Concept and Regulation in Guatemala
The Special Valuation Rules among Related Parties were introduced in the Guatemalan Tax Legislation in 2012, in the Tax Update Law, through Decree 10-2012.
Subsequently, in May 2013, Governmental Agreement No. 213-2013, or Regulation of the Tax Update Law, was published, which dictates Transfer Pricing provisions regarding Articles 54 to 67 of the Law.
Nonetheless, in December 2013, the application of these regulations through Decree No. 19-2013 was suspended, thus only applying in 2015. Therefore, this article briefly addresses the legislation on this matter, such as its scope of application, definitions, subjects required to declare, Technical Study, and non-compliance penalties.
Arm’s Length Principle: Concept
The Arm’s Length Principle states that prices agreed upon in related party transactions are similar to those of independent third parties, i.e., at market value.
The Transfer Pricing legislation of Guatemala has also incorporated this principle in Article 54 of Section I in Chapter VI, Title II of the Tax Update Law.
This article conceptualizes this principle by stating that prices must be agreed upon as those of independent parties in Arm’s Length conditions for comparable transactions.
Transfer Pricing Application Scope in Guatemala
According to Article 57 of the Law, this regime in Guatemala will apply to transactions between a resident in the country and an entity related thereto abroad as long as this operation affects the determination of the tax in the period it is carried out.
Definition of Related Parties in Guatemala
According to Article 56 of the Law, related parties are considered to be a resident of Guatemala when any of the following conditions are met:
- One of them directly or indirectly manages, controls, or owns atleast 25% of the capital of another.
- Both related partiesare managed or controlled by five or fewer related persons, or they jointly own at least 25% of the capital of another company.
- Two companies, which are legal entities, belong to the same business group related to a third one. All these entities are members of the group.
It should be noted that the term entity refers to both legal and natural persons.
Likewise, regarding the percentage indicated in paragraphs a) and b), the Regulation establishes the relationship when this percentage corresponds to the spouse or a person related by kinship or consanguineously until the fourth and second degrees of affinity. Related parties are also considered:
- When there is an exclusive distributor or agent abroad.
- When the exclusive distributor or agent is a resident in Guatemala, regarding a foreign entity.
- The person resident in Guatemala regarding its permanent establishments
- The permanent establishment in Guatemala regarding its parent company abroad.
Transfer Pricing Methods in Guatemala
Guatemalan legislation regarding terms of valuation standards establishes six methods to analyze whether the prices agreed upon among related parties comply with the Arm’s Length principle. According to Article 59 of the Law, they are as follows:
- Comparable Uncontrolled Price Method
- Cost Plus Method
- Resale Price Method
- Profit Split Method
- Transactional Net Margin Method
- Valuation Method for Imports or Exports of Merchandise (Commodities)
The taxpayer may choose the most appropriate method according to the characteristics of the transaction, as indicated in Article 48 of the Tax Update Law Regulations.
Comparability Analysis Guatemala
According to paragraph 3 of Article 58 of the Law under Articles 42 to 45 of the Regulations, in order to analyze whether one or more transactions with similar characteristics transactions made to a related third party, the following must be considered:
- The specific characteristics of the transaction.
- The functions assumed, assets, and risks used in the transaction.
- Contractual terms.
- The affected Market characteristics.
- Commercial strategies.
Transfer Pricing Affidavit and Documentation
The Guatemalan Regulation establishes two types of formal obligations to be analyzed by taxpayers performing related party transactions, such as filing the Annex with its details and analyzing these operations, as well as a Transfer Pricing Study.
Transfer Pricing Affidavit (Annex)
According to Article 64 of the Regulations of the Law, taxpayers who indicate in the Annual Income Tax Affidavit that they have carried out a related party transaction must attach an Annex with the content indicated by the Tax Administration.
Therefore, the ATS issues an Instructive Guide indicating the Transfer Pricing Affidavits content.
Technical Transfer Pricing Study
Article 65 of the Law states that the taxpayer subject to the scope of the Transfer Pricing rules must have the information and analysis of the related party transactions.
Article 65 of the Regulations of the Law establishes, in turn, that this information must be contained in the Transfer Pricing Study.
This study must be filed at the Tax Administration’s request within 20 days from receipt.
It will contain information on the business group, information related to the tested party, matrix of related parties, comparability analysis, economic analysis, adjustments made, and conclusions.
Transfer Pricing Non-Compliance Penalties in Guatemala
Article 66 of the Regulations states that non-compliance with the formal obligations will be sanctioned under the quoted in the Tax Code.
According to paragraph 13 of Article 94 of the referred Code, the Tax Administration fines 5,000.00 Quetzals for failure to the established reports and 10,000.00 Quetzals if re-offend.
If re-offending more than once, the fine will be 10,000.00 Quetzals, adding 1% of the gross revenues obtained during the last reporting.
On the other hand, if the related party transactions were agreed upon failing the Arm’s Length Principle, the taxable base of the Income Tax will be adjusted. The penalty for resulting adjustments will be equivalent to 100% of the amount of the omitted tax plus the corresponding interest.
