams in transfer pricing areas within Tax Authorities Increased frequency of audits by Tax Authorities in the region Sophistication of the tax authorities and exchange of information across jurisdictions The evolution of InterAmericas jurisdictions demonstrates that the region will undergo changes faster than those experienced in other Latin American countries Tax Administrations betting heavily on increasing revenue through transfer pricing enforcement Taxpayers must be prepared to face these new challenges 20

21 A results oriented service. Adding value to your business. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

South America: Dealing with local complexity when applying global transfer pricing policies

South America: Dealing with local complexity when applying global transfer pricing policies The regulations in place in South America, as well as the approach adopted by the tax authorities in relation to intercompany transactions, create problems when applying certain OECD compliant structures