Transfer Pricing legislation has been incorporated in El Salvador for 12 years roughly. This article briefly addresses a look at the application scope, definition of related parties, methodologies, formal obligations such as the Transfer Pricing report and penalties for non-compliance.
Transfer Pricing Regulations in El Salvador were included in 2009, through the enactment of Legislative Decree No. 233, which amends and adds Articles 62-A, 124-A, 199-B, 199-C, 199-D of the Tax Code, which frame this regime.
Subsequently, in 2014, an amendment was made to Article 62-A of the Tax Code of El Salvador, incorporating for the first time the mention of the guidelines on this matter given by the Organization for Economic Cooperation and Development (OECD).
What is Transfer Pricing?
This is understood as the prices or values agreed for transactions among related parties or also called intercompany transactions.
Principle of Full Competence
This principle, also known as the “Arm’s Length” principle, is based on the principle that the prices or considerations agreed among related parties are at market value.
In the Transfer Pricing legislation in El Salvador this principle is quoted in Article 62-A of the Tax Code, which states that taxpayers who enter into transactions with related parties must determine the prices based on market prices, i.e. prices that would have been agreed upon by independent parties.
Application Scope of Transfer Pricing in El Salvador
According to Article 62- A, of the Tax Code, taxpayers shall be within the scope of the Transfer Pricing rules in El Salvador, if they are in any of the following situations:
- Perform transactions with related parties.
- Perform transactions with subjects domiciled, incorporated or located in countries, states or territories of low or no taxation or tax havens, or having preferential tax regimes.
Definition of Related Parties in El Salvador
Article 199-C, of the Tax Code of El Salvador, stipulates who shall be understood as related parties.
Said norm indicates the following:
- When one of them directly or indirectly directs, controls or owns 25% or more of the capital stock or voting rights of the others.
- When both parties have five or fewer persons in common who directly or indirectly direct, control or jointly own the aforementioned percentage.
- Companies being part of the same Business Group.
- For the purposes of the first two cases of linkage described above, a natural person will also be considered to own the indicated percentage of capital when the ownership of the shareholding, either directly or indirectly, corresponds to the spouse or person related by blood up to the fourth degree and by affinity up to the second degree.
- When any of the contracting parties or associates in a joint venture, partnership, business collaboration or joint venture contracts participates, directly or indirectly, in more than 25% of the result or profit of the contract.
- The person domiciled in El Salvador regarding to the exclusive agent or distributor residing abroad.
- An exclusive agent or distributor domiciled in the country, regarding to an entity abroad.
- The person domiciled in the country with the supplier residing abroad, when the former makes purchases for more than 50% of its volume.
- The person resident in El Salvador regarding to the permanent establishments abroad.
- A permanent establishment in the country regarding to the parent company abroad.
Definition of Tax Havens or Preferential Regimes in El Salvador
According to the last paragraph of Article 62-A of the Tax Code, countries or territories are considered as countries or territories of low or no taxation or preferential tax regimes when:
- Those are not taxed abroad, or have a calculated income tax of 80% less than what would have been paid in El Salvador.
- Those classified as such by the OECD and the Financial Action Task Force (FATF).
Additionally, the General Directorate of Internal Taxes (GDII) will publish a list indicating the countries that qualify as such.
Transfer Pricing Methods in El Salvador
Article 199-B of the Tax Code indicates what should be considered as market price, indicating rules in the case of local and international transactions.
Thus, in the case of local operations, the market price will be determined based on the price agreed upon by unrelated local businesses for the same goods or services.
In case of transfer of goods or services to foreign parties, the market price shall be determined by the price at which other unrelated parties have agreed for goods or services of the same kind, from El Salvador to the same place of destination.
The market price of imports shall be the price for such transactions in the country where it was acquired or loaned, adding the corresponding costs or expenses.
Likewise, it should be noted that Article 62-A after the amendment made in 2014, states that the methods contained in the Transfer Pricing guidelines established by the OECD may also be used to determine the market price.
Therefore, the following methods would also be applicable:
- Uncontrolled Comparable Price Method
- Resale Price Method
- Added Cost Method
- Profit Splitting Method
- Net Transaction Margin Method
Comparability Analysis in El Salvador
In order to be able to analyze whether two or more transactions are comparable, Article 199-D of the Tax Code has established the following comparability criteria to be taken into consideration:
- Transaction characteristics.
- Analysis of functions, assets and risks in the transactions by each of the parties.
- Contractual terms.
- Economic circumstances.
- Business Strategies.
Transfer Pricing Affidavit in El Salvador
Article 124-A of the Tax Code establishes that those taxpayers who perform transactions under the scope of these regulations must file a report of such operations or Technical Price Study to the Tax Administration.
In addition to performing these transactions with related parties or tax havens, in order to be obligated to file such declaration, the transactions indicated separately or jointly must be equal to or exceed five hundred seventy-one thousand four hundred twenty-nine dollars ($571,429.00).
This affidavit will be made through Form 982, with a filing deadline within the first three months of the fiscal year at the latest.
In order to file such declaration, the GDII makes available the general orientation guide.
Transfer Pricing Documentation in El Salvador
Taxpayers must keep the documentation related to transactions with related parties and/or tax havens, which may be required by the Tax Administration.
Sanctions for Transfer Pricing Non-Compliance in El Salvador
Non-Compliance to file the aforementioned report or affidavit generates the infraction typified in article 241, paragraph b), of the Tax Code for late filing of the reports established by the Tax Administration.
This is penalized with a fine equivalent to 0.5% of the net worth of the taxpayer who commits the infraction.
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