Transfer pricing studies in El Salvador

Transfer Pricing rules are fundamentally based on the Arm’s Length Principle, articulated in art. 9 of the OECD Model Tax Convention. This principle is pivotal for bilateral and multilateral tax treaties to avoid double taxation, reiterated in point 1.6 of the OECD’s “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.”

The Arm’s Length Principle aims to treat members of a multinational group as independent entities rather than as inseparable parts of a single unified company. This approach is intended to prevent tax avoidance schemes that could diminish the tax bases of various jurisdictions.

In Salvadoran legislation, according to art. 62-A of the Tax Code, taxpayers are required to determine the prices and amounts of considerations by considering market prices used in comparable transactions between independent parties when either of the following situations occur:

    1. Transactions between related parties.
    2. Transactions with entities domiciled in countries, states, or territories with preferential tax regimes, low or no taxation, or tax havens.

In 2014, Legislative Decree No. 763 of July 31, 2014, published in the Official Gazette on the same date, reformed art. 62-A of the Tax Code, specifying in its second paragraph that for determining the market values of transactions, the procedures and technical methods outlined in the Tax Code and the OECD Transfer Pricing Guidelines should be used. It also indicated that these guidelines would apply to the Tax Administration in exercising its powers to determine market prices and make the corresponding tax adjustments.

However, this reform was declared unconstitutional by rulings 96-2014 of May 28, 2018, and 126-2014 of December 12, 2018.

As a result, the current national legislation does not directly mandate a Transfer Pricing Study but only requires taxpayers (in any of the situations) to establish their prices and considerations at market value.

The current position of the Tax Administration is that taxpayers can continue using the OECD technical guidelines, confirmed by the contents of the “Guidance for Facilitating the Determination of Transfer Prices” (Guidance No. DG-001/2018) dated March 21, 2018, which adopts the OECD methodology. This guidance regulates the following methods:

    1. Comparable uncontrolled price method.
    2. Resale price method.
    3. Cost plus method.
    4. Transactional net margin method.
    5. Profit split method.

However, if the Tax Administration challenges the determination of Transfer Prices, it cannot use the OECD Methodology but must apply the regulations in articles 199-A and 199-B of the Tax Code, which grants the Tax Administration the power to estimate the tax base if the transfer price of movable goods or the remuneration amount for services is unreliable or different from the current market price.

Additionally, according to art. 124-A of the Tax Code, there is an obligation to report transactions with related parties or entities domiciled in countries with preferential tax regimes, low or no taxation, or tax havens, if such transactions individually or collectively equal or exceed USD 571,429.00. This report must be submitted to the Tax Administration within the first three months following the end of the fiscal year.

Failure to comply with this formal obligation, according to art. 244 of the Tax Code, may result in a penalty equivalent to 0.5% of the net worth or equity listed on the balance sheet, excluding unrealized asset revaluation surplus, with a minimum penalty of three-monthly minimum wages (USD 1,095.00).

In conclusion, we can highlight the following points:

    1. Salvadoran legislation does not impose the obligation to have a Transfer Pricing Study, but it does require establishing prices and considerations at market value. For this purpose, taxpayers may use the OECD technical guidelines. In the event of non-compliance, the Tax Administration can determine if these prices align with market values according to the Tax Code regulations.
    2. If these transactions exceed USD 571,429.00, a report must be submitted to the Tax Administration. Otherwise, a violation subject to a penalty of 0.5% of the net worth or equity, not less than three monthly minimum wages (USD 1,095.00), will occur.

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