By: Rafael Luna
The Transfer Pricing Guidelines were issued for the first time in 1995 by the Organization for Economic Cooperation and Development (OECD). Since then, there have been three updates, the first in 2010, the second in 2017 and the last in 2022. The Guides are mainly addressed to Tax Administrations around the world, as well as to multinational companies, despite the fact that, in Central America, in most countries it is not required that the company is a multinational for its application, but it is enough that there are several related companies within the same country that carry out operations among them.
The guidelines offered in this document refer to the way in which it can be verified that such transactions between related entities have been carried out at market prices. In this sense, the Guidelines impose limitations on taxpayers, in the sense that they are not fiscally allowed to have freedom in the setting of transfer prices of goods and services when dealing with a related entity, but are obliged to charge or pay the same as would have been agreed between unrelated companies.
The premise of this limitation is that, if the market price parameter is not used as a reference, companies could manipulate their pricing policy between related entities to achieve a lower overall tax burden, for example, by selling very cheaply to another country with a lower tax burden and thus accumulating a higher profit in the country that pays less tax. Conversely, the company in the country where it has a lower tax burden could increase its collections (and therefore its profit), to the detriment of the jurisdiction where the payments are made, where they will serve as deductible expenses and therefore it will have a lower profit and pay a lower amount of taxes. A second impact refers to the cost of compliance with formal Transfer Pricing obligations, in order to demonstrate to the tax authorities that there has not been any artificial manipulation of the prices agreed between related parties, but that they have been made at market prices through a Transfer Pricing Study that must be performed annually.
However, in order to comply with this obligation, taxpayers have to dedicate a significant amount of financial and human resources, whether or not they outsource the annual preparation of the Transfer Pricing Study. A third impact, which may be the most important, is when the Tax Administration carries out a Transfer Pricing audit and considers that the principle of market values in the transactions has not been complied with. This situation is linked not only to the collection of taxes, but also to the additional imposition of fines and interest, in addition to the cost of the legal defense of the case, which can be prolonged for many years.
On the other hand, it should be noted that, in most cases, transfer pricing adjustments are for comparatively high or very high amounts, which can put the company in a very delicate financial situation. In particular, what the new 2022 Guides do is to incorporate a number of reports issued by the OECD after the previous update in 2017 and which now form an integral part of the new Guides. These inclusions relate to an update and relaxation in the use of one of the transfer pricing methods, i.e., the Profit and Loss Allocation Method. They also include guidance on the valuation of related financial transactions, the granting of credit guarantees and the use of cash pool systems. In addition, it gives further guidance to the Tax Administration on how to make calculations when dealing with intangible assets that are difficult to value (such as trademarks, patents or formulas), so if your company finds itself in any of these situations, the new Guidelines are of particular importance in the prudent management of the business.
Finally, it should be noted that at present, the companies dedicated to perform Transfer Pricing analyses are having problems to obtain updated information for the years 2020 and 2021, due to the effects of the COVID 19 Pandemic, since the largest databases dedicated to these analyses are not receiving a normal flow of information, as a consequence of the fact that the companies themselves, in many cases have dedicated greater resources simply to stay afloat as a consequence of the financial crisis and that at present, the conflict in Ukraine could tend to aggravate even more. In this regard, the OECD itself made a report on the matter in December 2021 in which it makes the above points, but at the same time, insists that the taxpayer is the one to deploy greater efforts of documentation in order to prove to the Tax Administrations that their operations are at market values. In practical terms, this implies greater efforts and costs for taxpayers.