The Special Valuation Standards for transactions among related parties in Guatemala are in force again as of fiscal year 2015. This article briefly discusses the legislation on this matter, such as its application scope, definitions, subjects obliged to the affidavit and the Technical Study; as well as the penalties for non-compliance.
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 provisions on Transfer Pricing with respect to Articles 54 to 67 of the Law.
Nonetheless, in December 2013, it was decided to suspend the application of these regulations through Decree No. 19-2013, and their application was only activated in 2015.
Principle of Full Competition: Concept
Also known as the “Arm’s Length” Principle. The basis is that the prices agreed upon in transactions among related parties are in accordance with what independent third parties would have agreed, i.e., at market value.
This article conceptualizes this principle by stating that it is taken to mean as the price that independent parties would have agreed to in conditions of free competition 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 to it abroad, provided that this operation has effects on the determination of the tax in the period in which 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 rules, controls or owns at least 25% of the capital of another.
- When both related parties are managed or controlled by 5 or less persons in common or when they jointly own at least 25% of the capital of the other company.
- In the case of legal entities belonging to the same business group. Likewise, when two companies are part of a business group or economic group, in relation to a third one, all these entities are part of the group.
- When there is an exclusive distributor or agent abroad.
- When the exclusive distributor or agent is a resident in Guatemala, regarding to a foreign entity.
- The person resident in Guatemala regarding to its permanent establishments abroad.
- The permanent establishment in Guatemala, regarding to its parent company abroad.
It should be noted that the term person refers to both legal and natural persons and other personalities with or without legal personality.
Likewise, regarding to the proportion indicated in paragraphs a) and b), the Regulation states that the linkage is also established when the aforementioned proportion corresponds to the spouse or a person related by kinship or consanguineously linked up to the fourth degree and second degree of affinity.
Transfer Pricing Methods in Guatemala
Guatemalan legislation, regarding to terms of valuation standards, establishes five methods to analyze whether the prices agreed among related parties comply with the Arm’s Length principle.
In accordance with Article 59 of the Law, they are as follows:
- Uncontrolled Comparable Price Method
- Cost Plus Method
- Resale Price Method
- Profit Splitting Method
- Net Transaction Margin Method
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
Pursuant to paragraph 3 of Article 58 of the Law, in accordance with 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 taken into consideration:
- The specific characteristics of the operation.
- 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 that must be observed by taxpayers who carry out operations with related parties. These are the presentation of the Annex with its detail and the analysis of these operations, as well as a Transfer Pricing Study.
Transfer Pricing Affidavit (Annex)
In accordance with Article 64 of the Regulations of the Law, those taxpayers who indicate in the Annual Income Tax Affidavit that they have carried out a transaction among related parties must attach an Annex with the content indicated by the Tax Administration.
For this purpose, the ATS issues an Instructive Guide in which it indicates the Transfer Pricing Affidavits content.
Technical Transfer Pricing Study
Article 65 of the Law states that the taxpayer subject to the Transfer Pricing rules scope must have the information and analysis of transactions with the related parties.
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 request, within 20 days from the receipt there of.
Sanctions for Transfer Pricing Non-Compliance in Guatemala
Article 66 of the Regulations states that non-compliance with the formal obligations related to this matter will be sanctioned in accordance with the quoted in the Tax Code.
According to paragraph 13 of article 94 of the referred Code, the no-compliance of the established reports to the Tax Administration is sanctioned with a fine of 5,000.00 Quetzals the first time and 10,000.00 Quetzals the second time.
If non-compliance occurs more than twice, the fine will be 10,000.00 Quetzals adding 1% of the gross revenues obtained during the last month in which income was declared.
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