Transfer Pricing in Ecuador

Concept and Regulation

Transfer Pricing in Ecuador is regulated by the LORTI (Ley Orgánica del Régimen Tributario – Organic Law of the Internal Tax Regime). This article briefly addresses the Transfer Pricing Regulations therein regarding their definitions, linkage cases, Informative Affidavit obligations, the comprehensive document, and the respective penalties. 

Due to economic globalization advances, intercompany transactions have become increasingly frequent, and Transfer Pricing issues have become more relevant.

Arm’s Length Principle: Definition

According to the unnumbered article following Article 15 of the LORTI, the Arm’s Length principle is established as follows: 

“For tax purposes, the Arm’s Length Principle is that by which, when conditions are established or imposed among related parties in their commercial or financial transactions that differ from stipulated with or among independent parties, the profits that would have been obtained by one of the parties if such conditions did not exist, but were not obtained due to the application of these conditions, shall be subject to taxation.” – Article added by Art. 78 of Legislative Decree No. 000.  

This principle stipulates that prices agreed upon among related parties should be consistent with those agreed upon among independent companies.

According to the LORTI, related parties are understood as individuals or companies, whether domiciled or not in Ecuador, when:

  1. An individual or company directly or indirectly owns 25% or more of capital stock or equity in another company.
  2. Companies with partners or shareholders in common and the latter directly or indirectly participate in the proportion indicated above, even when this corresponds to their spouses or relatives up to the fourth degree of consanguinity or second degree of affinity. The relationship will also be constituted when these maintain commercial transactions, provide services, or are dependent.
  3. An individual or company directly or indirectly owns 25% or more of the capital stock or equity in two or more companies.
  4. An individual or company makes 50% or more of its sales or purchases of goods or services with a natural person or company. In this case, the Tax Administration must report the taxable person.

Transfer Pricing Methods in Ecuador

According to Article 85 of the RLRTI, to determine the prices of related party transactions, which reflect the Arm’s Length principle, any of the following methods may be used:

  • Comparable Uncontrolled Price Method (CUP)
  • Resale Price Method (RPM)
  • Cost Plus Method (ACM)
  • Profit Split Method (PS)
  • Transactional Net Margin Method (TNM)

Comparability Criteria in Ecuador

According to Section Two of the LORTI, the following criteria must determine whether a transaction is comparable:

  • The transaction characteristics.
  • Analysis based on functions, assets, and risks.
  • Contractual terms.
  • Economic or market circumstances.
  • Business strategies, including those related to market penetration, permanence, and expansion.

Formal Transfer Pricing Obligations in Ecuador

Ecuadorian Transfer Pricing legislation provides for two types of formal obligations to demonstrate the prices agreed upon among related parties are at the Arm’s Length principle. 

According to Article 84 of the RLRTI and article two of Resolution NAC-DGERCGC15-00000455, published in May 2015, taxpayers who have carried out transactions with related parties that exceed the thresholds established therein, will be required to file the Annex of Related Party Transactions, as well as if applicable the Transfer Pricing Report.

Informative Transfer Pricing Affidavit

According to the aforementioned regulations, taxpayers who maintain, during a fiscal year, related party transactions for an amount exceeding three million U.S. dollars are required to file the Annex of Related Party Transactions. 

This Annex must be filled out under the Technical Sheet published by the IRS, which describes aspects of the content, such as information related to the taxpayer, related parties, and the details of the performed transactions.

Technical Transfer Pricing Study

Taxpayers whose amounts for transactions with related parties exceed US$15 million during the same fiscal year will be required to file, in addition to the Annex, the Comprehensive Transfer Pricing Report (Study). The referred Report must be filed following the specifications contained in the Technical Sheet for the Standardization of the Transfer Pricing Analysis.

Filing Date

The Schedule of Related Party Transactions and the Integral Report must be filed within two (2) months after filing the annual income tax return, according to the last TIN digit.

Transfer Pricing Deadlines in Ecuador

Art. 84 – Submission of Information on transactions with related parties.  Taxpayers subject to Income Tax who carry out related-party transactions and are not exempt from the Transfer Pricing regime under the unnumbered fifth article added after Article 15 of the Internal Tax Regime Law, in addition to their annual income tax return, shall file to the Internal Revenue Service the comprehensive Transfer Pricing report and the annexes established by General Resolution by the IRS regarding their transactions with these parties within a period not exceeding two months from the due date of the income tax return under the provisions of the corresponding article in this regulation.

 
If the ninth RUC digit is Due date of the Income Tax Return (up to date) Transfer Pricing Statement due date (up to date)
1 March 10, 2024 May 10, 2024
2 March 12, 2024 May 12, 2024
3 March 14, 2024 May 14, 2024
4 March 16, 2024 May 16, 2024
5 March 18, 2024 May 18, 2024
6 March 20, 2024 May 20, 2024
7 March 22, 2024 May 22, 2024
8 March 24, 2024 May 24, 2024
9 March 26, 2024 May 26, 2024
0 March 28, 2024 May 28, 2024

Obligation to File Transfer Pricing Documentation

Through Resolution No. NAC-DGERCGC16-00000532 published in the Sixth Supplement of the Official Register No. 913 on December 30, 2016, the Internal Revenue Service established technical standards to apply the Transfer Pricing regime.

 

Reports Applicable
Declare the existence of transactions with related parties in the corresponding boxes of the income tax return form. If the company files related party transactions, regardless of the amount thereof.
Annex of Related Party Transactions Related party transactions in an accumulated amount exceeding three million U.S. dollars (USD 3,000,000).
Comprehensive Transfer Pricing Report If the amount exceeds ten million U.S. dollars (USD 10,000,000).

Subjects Exempted from the Transfer Pricing Regime in Ecuador

The LORTI states that taxpayers who carry out transactions with related parties are exempted from the Transfer Pricing regime scope when:

  • Have a tax liability of more than 3% of their taxable income.
  • Do not carry out transactions with residents of tax havens or preferential tax regimes.
  • Do not hold a contract with the State for the exploration and exploitation of non-renewable resources.

OECD Guidelines

Although Ecuador is not an OECD member country, it follows the Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations approved by this organization in force as of January 1 of the corresponding fiscal period as a technical reference for the provisions of the Transfer Pricing legislation.

Non-Compliance Sanctions

The Transfer Pricing rules provide for a sanction in case of not filing the Transfer Pricing report or the Annex of Related Party Transactions and whether they are declared inaccurately. 

According to the unnumbered article after Article 22 of the LORTI and Article 84 of the RLRTI, the above-quoted infraction will be sanctioned with a fine of up to US$15,000.

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