In recent years, tax authorities in Latin America have significantly strengthened their audit processes regarding Transfer Pricing. Information exchange, the adoption of international standards, and the use of risk analysis tools have raised the level of scrutiny of transactions between related companies. In this context, a transfer pricing study is no longer limited to fulfilling a formal obligation but is a key element in supporting the tax policy of multinational groups.
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Insufficient Functional Analysis (FAR)
One of the most common mistakes is conducting an incomplete functional analysis. Tax authorities assess whether each entity actually performs the functions it claims to perform, manages the risks it assumes, and contributes the assets that justify the profitability achieved.
When the analysis of Functions, Assets, and Risks (FAR) does not reflect the group’s operational reality, the risk of adjustments during a Transfer Pricing audit increases considerably. The OECD Guidelines stipulate that the allocation of profits must be aligned with value creation and with the functions actually performed.
2. Inappropriate Selection of Comparable Companies
The quality of the economic analysis depends largely on the correct selection of comparables. However, it is common to find studies that use companies with functions, risks, or markets different from those of the operation being analyzed.
Differences in business model, economic sector, or geographic location can significantly affect the results of the analysis and reduce the reliability of the conclusions. For this reason, the OECD Guidelines emphasize the importance of conducting a robust comparability analysis before applying any valuation method.
3. Failure to Demonstrate the Economic Substance of Transactions
Tax authorities no longer limit themselves to reviewing contracts or documentation. It is increasingly common for them to request evidence demonstrating that transactions correspond to a real economic activity.
Aspects such as the presence of qualified personnel, the capacity to assume risks, effective decision-making, and the performance of strategic functions are elements that are now part of Transfer Pricing reviews in numerous Latin American countries.
4.Outdated Documentation
Another common mistake is reusing studies prepared in previous fiscal years without incorporating changes that have occurred within the organization.
Restructurings, new lines of business, changes in the supply chain, or variations in the functions performed by group entities must be reflected in the documentation in a timely manner. Maintaining outdated information can affect the consistency of the analysis and weaken the taxpayer’s position in the event of an audit.
5. Inconsistencies Between the Study and Financial Information
Tax authorities are comparing the information contained in the Transfer Pricing study with financial statements, intra-group contracts, and other corporate documentation in ever greater detail.
Discrepancies between the functions described and those actually performed, inconsistencies in financial results, or information that does not match accounting records often become key findings during a tax audit. Documentary consistency is an essential element for demonstrating compliance with the arm’s-length principle.
In an environment where Latin American tax authorities are continually increasing their audit capabilities, avoiding these errors represents a strategic advantage for multinational companies. A robust Local File must include a consistent functional analysis, reliable comparables, up-to-date documentation, and sufficient evidence to support the economic substance of the transactions.
At TPC Group, we have a team of Transfer Pricing specialists who advise multinational companies on the design, implementation, and documentation of policies aligned with the OECD Guidelines and current regulations in Latin America. Our approach combines technical analysis, regional knowledge, and practical experience to help organizations reduce tax risks, strengthen their tax compliance, and navigate audit processes with greater confidence.
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