Transfer Pricing in Ecuador
Concept and Regulation
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.
Principle of Full Competence: 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 understood as the principle by which, when conditions are established or imposed between related parties in their commercial or financial transactions that differ from those that would have been stipulated with or between 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, 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.
Criteria to identify related or linked 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:
- 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.
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.
Transfer Pricing Deadlines in Ecuador
Art. 84 – Submission of Information on transactions with related parties. Taxpayers subject to Income Tax who carry out transactions with related parties and are not exempt from the transfer pricing regime in accordance with the unnumbered fifth article added after article 15 of the Internal Tax Regime Law, in addition to their annual Income Tax return, shall submit to the Internal Revenue Service the Comprehensive Transfer Pricing Report and the annexes established by General Resolution by the SRI regarding their transactions with these parties within a period not exceeding two months from the due date of the income tax return in accordance with the provisions of the corresponding article in this regulation.
| If the ninth digit of RUC is | Due date of the Income Tax Return (up to date) | Transfer Pricing Statement expiration 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 Submit 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 for the application of 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 presents transactions with related parties regardless of the amount of these transactions. |
| Annex of Transactions with Related Parties | Transactions with related parties in an accumulated amount exceeding three million United States dollars (USD 3,000,000). |
| Comprehensive Transfer Pricing Report | If the amount exceeds ten million United States 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 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.
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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