Central America: The double impact of TP and BEPS
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Central America: The double impact of TP and BEPS

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Tax authorities across the Central American isthmus have been moving at different speeds in their approaches to TP regulations and BEPS, write Byron Martinez, Federico Paz and Roberto Revel-Chion of Deloitte.

As a result of a fast-evolving globalisation process, Central American countries have realised that it is time to reform their transfer pricing legislation and allocate more resources to monitor multinational enterprises (MNEs) operating in the region. The implementation the OECD's BEPS project is still work in process, especially when it comes to providing specific guidelines. However, tax authorities across the region are increasing their reporting requirements in addition to working on implementing the three-tiered reporting recommendations under BEPS Action 13.

Both tax administrations and MNEs should agree on the benefits of avoiding wasted time and resources in lengthy and intrusive TP examinations. To that end, many Central American countries are incorporating into their legislation, mechanisms to allow taxpayers to request advanced pricing agreements (APAs), although the first cases are yet to be filed.

Considering the post-BEPS environment around the world, there are still some disagreements between tax authorities and MNEs. Indeed, stronger audits are being undertaken while at the same time increasingly complex and aggressive tax planning is developed.

A tour around Central America is needed to get a sense of the measures that have been taken by the region's countries for transfer pricing and tax issues in light of the BEPS environment.

Guatemala's TP crackdown

During the past two years, Guatemala's tax authority (Superintendencia de Administración Tributaria – SAT) has been focusing on strengthening its TP auditing procedures.

In its first move, the SAT compiled a list of taxpayers that were expected to declare that they had non-resident related parties and related transactions affecting their local taxable activities. By 2018, a total of 1,453 taxpayers were on the SAT's list and those taxpayers are now being monitored to determine whether they comply with TP rules. Those taxpayers must file a summary of their controlled transactions with their non-resident related parties and the respective economic results, and disclose the TP method applied. All of this is done through an online return to be filed jointly with the annual income tax return, which is due on March 31 of the immediate following year.

The SAT, with the assistance of other Latin American tax authorities, prepared a risk matrix to produce a risk-based sample of taxpayers to be audited. Local media has reported that during the past two years, Guatemala's SAT carried out 25 audits, out of which 18 resulted in assessments for GTQ1.2 billion (approximately $160 million), with an outstanding tax liability under controversy of GTQ330 million.

The review of the TP documentation by the Guatemalan SAT focuses mainly on the economic analysis. The most questioned topics are: the profit level indicators; the method(s) used; selected comparables and reasons of selection; the calculation of the arm's-length range; and segmented financial statements, among others.

Based on the above, where local TP positions are subject to strict scrutiny, it is strongly advisable that local branches, subsidiaries and groups plan and execute accordingly.

Panama amends its FTZ and MNE rules

In mid-2019, Panama's tax authorities were moving forward with the implementation of the recommendations in the OECD's BEPS project. The tax authorities carried out, in conjunction with the OECD, an evaluation of the regulations for special tax regimes to determine whether they encourage harmful tax practices, as indicated in BEPS Action 5. As a result of the findings from the evaluation, the Law of the Headquarters of Multinational Enterprises and the frameworks for the Panama Pacifico special economic zone and the Ciudad del Saber were amended. It is noteworthy that the Colón free trade zone was excluded from the amendment.

Furthermore, starting in financial year 2019, free zones, economic areas, special regimes and any other free zone that is created in the future, will be subject to the transfer pricing regime. This will be the case even if the zone, area or regime is exempt from income tax or benefits from a reduced rate for operations performed with related parties located within Panamanian territory or in other Panamanian free zones, or with tax residents in other jurisdictions.

On January 24 2019, the Panamanian tax administration signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports. This completes the range of documentation underpinning the TP regime (Action 13). For this reason, the recently promulgated Executive Decree No. 46 demands that a tax resident in the Republic of Panama submit the country-by-country report to the multinational group. This is effective from the fiscal year of 2018, which must be filed by December 31 2019.

It is expected that further regulations on this matter will address if a taxpayer's multinational group complies with the regulations in other jurisdictions, and whether it should only notify of its filing to the Panamanian tax administration.

El Salvador and Honduras: Small steps

The TP regime in El Salvador has not been updated since reforms in 2014. However, during the last fiscal year the tax authorities issued guidance and a new format for the presentation of Form F-982, which concerns TP disclosures.

The new guidance includes technical extensions on the application of the TP methodology according to the OECD's Guidelines. One of its main changes has been the issuance of new formulas for adjustments to capital accounts, including the possibility of adjusting to comparable companies for 'property, plant and equipment'. Form F-982 has evolved from a paper to an online filing and requires taxpayers to report the result of their TP analysis for each intercompany transaction (inter-quartile range) and any tax adjustments that were applicable.

Regarding the OECD Guidelines and the BEPS project, the tax authorities have not reported on any draft reform to the Tax Code that includes the recommendations. So far, there are no new guidelines and/or documentation requirements on TP issues. The tax authorities have not commented on the implementation the CbC report or master file requirements.

For its part, Honduran TP legislation has undergone several changes over the past five years, mainly with the publication of TP regulations, which incorporated the requirements for how taxpayers' should present their information and the TP informative return.

The Honduran TP regime came into force in 2004. Nevertheless, it was only in 2011 with Decree N° 232-2011 that firmer steps were taken for more structured and formal legislation. The legislation was then modified in 2015 via Agreement 027-2015 and in 2016 with Decree N° 170-2016.

Costa Rica: Giant leaps

The Costa Rican transfer pricing regime has evolved significantly in the past year, mainly with the incorporation of BEPS Action 13 documentation requirements and the enactment of the tax reform, which brought with it new and specific TP considerations.

The tax reform was implemented via Law No. 9635 on Strengthening of the Public Finances, with Article 81-bis being especially important. As part of the modifications that came with the reform, the TP regime adopted the character of a law, where previously it had been based on a decree.

There are four key areas in the tax reform. The first comes in local regulation, where even though the direct use of the OECD Guidelines is not established, the applicable TP methodologies are based on it.

Obligations are a second key area, with the formal requirements depending on a taxpayer's category. A local file is done on an annual basis, and all taxpayers must be in possession of the information, documents and an economic analysis to assess whether their transactions with related parties comply with the arm's-length principle. The documentation must be in Spanish and available to the Costa Rican tax administration (Dirección General de Tributación – DGT) when requested. For a master file, every taxpayer must have the documentation concerning the economic group available in Spanish and when the DGT requires it.

Meanwhile, for a country-by-country report (CbC report), companies whose gross accumulated income at a global level is equal to or higher than €750 million or its equivalent in domestic currency in the reporting fiscal year, must provide the information of the CbC report to the DGT by December 31 of each year. This is done through an XML archive that complies with the standard structure established in the BEPS Action 13.

Any entity, member of a group or multinational group with a fiscal domicile in Costa Rica, must notify the DGT of its status as an informing entity, on behalf of its higher level dominant entity or as substitute dominant entity, of a certain group or multinational group. This notification must be made by the last business day of March of each year, beginning March 2018. The notification must be sent digitally, signed by the entity's legal representative and addressed to the General Director of Taxation.

Large taxpayers, large territorial companies and entities that are under the free trade zone regime must submit the TP information return to the DGT annually. Taxpayers must submit the required information electronically on the last day of June, every year, and this must be consistent with the taxpayer's TP study. However, in accordance with Resolution N°DGT-R-28-2017 of June 5 2017, the deadline for submitting the first transfer pricing return remains, for the time being, suspended.

A third key issue concerns advance pricing agreements (APAs). Taxpayers can request an APA from the DGT, which can accept, reject or modify the proposal. If the proposal is accepted, the APA will be valid for three years and reviewed annually.

A fourth highlight is a series of modifications to income tax regulations, in particular with regards to 'presumption of linkage'. This impacts jurisdictions that have an equivalent tax rate set 40% lower than that established by Costa Rican income tax law.

Before Law No. 9635, taxpayers classified as big taxpayers, large territorial companies and those under the free zone regime were obliged to submit the information return. However, the income tax return regulation incorporates a new clause, reaching those taxpayers who: "Carry out national or cross-border operations with related parties and separately or jointly exceed the amount equivalent to 1,000 base salaries in the corresponding year."

Nicaragua: Arming the tax authority

Nicaragua enacted TP regulations in 2012 that became effective on January 1 2013. This reform incorporated TP rules based on the OECD regulations (including contemporaneous documentation requirements), and it has been in effect since June 30 2017.

The reform impacts documentation requirements as taxpayers must, at the time of submitting their income tax return, have the information, data and sufficient analysis to assess their operations with related parties. They must be able to provide this information to the tax authority (Direccción General de Ingresos – DGI) within 10 business days of it being requested. The DGI is also entitled to perform TP examinations starting from fiscal year 2017 onwards. Although TP reviews are part of a regular tax audit, the procedures have not been published. Law 822 only establishes the DGI's faculty to perform scrutiny of the transactions.

Taxpayers can request an APA from the DGI in order to confirm or propose the valuation of transactions among related parties. The DGI can accept, reject or modify the proposal. If the agreement is accepted, it is valid for one to four fiscal periods, depending on the agreement reached.

As regards intra-group services, the deduction of costs or expenses for services has been conditioned to compliance with the benefits test and to the disclosure of certain documentation and information to the DGI.

Finally, as a general rule, interest deduction is allowed when derived on loans from financial institutions. However, the paid interest derived on loans from non-financial institutions will be deductible up to the amount resulting from applying the average lending rate of the local bank at the date of obtaining the loan, if fixed, or at the date of each payment, if variable.

Dominican Republic: Yet to regulate

The Dominican Republic joined the Inclusive Framework on BEPS in 2018. As a result of joining, the Dominican Republic commits to implementing the four minimum BEPS standards: harmful tax practices (Action 5); treaty abuse (Action 6); country-by-country reporting (Action 13); and dispute resolution (Action 14).

To date, there have been no modifications in Dominican legislation regarding the Inclusive Framework.

TP regulation was included in Law No. 11-92, Article 281, which was implemented in the Dominican Tax Code since 1992. Further TP regulations have been included since, but the last one was issued in 2014.

Related companies are defined as all those that comply at least with one of the assumptions established in paragraphs I and IV of Article 281 of the Tax Code, modified by Law No. 253-12 on the Strengthening of the Collection Capacity of the Taxpayer State for Fiscal Sustainability and Sustainable Development. In addition to the common variables that define related parties, the exclusive distributors, those that register costs or sales higher than, or equal to, 50% with a unique provider or client and those that made transactions with entities with low or preferential tax rates, are considered as well.

The duties detailed in the aforementioned regulations are applicable to residents who carry out commercial or financial operations with: individuals, legal entities or related entities from abroad; a related resident; or individuals, legal entities or domiciled entities, incorporated or located in states or territories with preferential tax, low tax or no tax regimes or tax havens, whether or not the latter are related.

Transactions between related parties must comply with Article 18 of Decree 78-14 Paragraph I, which establishes the obligation to submit information through an informative return. This return must be filed annually, within 180 days of the taxpayer's closing date.

In addition, taxpayers subject to the TP regime must at the time of filing the informative return be in possession of a study in which the valuation process for the TP prices agreed with its related parties are detailed. The report is only delivered to the Dominican tax authorities (DGII) when it is required.

On the other hand, taxpayers that carry out transactions with resident associates are excluded from the preparation of TP reports for the part of the transactions carried out with them exclusively that do not exceed RD$11 million (approximately $216 million) during the fiscal period, annually adjusted for inflation.

Taxpayers that carry out operations of costs or expenses distribution must submit the agreement that supports the contributions foreseen for each participant for the purpose of considering them deductible for tax purposes (as an additional procedure to the registration and payment of the corresponding withholding) to the DGII.

Otherwise, those who carry out this type of transaction with entities domiciled in preferential tax regimes must send the DGII the agreement for their approval prior to their execution.

As regards APAs, taxpayers may request in writing and within the first three months of the fiscal year, the conclusion of an APA, whether bilateral or multilateral. The proposal delivered by the taxpayer will be reviewed within 24 months from the filing date.

The APAs will be published by resolution and valid for 18 months. Subsequent agreements may be valid for up to 36 months.

Taxpayers operating in the Dominican Republic's all-inclusive hotel industry are primarily subsidiaries of multinational hotel and leisure companies. The DGII has an industry-wide APA covering the prices and rates that will be recognised for TP purposes. The APA is based on parameters derived from the comparability of tourist zones, cost analyses and other variables that impact the all-inclusive hotel business.

The future may be in APAs

There is no doubt that in Central America the tax environment is experiencing changes and that it will continue in this process for the next few years. In this post-BEPS environment, tax administrations are asking MNEs to document their transfer pricing transactions and report information on all their affiliates in order to have a view of the type of transaction and structure that is performed inside and outside their respective countries.

It is also important to note that tax administrations are focusing to a greater extent on transfer pricing transactions and this is evident in the changes being made to their respective laws.

For MNEs, it is important to continue to comply and develop robust and consistent transfer pricing policies and procedures, as tax administrations are continually challenging inter-company transactions, and mainly outbound payments. In order to avoid tax authorities' examinations as much as possible, APAs may become an attractive option. These agreements bring legal and economic certainty to MNEs and allow them to optimise the tax authorities' resources.

Byron Martinez


CEO Guatemala and El Salvador


Tel: +502 2384 6532


Byron Martinez is the CEO for Deloitte Guatemala and El Salvador and leader of Deloitte Guatemala's TP practice. After Guatemala's adoption of TP regulations in 2012, Byron took charge of developing the Deloitte Guatemala's practice.

During his 30-year practice as a tax consultant, he has developed extensive experience in providing multinational clients with the following services: TP and tax consulting; tax compliance; tax and legal assistance in M&A, restructurings and spin offs; tax controversies; strategic tax planning; tax outsourcing and statutory accounting processes; project finance-related tax planning; and local employee and expatriate planning and compliance.

Byron has also provided consulting services in using government incentives in areas such as drawbacks, exports, free zones and bonded warehouses. His industry experience covers banking and finance; consumer businesses (retail, food and beverages and pharmaceuticals); oil and gas; utilities; telecom; services; manufacturing; transport; real estate; exports; and free trade zones.

Byron has published numerous articles on transfer pricing and speaks frequently on TP issues. He is a professor in taxation at his alma mater, the Universidad Rafael Landivar. Byron is a public accountant and auditor with a master's degree in finance and is registered with the Guatemala Public Accountants and Auditors Bar.

Federico Paz


Partner, Tax & Legal, El Salvador


Tel: +503 2524-4100


Federico Paz is Deloitte's tax and legal managing partner in El Salvador. During his 24 years of professional experience, Federico has provided tax services to some of Deloitte's main clients throughout the region, covering business activities including: manufacturing; services; telecommunications; IT services; electricity; and oil and gas, among others. Federico has experience in transfer pricing and corporate and international tax consultancy as well as in providing a wide range of tax solutions to Central American companies.

Federico obtained a bachelor of business administration from Franklin University in the US. He has been a member of the Tax Affairs Committee of the American Chamber of Commerce of El Salvador since 2010. His key clients include Unilever, Scotiabank, América Móvil and AES Corporation.

Roberto Revel-Chion


Transfer pricing senior manager, Costa Rica



Roberto Revel-Chion is a senior tax manager at Deloitte Costa Rica and is in charge of the TP departments for Costa Rica, the Dominican Republic, Honduras and Nicaragua. He has more than 13 years of experience in the area.

Roberto has experience in TP projects in Venezuela, Mexico, Honduras, Nicaragua and the Dominican Republic. He provides transfer pricing documentation services and advises on the preparation of defence files before and within an audit process. He also advises on transfer pricing planning policies for multinational groups.

Roberto has run transfer pricing training sessions in the four countries where he is responsible for the firm's practice as well as in Venezuela. He obtained his degree in business administration from the Universidad Central de Venezuela and went on to specialise in corporate finance.

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