Application of the Sixth Method in Latin American Countries

January 30, 2024

Introduction to the Sixth Method in Latin America

Latin American countries are mainly characterized as commodity exporters, playing a significant role in the supply of primary goods for the world’s largest economies. Consequently, the “Sixth Method” methodology was introduced at the legislative level in several Latin American nations to regulate the trade of commodities, serving as a mechanism to counteract the harmful planning of transfer prices in import and export transactions of such products.

Each Latin American country has its particularities in terms of the sixth method application.

Application of the Sixth Method: Argentina

In the case of Argentina, the “sixth method” was implemented in 2003 to combat tax evasion in the marketing of primary products such as cereals and soybeans, achieving positive results. Conversely, those properly registering contracts should not apply the Sixth Method. In the case of Bolivia, according to the non-mandatory norm, thus employing another method to value their transactions according to their nature, economic reality, and specific circumstances of each case.

Application of the Sixth Method: Brazil

In the case of Brazil, it is mandatory for import and export transactions involving commodities when such transactions are carried out between a legal entity domiciled in Brazil and related natural or legal persons resident or domiciled in countries or dependencies with tax havens.

Application of the Sixth Method: Honduras

In the case of Honduras, when the price agreed between the related parties is higher than the one quoted, the higher price will be taken, so in this case, there cannot be a Transfer Pricing adjustment under the sixth method.

Application of the Sixth Method: Uruguay

In the case of Uruguay, the methodology is applied, whether or not there is an intermediary, it must meet the following requirements: Have residence abroad, have a real presence where it resides, have a commercial establishment, the assets risks and functions assumed must be under the negotiated volumes of operations, in addition, the activity must not consist of obtaining passive income, in intermediation with other members of the economically linked group (may not exceed 30% of the annual total of its concerted operations.

Application of the Sixth Method: Ecuador

In the case of Ecuador, the quotation period of the “day of merchandise loading” is replaced by the quotation period established for the application of reference prices for tax purposes.

Application of the Sixth Method: Peru

In the case of Peru, it mentions that the uncontrolled comparable price method does not adequately reflect the economic reality of the transaction. In addition, the transactions carried out by independent third parties are not comparable, or even if they are possible for comparability adjustments, these end up detracting from the reliability of the application of the method. Therefore, the taxpayer must support the implementation of a different method by filing a technical report and documentation supporting the economic, financial, and technical reasons reasonable and pertinent to justify the application of this method.”

Fundamentals of the Sixth Method According to CIAT

According to the CIAT (Centro Interamericano de Administraciones Tributarias – Inter-American Tax Administration Center), the “Sixth Method” is based on the comparison of transaction prices between goods and services between independent parties in comparable transactions. The main objective is to verify that transactions between related parties comply with the conditions established by the regulations of each jurisdiction.

Diversity of Regulating Perspectives

The CIAT emphasizes the application of the “Sixth Method” must be based on objective and verifiable criteria, and the selection of market data must be careful and rigorous. The most experienced countries in the application of this method include Argentina, Bolivia, Brazil, Costa Rica, the Dominican Republic, Ecuador, Honduras, Guatemala, Paraguay, Peru, Uruguay, and the Dominican Republic.

Differences and Similarities Among Regulations by Country

A table detailing the main differences and similarities between the regulations adopted by these countries is provided. The disparities found in the various policy perspectives are summarized below:

Element Diverse Perspectives Supported
Legal Nature The measures can be adapted to the economic sectors and local contexts of each of the countries, both in terms of their legal nature and their practical application:

  1. Supplementary Method of Applying the Uncontrolled Comparable Price
  2. Anti-Abuse Policy
  3. Safe Harbor
  4. Other
Mandatory compliance
  • Mandatory: if the conditions set out in the standard are met.
  • Optional: This measure or the CUP method can be applied interchangeably.
  • It is not expressly stated in the standard.
Operation-Specific Application
  • Export operations only
  • Import operations only
  • Import & Export Operations
Comparability Adjustments The method allows comparability adjustments to quoted prices for characteristics, such as the physical characteristics and quality of commodities, as well as traded volumes, contract terms and conditions, other relevant variables, the date, and conditions of delivery (CIF, FOB, etc.) and whether the transaction between the related companies is performed at the same level of the supply chain as the one that served to set the publicly available price.”
Application according to the good
  • Commodities only
  • Other Goods
  • Other goods not mentioned by the standard
Condition of the existence of an international intermediary The condition of an international intermediary without any economic substance to apply the measure is expressly established in most countries.
Bonding Condition The condition of relation between the exporter and the importer and/or the actual recipient is expressly established in most countries.
Exceptions to the application of the measure Some measures implemented in the region provide the possibility for the local subject to prove the intermediary has economic substance, although the criteria are not the same in all cases.