Transfer Pricing in Ecuador is regulated in the Ley Orgánica del Régimen Tributario (Organic Law of the Internal Tax Regime) or LORTI. This article takes a brief look at the Transfer Pricing Regulations in that country, in terms of their definitions, cases of linkage, obligations to the Informative Affidavit and the comprehensive report, as well as the respective penalties.
Due to economic globalization advances, intercompany transactions have become increasingly frequent and Transfer Pricing issues have become more relevant.
What is Transfer Pricing? It is the name given to the price or consideration agreed among related parties for the transactions performed among them.
The importance of these is recognized by different countries, which have been regulating them in their tax legislation.
Ecuador knows this phenomenon of international taxation, so much that it has regulated the Transfer Pricing regime in the LORTI quoted above, in the Reglamento para la aplicación de la Ley de Régimen Tribuario Interno (Regulations for the Application of the Internal Tax Regime Law) or RLRTI and in several Resolutions issued by the Servicio de Rentas Interno (Internal Revenue Service) SRI.
Principle of Full Competence: Definition
This principle, also known as the “Arm’s Length Principle“, is based on the principle that prices agreed among related parties should be consistent with those that would have been agreed among independent companies.
The LORTI has adopted the Arm’s Length principle, in the Second Section, stating as a tax effect for those transactions that are not in accordance with this principle. Otherwise, it would have generated profit, the taxation of the latter.
Definition of Related Parties in Ecuador
According to what the LORTI has established, related parties are understood as natural persons or companies, whether domiciled or not in Ecuador, which:
- One of them controls directly or indirectly through the management, administration or capital of others;
- Or in which a third party participates directly or indirectly in the management, administration or capital of these.
Article 4 of the LORTI Regulations establishes the criteria linkage among related parties when they are based on capital or volume of transactions.
The aforementioned article sets non-exhaustive situations in which the aforementioned types of relationship are established, such as the following:
- When a natural person or company directly or indirectly owns 25% or more of the capital stock or equity in other company.
- Companies having partners or shareholders in common and these participate directly or indirectly 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.
- When a natural person or company directly or indirectly owns 25% or more of the capital stock or equity in two or more companies.
- When a natural person 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 inform the taxable person.
Additionally, the LORTI also considers as related parties companies domiciled, incorporated or located in Tax Havens or in a tax jurisdiction with lower or no taxation.
Transfer Pricing Methods in Ecuador
According to Article 85 of the RLRTI, in order to determine the prices of transactions among related parties, which reflect the Arm’s Length principle, any of the following methods may be used:
- Uncontrolled Comparable Price Method (UCPPM)
- Resale Price Method (RPM)
- Added Cost Method (ACM)
- Residual Method of Profit Distribution (RMPD)
- Transactional Margins of Transaction Income Method (TMTIM)
Comparability Criteria in Ecuador
According to Section Two of the LORTI, the following criteria must be taken into consideration to determine whether a transaction is comparable:
- The transactions 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 legislation on Transfer Pricing provides for two types of formal obligations, in order to demonstrate that the prices agreed among related parties are in accordance with 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.
Transfer Pricing Informative Affidavit
According to the aforementioned regulations, taxpayers who maintain, during a fiscal year, transactions with related parties for an amount greater than three million U.S. dollars are required to file the Annex of Related Party Transactions.
This Annex must be filled out taking into account the considerations indicated in the Technical Sheet published by the IRS, which describes aspects of the content, such as information related to the taxpayer, related parties and the detail of the operations carried out.
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
Both the Schedule of Related Party Transactions and the Integral Report must be filed within two (2) months after the filing of the annual income tax affidavit, according to the last TIN digit.
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 a member country of the OECD, 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.
Sanctions for Non-Compliance
The Transfer Pricing rules provide for a sanction in case of not filing the Transfer Pricing Report or the Annex of Related Party Transactions, as well as 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.
The IRS issued, nonetheless, an Instruction for the Establishment of Monetary Sanctions in order to establish the amount of the fine according to the seriousness of the non-compliance or misdemeanor, which in case of late filing or incomplete information could result in a fine of up to US$333.
Offices in Ecuador
- Juan Gonzalez N35-26 y Juan Pablo Sanz, edificio Torres Vizcaya II.Quito, Ecuador
- Av. Benjamin Carrión City Plaza. Town Center Edif. City Office Buisness 3er piso Of. No.328 Guayaquil – Ecuador
- contacto@tpcgroup-int.com
- +593 4 228 03 18
- +593 980382008
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