Accreditation of Comparability Adjustments in the Transfer Pricing Standard and Supporting Jurisprudence

By Martín Ramos

The application of the arm's length principle in transfer pricing studies requires ensuring comparability between related party transactions and transactions between independent parties. In this context, the Peruvian regulation establishes that comparability adjustments are necessary when there are significant differences between the compared transactions. Therefore, the following is an analysis of the criteria to accredit such adjustments under Peruvian law, its support in jurisprudence and its alignment with international standards.

The regulatory framework for transfer pricing in Peru is established in Article 32-A of the Income Tax Law and Article 108 and following of its regulation. Likewise, Superintendence Resolution No. 163-2018/SUNAT regulates the filing of the informative affidavits Master Report and Country-by-Country Report.

Subsection d) of Article 32-A establishes that the comparability of transactions should be evaluated considering those elements or circumstances that most closely reflect the economic reality of the transactions, depending on the method selected, and also considering aspects such as: the characteristics of the goods and services, the functions performed, the contractual terms, the economic circumstances and the business strategies. If there are material differences that affect comparability, the standard allows technical adjustments to improve the reliability of the analysis.

In addition, Article 110 of the regulation allows the consideration of information from two or more fiscal years prior or subsequent to the audited period in cases where the business cycles or commercial acceptance of the product cover more than one fiscal year, when it is necessary to better understand the factors that influenced the prices or to determine the origin of declared losses, especially if these derive from comparable transactions or prior conditions.

At the international level, the OECD Transfer Pricing Guidelines note the importance of comparability analysis to find the most reliable comparables as part of the process of selecting the most appropriate transfer pricing method and its application.

The same guidelines recommend the application of comparability adjustments to improve the reliability of the analysis, as long as such adjustments are technically sound and properly documented, quoting the guidelines as follows: “To be comparable means that none of the possible differences between the situations being compared can significantly influence the condition being examined methodologically, or that adjustments sufficiently precise can be made to eliminate the effect of such differences”. Countries such as Mexico, Colombia and Chile have implemented similar criteria in their tax regulations.

As noted above, comparability adjustments seek to eliminate differences that may affect the reliability of the transfer pricing analysis. The main types of adjustments recognized in international practice and OECD doctrine include:

- Adjustments for functional differences: When the comparable companies perform additional or different activities to those of the entity analyzed.

- Working capital adjustments: To correct differences in cash conversion cycles between the comparable companies and the entity analyzed.

- Adjustments for risks assumed: To eliminate the impact of differences in the assumption of financial, operating and market risks.

- Cost structure adjustments: To correct distortions arising from differences in the cost structure of the companies compared.

- Adjustments for market conditions: When there are significant differences in the economic and competitive environments in which the analyzed entities operate.

In order for a comparability adjustment to be accepted by the tax authorities, it must meet the following requirements:

a) Quantitative and methodological substantiation: Must explain the need for the adjustment and the quantifiable impact on comparability.

b) Consistency with OECD Guidelines: The methodology used should be aligned with international recommendations.

c) Supporting documentation: Technical reports, economic models and evidence justifying the adjustment must be submitted.

d) Uniform application: Adjustments should be applied consistently across all comparisons made within the same study.

The jurisprudence of the Tax Court has addressed in several resolutions important criteria regarding the comparability adjustments that must be taken into account, as follows:

- To calculate the amount of comparability adjustments there is no methodological rule or standard procedure, since the level of transparency, precision and/or reliability of the criterion for its application will depend on the particularities of the adjustment in each specific case.

- In order to make comparability adjustments in the determination of the profitability ratio, it is necessary to prove the existence of extraordinary situations that have a significant impact on profitability. The mere allegation of factors that are part of the normal operation of business activities does not justify the application of such adjustments. In this sense, the lack of documentation that technically or economically supports the extraordinary nature of the alleged factors prevents their recognition as elements that affect comparability.

- Comparability adjustments should only be considered if (and only if) they are expected to improve the reliability of the results, and are therefore only appropriate if the differences actually affect the comparison, as differences between the taxpayer's related party transactions and those of comparable third parties are unavoidable, the comparison may be correct even if there is an unadjusted difference, as long as it does not affect the reliability of the comparison.

Comparability adjustments are a key tool in the application of transfer pricing methods, as long as they are made in a technical and substantiated manner. In Peru, the regulation establishes the possibility of making these adjustments, but their acceptability depends on the rigorousness of their justification. The jurisprudence of the Tax Court confirms the importance of adequately documenting the application of these adjustments, ensuring that they are not used in a discretionary manner.

To avoid tax contingencies, companies must support any comparability adjustment with robust methodologies and documentary evidence supporting its applicability in each specific case. In this regard, compliance with regulatory requirements and alignment with jurisprudential criteria are essential to ensure the validity of the adjustments and their acceptance by the Tax Administration.