Correlative Transfer Pricing Adjustment

February 9, 2024

In the Globalization context, multinational corporations have become significant on the global economic stage, triggering tax challenges simultaneously, particularly concerning double taxation. Conversely, tax legislation has evolved to address this problem, leading to the negotiation of Bilateral Agreements for prevention or mitigation cases of double or multiple taxation.

Bilateral Agreements and Correlative Adjustments

Bilateral Conventions play a crucial role in establishing a framework to avoid double taxation, including provisions relating to correlative adjustments.

Correlative adjustments, formerly known as bilateral adjustments, are regulated in Article 109 of the Income Tax Law Regulations. These adjustments imply the recognition of a higher or lower income in a related party and, simultaneously, a greater or lesser expense or cost in the other related party when both are domiciled in the same country. Currently, Peruvian legislation refers to these adjustments as “Correlative Adjustments” in subsection c) of Article 109 of the Income Tax Law Regulations, indicating to be under the provisions of the international agreements to avoid double taxation signed by Peru.

Correlative Transfer Pricing adjustments apply to countries that have signed a double taxation agreement (DTA), specifically regarding the Transfer Pricing revision. These adjustments aim to prevent the same income from being taxed by both contracting states of the DTA, thus reducing the tax burden for the taxpayers involved.

Double Taxation

Double or multiple taxation is given when two or more countries consider to be able to impose taxation on certain income, which implies the potential taxation in more than one State and during the same period of the same subject or income due to the application of several relation criteria.

Double Taxation Agreements (DTAs)

DTAs are bilateral instruments to avoid international double taxation and promote foreign investment. These agreements sign rules against the double taxation faced by taxpayers for income tax or wealth taxes due to their investment or business relationship with another State. In addition, they contemplate mechanisms for collaboration between the Tax Administrations of the signatory countries to detect tax evasion.

Through the use of the conventions, signatory States must:

  • Waive the taxation of certain profits and agree that only one of the States will collect the tax, or,
  • Carry out a shared taxation, i.e., that both States collect part of the total tax to be paid by the subject.

Double Taxation Agreements in Peru

Currently, Peru has 8 bilateral DTAs in force, in addition to Decision 578 of the Andean Community. The CDIs are based on models developed by international organizations, such as the Organization for Economic Co-operation and Development (OECD) and the United Nations (UN).

In conclusion, DTAs and correlative adjustments are crucial tools for avoiding double taxation of multinational enterprises. Taxpayers must take advantage of the arrangements of these agreements to apply the corresponding adjustments and avoid additional tax costs in their transactions. International collaboration and respect for the regulations established in these agreements are key to fostering a favorable business environment and promoting foreign investment in Peru and other countries.