Does the transfer pricing adjustment affect my operating loss for purposes of the ISO exemption in Guatemala?

Transfer Pricing provisions originate to establish principles and regulations to the costs or amounts agreed by multinational entities in their international transactions and their impact on the calculation of the income tax base. This is done, mainly, to avoid a detriment or deferral of the payment of taxes in each jurisdiction. The objective is that multinational companies do not shift their profits or benefits generated by their operations globally to jurisdictions with a more beneficial tax treatment.

Therefore, the principle of free competition standard was created to prevent the manipulation of such prices and to force companies to determine them, for tax purposes, as if they had agreed with a third party under arm’s length conditions. That is, without taking into consideration that they are related entities.

To prove that the prices were agreed under the arm’s length principle, it is possible to use different methods established by law, which are also internationally recognized.

In Guatemala, the principle of free competition is regulated in the Tax Update Law, which regulates the Income Tax. The regulation is in accordance with what was previously indicated regarding the objective of the transfer pricing regulations, the arm’s length principle and the methods that must be used to verify compliance with it.

The Tax Administration is empowered to verify if the operations carried out between related parties were valued in accordance with the arm’s length principle and if the corresponding adjustments may be made when the same result in a lower taxation in the country or tax deferral. These adjustments are made in accordance with the Income Tax since the regulation is specifically established for the category of income from lucrative activities.

In Guatemala, we also have the Solidarity Tax. This tax has no transfer pricing regulation, but it is levied on mercantile or agricultural activities, in the national territory, that obtain a gross margin higher than 4% of their gross income. The taxable base of the tax is the greater of one-fourth of the net assets or one-fourth of the gross income of the taxpayer.

However, within the exemptions of this tax, it is regulated that it will not be paid by taxpayers who, as of the effective date of this tax, incur in operating losses during two consecutive years. This exemption applies exclusively to the four quarters following the second year in which the losses resulted. Therefore, a taxpayer that has operating losses for more than two consecutive years is not subject to the payment of the Solidarity Tax, provided that the procedure established in the law is complied with.

It should be noted that the exemption expressly establishes that the losses must be the results of the taxpayer’s operations. A transfer pricing adjustment, which modifies the profit, for tax purposes of the taxpayer, does not generate an operating profit. This is because the transfer pricing regulation has as its objective the modification of these for tax purposes, therefore its adjustment, for purposes of the Solidarity Tax exemption, would not generate a modification of the loss.