In the last few years, the Peruvian tax administration, through SUNAT (Superintendencia Nacional de Aduanas y Administración Tributaria – National Superintendence of Customs and Tax Administration), has intensified its inspection work on intra-group transactions, focusing on compliance with Profit Test. This test is essential in Transfer Pricing and tax documentation, given that if not met, the latter will not be able to deduce costs or expenses for Income Tax purposes. Recently, the SUNAT has started to send summons to several companies that have failed to comply with this obligation during the periods 2019, 2020, 2021, and 2022 as part of the tax control actions implemented to ensure that companies not only correctly declare their service transactions but also support them properly.
What is the Profit Test?
The Profit Test aims to demonstrate that intra-group services provide economic and/or commercial value to the recipient company. According to Transfer Pricing rules, only services generating profits for the receiving entity can be considered in the Transfer Pricing determination and, therefore, must be properly reflected in the Local Report. If you have services received by your related parties and do not have the Profit Test, you will not be able to support cost or expense for income tax purposes, which is clearly a considerable tax detriment. In many cases, companies do not include/expose information related to the test in the Local Report, which generates observations by the tax administration since it observes that there are intra-group related party operations.
Regularization
Due to the massive notification of the SUNAT’s Summons, taxpayers must comply with regularizing their situation by requesting that Transfer Pricing specialists prepare the corresponding Profit Test. Except in those cases where there is no obligation thereto, it must express the necessary arguments to face this first disclaimer before the SUNAT and an eventual audit before the Tax Administration. Companies must respond promptly to these summonses, providing all the documentation requested, such as the analyses signed by legal representatives justifying the omission of the Profit Test. In addition, companies should proactively review their compliance in this regard, given that eventual audits may detect other inconsistencies.
Conclusion
Compliance with Transfer Pricing regulations, especially regarding the Profit Test, is a priority for the Peruvian tax administration. Companies carrying out intra-group transactions must ensure that these operations are adequately justified, both from an economic and documentary point of view, to avoid tax contingencies, such as (i) unknowledge of 100% of the cost or expense incurred by the company for its related party operations, which means increasing the taxable base for Income Tax, paying an additional 29. (ii) payment of fines for omitted taxes, when due to the unknowledge of the cost or expense, there is an income tax to be paid, without forgetting that (iii) the tax authorities may initiate auditing procedures to reassess the tax returns and collect a higher tax debt.
