Global outlook and local context
In an environment where the OECD is reviewing intra-group royalty payment practices, Peru faces growing pressure to demonstrate that internal transactions reflect real economic value and not merely aggressive tax strategies. The BEPS (Base Erosion and Profit Shifting) project promotes a comprehensive view of the economic cycle, from development to asset exploitation: the DEMPE approach.
Step-by-step analysis: DEMPE approach
First, DEMPE requires that consideration be attributed to each activity involved in the development, improvement, maintenance, protection, and exploitation of an intangible asset. Thus, the MNE must be able to demonstrate who actually generates the value before establishing consideration for the transfer of trademark use (royalty payments).
Second, Pillar 2 introduces the “subject to tax rule,” a measure that ensures that even if a payment passes through low-tax jurisdictions, a minimum tax is imposed.
Recent relevant cases
In Brazil, the elimination of fixed limits for deducting royalty payments provided greater flexibility, provided that there is economic justification. On the other hand, South Africa challenged a Mauritian subsidiary, recognizing that the actual contribution came from the local entity.
These experiences not only show that the OECD is promoting a stricter approach, but also reflect how authorities react to weak documentation or structures without economic substance.
Implications for Peru
- Review of the DEMPE Approach: companies must rigorously document who developed or exploited the asset.
- Greater transparency: solid transfer pricing reports, formal agreements, and evidence of economic benchmarking are necessary.
- Adjustment of internal policies: transactions with related entities that do not participate in substantive functions could be subject to tax adjustments.
Recommendations for TPC Group
- Perform a complete DEMPE analysis for each intangible asset and related entity.
- Strengthen intragroup agreements with clear functional responsibilities and cost accountability.
- Prepare benchmarking that reflects the actual value generated in each jurisdiction.
- Keep up to date with developments in Peruvian regulations and treaties that adopt Pillar 2 and the OECD Guidelines.
Contact TPC Group for:
- Auditing your royalty structures.
- Implementing a robust intellectual property transfer plan.
- Complying with BEPS regulations with supporting documentation.
Source: ITR