Challenges faced by companies in transfer pricing in Latin America

Marcos Rivera is an economist from the Pontificia Universidad Católica del Perú. He holds a Master’s in Finance from the Universidad del Pacífico and is responsible for the transfer pricing division at Englobally Latinamérica. Initially, his interest was in private-sector financial issues. Later, he specialized in advising companies that, due to their expansion, needed to deal with different tax administrations in other jurisdictions. In addition to working in significant firms in Peru, he had the opportunity to gain intimate knowledge of the reality of Ecuador and Chile, where he was assigned. He has taken specialization courses at the Inter-American Center of Tax Administrations (CIAT) and courses on transfer pricing in Europe.

What is the objective behind the concept of transfer pricing?

They have their origin and development in a worldwide globalization process, and they are based on the need for the prices and conditions agreed upon in the operations of the economic groups to be carried out at market value. This is the primary and most important principle governing the whole transfer pricing issue. The conditions that you have agreed upon with your related group must be the same conditions that you agree upon with third parties in such a way that the control or subordination in a company or a group of companies should not be a reason for the prices or the agreed-upon conditions to be artificially affected or manipulated. There is a formal compliance issue, but these analyses allow more efficient management of the company’s resources and guarantee tax equity in a globalized business environment.

The issue of transfer pricing began to develop in England and the United States from 1915–1917 as a preventive instrument. It was after the Second World War that it acquired greater importance, and in the 1930s, the first regulations were implemented. In Latin America, it took off in the 1990s, with Mexico as a precursor due to its leading partner, the United States, after the signing of the free trade agreement.

What is the general situation in Latin America regarding implementing transfer pricing in its companies?

The region is already aligned with the OECD guidelines. Different countries have already incorporated it with greater or lesser enforceability, formalism, and fines by their tax administrations. In this sense, in Latin America, it is already an issue that is internalized in the legislation of each country and large company.

What are the main challenges facing companies in the region?

Local companies must fully adopt the methodology and incorporate more technical and theoretical development in this area. The last major update was made in 2013 by the OECD with the presentation of the Base Erosion and Profit Shifting (BEPS) project, which seeks to address tax strategies to prevent tax avoidance at the international level, i.e., multinational companies moving profits to low-tax jurisdictions and eroding the tax bases of high-tax countries.

We also have to consider that tax administrations often overlook the economic climate when assessing the pricing policies of multinational companies in Latin America. For example, the COVID-19 crisis affected some productive sectors that saw their margins affected during that period and caused many countries not to grow. In addition, the burden of proof falls on the taxpayer, which may be difficult to justify in numerical terms when there are subjective factors, such as declining demand, markets in recession or expansion, proximity to profitable markets, the degree of competition in specific markets, and increased costs due to externalities.

Have there been significant changes?

Most Latin American countries produce low-value-added raw materials, which are generally traded abroad to clients of the same economic group. That means that one method, the uncontrolled comparative price, which consists of comparing the same circumstances with the same prices, has to be incorporated within each of these countries. Some have developed complementary methods, such as the commodity method, to value these produced materials.

There is a theoretical discussion of how commodities should be valued since they are generally part of a chain with great value added. Still, the value added at the source is minimal. So, the question is how the commodity producer can have a significant share of the final income from that product. This is an excellent discussion that administrations around the world are having.

Also, in 2013, the United Nations presented the Transfer Pricing Practical Manual to provide developing countries with a practical and complementary tool for implementing transfer pricing policies. These policies avoid tax evasion and the undue transfer of profits between related companies in different jurisdictions.

Technology has entered with great force into different areas of society; the economy is no exception. How do international organizations face the emergence of cryptocurrencies in transfer pricing?

About three years ago, I was asked that question for the first time in Chile because specific cryptocurrency regulations were coming out. Because these are based on a digital ecosystem, one tries to isolate it from the other variables. This is addressed in Action One of the BEPS Project, and the important thing is to know where a digital currency is generated, where it is traded, and where the benefit of this gain in the currency will be felt. There is a subject, in this case, the permanent establishment of a cryptocurrency, which can be recognized as a profit in the territory in which it can be taxed. It is an excellent challenge for the countries’ economies and their tax administrations to avoid the liquefaction of this generation of wealth, which used to be tangible but is now totally virtualized. I see Chile, Brazil, Colombia, and Mexico as pioneers in this type of regulation.

How do the teams within the company collaborate in this area?

The personnel who will elaborate on or review whether the operational conditions between the economic groups have been given in market conditions have a lot to do, and their coordination is relevant to the result. The financial accounting area manages the accounts and records; the legal area is in charge of the contractual support of the company’s operations; the commercial area sells, adapts, and sets prices; and the general management defines the company’s course through a value-generation strategy. In large companies, it is customary to find a transfer pricing manager responsible for reviewing all the internal processes involved in compliance with transfer pricing regulations.

 

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