Transfer pricing is a crucial aspect for multinational companies, since it involves the transfer of goods, services and intellectual property between their different business units located in different countries.
Local reporting on transfer pricing, which involves specific information on transactions between related entities, is a tool that is becoming increasingly important for the Tax Administration.
Local reporting is essential for companies, not only because they must comply with a legal obligation established by the Tax Administration, which if not complied with may result in a financial penalty, but above all because it is an important tool for the Tax Administration when determining whether or not to carry out an audit and the scope of the audit. Local reporting plays a key role in risk management, regulatory compliance and optimization of resources for multinational companies. By ensuring transparency and proper documentation of transactions between related entities at the local level, companies can mitigate risks, avoid tax contingencies and enhance their corporate reputation.
In the beginning, the reporting of related party transactions was mainly governed by the provisions of the Tax Code and the regulations issued by the National Superintendency of Customs and Tax Administration (SUNAT) in Peru. The documentation required was relatively basic and consisted of information on related party transactions and the methodology used to determine transfer prices.
Over time, the tax legislation was aligned with the guidelines of the Organization for Economic Cooperation and Development (OECD) on transfer pricing being that since 2017 the local regulations were aligned with the new documentation requirements that the BEPS generated through the Action. This implied a greater sophistication in local reporting, including the need for more detailed information, comparative analysis and justifications of the transfer pricing policies adopted by companies.
Currently, local reporting requirements to reflect international standards and ensure greater fiscal transparency include information such as organizational structure and a detailed description of the taxpayer's business lines, activities and strategies; in addition, the taxpayer's operations with related parties, including a description of the transactions performed, information regarding the profit test, amount of transactions performed, identification of counterparties, detailed functional analysis, identification of the most appropriate transfer pricing method applied and list and description of comparable transactions (internal or external) if any, among others. This has included the introduction of specific forms and the expansion of the information required, such as the presentation of a detailed comparability study and the disclosure of additional financial information on related parties.
In order to combat tax evasion and ensure compliance with transfer pricing rules, the Tax Administration has intensified its auditing efforts. This has led to increased scrutiny of the accuracy and veracity of the information presented in the local reports, resulting in increasingly incisive audits that have been generating omitted taxes, as well as higher penalties for those who do not comply with an adequate application of transfer pricing.
In view of the above, it is essential that companies not only comply with all formal requirements related to local reporting, which includes submitting the required information in a timely and accurate manner, but also maintain complete and accurate documentation to support their transfer pricing policies and related party transactions. This should include contracts, invoices, comparative analyses, comparability studies and any other relevant documentation that demonstrates the nature and value of intercompany transactions.
It is therefore important to conduct detailed and rigorous analyses to support the transfer pricing policies adopted by the company. This may involve conducting comprehensive comparability studies to demonstrate that the prices and terms of related party transactions are consistent with those practiced in the free market.
It should also be noted that transfer pricing documentation should be updated regularly to reflect changes in the company's operations, economic environment and tax regulations. This ensures that the information provided is relevant and up to date in the event of a tax audit.
In the event of prior requests for information from the tax authorities, it is advisable to maintain open and transparent communication, providing additional information or clarifications when necessary. This can help prevent misunderstandings and resolve any potential problems proactively.
Given the complexity of transfer pricing and the tax rules governing it, companies should seek professional advice from experts in the field. Enlisting the assistance of specialized economists, accountants and lawyers can help ensure compliance and proper preparation for a tax audit.
Therefore, to prepare a local transfer pricing report effectively and be prepared to successfully face a tax audit, it is essential to contemplate several key recommendations. First, the report should include a detailed description of the taxpayer's organizational structure, as well as a thorough explanation of its lines of business, activities and business strategies to support the application of the transfer pricing method that the company has used. In addition, it is crucial to have complete information on the taxpayer's operations with related parties, including a detailed description of the transactions carried out, the profit test applied, the amount of the transactions, the identification of the counterparties involved and a detailed functional analysis. Also, the most appropriate transfer pricing method applied in each case should have been validated and, if applicable, include a list and description of comparable transactions, whether internal or external. Other important aspects to consider are the adequate documentation of the transfer pricing policies implemented and the justification of the prices or margins applied in the transactions.
In summary, companies should take proactive steps to ensure that their local transfer pricing report is complete, accurate and up-to-date, which will enable them to successfully face a potential tax audit and comply with relevant tax regulations.
By: Martín Ramos
