Local File VS. Transfer Pricing Benefit Test

July 3, 2024

Introduction  

In Transfer Pricing, multinational companies must comply with several documentary obligations to ensure related party transactions are at market value. In Peru, the Local Report and the Profit Test are the main obligations. Herein, we will address the key differences between these two and their relevance to tax compliance.

Local Report

The Local Report is a document required by the tax authorities containing detailed information on related party transactions within a specific jurisdiction. It intends to demonstrate that the prices applied in these transactions are within the corresponding margins under normal market conditions.

Local Report Content

  • Company Description: General information on the organizational structure and business activity.
  • Functional Analysis: Details of the functions, assets, and risks assumed by the company and its related parties.
  • Intercompany Transactions: Description and quantification of related party transactions, such as contractual terms and business strategy.
  • Transfer Pricing Methods: Methodologies employed to determine Transfer Pricing and price comparability in each transaction described in the previous item.

For more information about Local File services, please visit our website.  

Profit Test

The Profit Test is a specific analysis used to assess whether a related party transaction earns a real economic benefit to the companies involved. The Profit Test must be evaluated to properly report and support the services received by the companies from their related parties to deduct the costs or expenses of such services.

A service must provide economic or commercial value to the service recipient, improving or maintaining its commercial position. Consequently, a service does not meet the Profit Test when performed by the parent or other group member or multinational group solely for its own interest or benefit.

Key Elements of the Profit Test

  • Profit Identification: Determination of the tangible and intangible economic profits derived from the transaction.
  • Needs Analysis: Assessment of the need and nature of the services or goods acquired in the transaction.
  • Duplicity of the Service: Review if there is duplicity of the service provided, i.e., if the service provided by the company is also provided by its parent company or another one of the group.
  • Profit Quantification: Measurement of the economic value of the profit received regarding the cost incurred.

For more information on Benefit Test services, please visit our website.  

Key Differences between Local File and Profit Test

  1. Purpose:  
    • The Local Report focuses on demonstrating that transactions are at market value.
    • The Profit Test seeks to support the relevance and economic value of the intragroup services.
  2. Scope:  
    • The Local Report covers all intercompany transactions.
    • The Profit Test applies to specific transactions corresponding to services received from related parties.
  3. Content:  
    • The Local Report includes a comprehensive analysis of all transactions, Transfer Pricing methods, and comparability.
    • The Profit Test focuses on the evaluation of profits and the necessity of the transaction.

Tax Compliance Importance

Both are essential for multinational companies to comply with Transfer Pricing regulations and avoid tax adjustments and penalties. A well-prepared Local Report ensures transparency and justification of the prices applied, while a proper Profit Test ensures the deductibility of cost and expense incurred in intragroup services.

Conclusion

The correct preparation of both the Local Report and the Profit Test is essential for compliance with Transfer Pricing regulations and the minimization of tax risks. At TPC Group, we have Transfer Pricing experts who can assist your company in complying with all the documentary requirements and ensuring efficient management of your intercompany transactions.

Call to Action

For further information on the Local Report and Profit Test preparation, please do not hesitate to contact us. At TPC Group, we are committed to offering customized and efficient Transfer Pricing compliance solutions.

Source: TPC Group - Local File and Benefit Test.