The analysis of transfer prices for tax purposes is based on the Arm’s Length principle. This principle establishes that taxpayers of this control regime are obliged to value their transactions as if they were independent entities in comparable circumstances. Most tax legislations and agreement to avoid double taxation in Latin America are based on this principle.
The Arm’s Length principle is based on the fact that market forces normally determine the conditions of commercial and financial relations. However, when transactions take place between related parties, market forces may not directly influence prices, either through corporate synergies or economies of scale or tax planning.
Given this situation, the analysis of the Arm’s Length principle assesses whether the agreed price and the conditions under which the transactions are carried out are consistent with those agreed upon by independent companies in comparable circumstances. To determine whether transactions between related parties comply with the arm’s length principle, a comparability analysis is necessary to ensure, from an economic and legal point of view, that the characteristics of transactions between related and independent parties are reasonably comparable.
The new OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations will be the international technical reference to address transfer pricing issues. The publication of the 2017 Transfer Pricing Guidelines entail a number of challenges for the Latin American Tax Administrations, such as modifying their base legislation and improving their control capacity according to the BEPS project. Each country will have a roadmap to adapt the new elements to be taken into account in the valuation of intra-group transactions.
It is important to point out that in some Latin American legal systems, the Transfer Pricing Guidelines are a technical reference for the assessment of the Arm’s Length methodology, and whenever they are they are compatible with the internal law. Before this situation we should ask ourselves the following questions:
- From which tax period will these new guidelines be enforced?
- Could these new guidelines have a retroactive interpretation when they improve the current controversy analysis derived from transfer pricing?
Within the Post-BEPS Era Transfer Pricing Guidelines, it should be emphasized that an approach is developed that transactions should be taxed where value is generated, and there is a significant evolution in the issue of intangibles valuation that are difficult to estimate, which due to their nature can cause situations of double non-taxation.
In addition, the Guidelines present a focus on real transactions, the economically relevant characteristics (risks assumed), guides on risk evaluation for value-added services, transactions with commodities.
With these Guidelines, Multinational Groups are probably redefining their transfer pricing policy towards a model of tax compliance. Clearly, Advance Transfer Pricing Agreements, APAs, may be very useful to avoid future controversies arising from intra-group transactions in the Post-BEPS era.
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