Local File VS. Transfer Pricing Benefit Test

July 3, 2024

Introduction  

In the field of Transfer Pricing, multinational companies must comply with several documentary obligations to ensure that transactions between related parties are carried out at market values. In Peru, two main obligations are the Local File and the Benefit Test. In this article, we explore the key differences between these two and their relevance to tax compliance.  

What is a Local File?

The Local File is a document required by the tax authorities that contains detailed information on transactions between related parties within a specific jurisdiction. The purpose of this report is to demonstrate that the prices applied in these transactions are within the margins that would correspond under normal market conditions.  

Content of the Local File

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

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

What is a Benefit Test?

The Benefit Test is a specific analysis used to assess whether a transaction between related parties brings a real economic benefit to the companies involved. It is important to evaluate the Benefit Test in order to properly document and support the services received by the companies from their related parties, in order to deduct the costs or expenses associated with such services.  

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

Key Elements of the Benefit Test

  • Benefit Identification: Determination of the tangible and intangible economic benefits 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; that is, if the service provided by the company itself is also provided by its parent company or another company of the group.  
  • Benefit Quantification: Measurement of the economic value of the benefit received in relation to the cost incurred.  

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

Key Differences between Local File and Benefit Test

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

Importance in Tax Compliance

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

Conclusion

The correct preparation of both the Local File and the Benefit Test is essential for compliance with Transfer Pricing regulations and minimization of tax risks. At TPC Group, we have Transfer Pricing experts who can help your company comply with all the documentary requirements and ensure efficient management of your intercompany transactions.  

Call to Action: For more information on how we can assist your company in the preparation of the Local File and Benefit Test, 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.