Andean States: Embracing tax transparency
Colombia, Peru and Venezuela have all taken steps to renovate their tax legislation, write Deloitte’s practitioners. The developments suggest that tax authorities in the Andean states are paying closer attention to compliance and reporting functions as they seek to expand their credibility at a global level.
On April 28 2020, Colombia formally joined as a member of the OECD. It became the 37th country to take on membership, and the third country from the Latin America region to join following Mexico and Chile.
It is hoped that membership will be the take-off point for the implementation of different economic, educational, political and tax reforms in order to improve the country's position, not only within Latin America, but also at a global level.
Developing transfer pricing audits
In the transfer pricing (TP) space, the Dirección de Impuestos y Aduanas Nacionales (DIAN) has improved its audit capabilities and procedures, learning from the experiences of other tax authorities. This includes being inspired by a range of other OECD members, as well as through the support of networks such as Tax Inspectors Without Borders (TIWB) and the Inter-American Center of Tax Administrations (CIAT).
The updated approach for TP audits is based on:
A decentralisation process, with TP specialists not only in Bogotá, but also in Medellín, Cali and Barranquilla. All specialists are technically supported by different areas of the DIAN, and work with a common audit policy.
TP fiscalisation processes based on an industrial/sectoral approach, and risk-profiling models. These make use of the different information available to the authorities: local files, master files and/or country-by-country (CbC) reports.
The main topics under review and/or discussion between the DIAN and the taxpayers under inspection, which have recently included:
The modification of a local file supported by a TP expert, different to the one that prepared the documentation, as a defense mechanism during the discussions with the authorities;
Comparability adjustments with no technical, economic or business support;
When the tested party is a foreign-related party and the financial information of it is not available or cannot be supported;
The allocation keys that support the charges for intra-group services; and
When a taxpayer has paid an important number or amount of penalties for modifying or having inaccuracies in its TP documentation.
Finally, it is important to mention that in the last couple of years, the DIAN has started to define and develop a strategy to establish an orderly and efficient advance pricing agreement (APA) programme through the publication of the 2019 guidelines and Decree 2120 of December 15 2017. Therefore, in the near future, a significant increase in the number of applications for this agreement can be expected, with a further rise stemming from the situations arising from the COVID-19 pandemic.
Peru has overseen advances in the implementation of the benefit test, a specific obligation for intra-group services that has been in force in Peru since 2017.
The purpose of this law is to establish protection mechanisms for the payment of services billed by related entities. For this reason, such law has established a series of requirements that must be complied with as mandatory conditions for the deduction of the cost or expense of services received from related entities.
The rule was widely considered by critics as not clear enough to allow taxpayers to monitor its implementation. However, the introduction of Legislative Decree No. 1369, effective as of January 1 2019, subsequently clarified the rule.
Modifications to the benefit test
In this regard, with such regulation, modifications were included to improve the practical application of the test.
Firstly, it was clarified that the compliance with the benefit test is a requirement for the deduction of the cost or expense only for services received from related entities, but not for those services received from independent third parties located in territories with low or no taxation.
Secondly, it was noted that the benefit test will be understood as complied with whenever it is possible to validate that:
The services received provide an economic and commercial value for the user of the service, improving or maintaining its commercial position; and
If the services were not received from a related entity, the company would hire an independent third party to satisfy its need or would execute it by itself.
For low value-adding services, the profitability margin on costs and expenses obtained by the related entity must not exceed 5%. It should be noted that the methodology for calculating the billing for services by adding costs, expenses and profit margin is only required by law for low value-adding services. In that sense, it can understood that, for other types of services, the calculation of the billing could be done following another methodology that adjusts to the usual practice of the market or industry.
The updated regulation also introduced information on the minimum documentation to be submitted in order to support the conclusions of the benefit test:
Description of the service provided and detail of the users of the service;
Reasons that justify that the service provided complies with the benefit test;
Justification of the provision of the service in the context of the business of the group;
The reasons for which the service provided qualifies as a high or low value-adding service; and
The details of costs and expenses incurred by the service provider, which would include:
Criteria selected for the allocation of costs and expenses to the user of the service and its justification;
Profit margin applied and its justification; and
Any other relevant documentation or information that is useful to determine the valuation of transactions.
Therefore, as a result of this regulation, there is a clearer framework for the application of the benefit test. In addition, due to these increasingly thorough requirements for the deductibility of intra-group services, the taxpayer is expected to plan its TP documentation more proactively and, thus, can have the sufficient support in its analysis of deduction of costs/expenses for services received from related entities, which are prepared for filing the pertinent annual tax return.
In recent years, it has been commonplace for taxpayers that receive an objection writ from the Venezuelan tax authority (SENIAT) challenging their transfer prices, to file a notice of disclaimer refuting the terms of the challenge.
Once the SENIAT responds to such a disclaimer and makes the resolution of the indictment, usually within a two-year term, the taxpayer must make the payment of the adjustment determined by the SENIAT. Common practice has also seen companies take the defense process to the next stage via an administrative appeal.
Stepping up compliance procedures
Based on the above, and considering that the first step before receiving an objection writ from the SENIAT consists of the request and review of formal duties, it is important to mention that in early 2020, the Organic Tax Code (OTC) was published, which modified the fines related to TP duties. In this sense, fines were significantly increased. This generated that the taxpayers have a greater responsibility in the compliance of their fiscal obligations.
In addition to the recent fines established in the OTC, there are more consequences for not keeping the documentation.
Firstly, the tax administration could calculate profit margins/prices that might differ from those calculated by the company. Without the TP documentation, the company might not be able to properly support its transfer prices before the administration.
Secondly, not having the support of TP documentation available to the tax administration, might make the company liable to further revisions by the tax administration.
If the TP documentation is not available, the public accountant responsible for auditing the company might include this situation in its auditor's report. Thus, being unable to assess the contingencies that could affect the financial statements of the company during the period under analysis, a decision regarding the inclusion of an uncertainty paragraph could be taken in the said report.
Furthermore, not having TP documentation might indirectly affect other administrative processes of the company, in particular when the company has to interact with government agencies, such as a financial entity or the labour ministry. Such interactions may require the auditor's report and should include an opinion without exceptions, in order to verify that the taxpayer has complied with the various accountancy practices. Not having the TP documentation could generate an exception in the public accountant's opinion, which would then be expressed in the auditor's report.
In conclusion, TP specialists from the SENIAT are actively participating in tax audits of foreign-based companies. In the most recent tax reviews conducted by the SENIAT, it is evident that the underlying purpose of recent examinations extends beyond the traditional, more limited reviews and that the SENIAT have routinely included a review of formal TP obligations.
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Bruno Urrieta Farías
T: +57 1 4262303
Bruno Urrieta Farías is a partner based in Colombia, who is responsible for the national TP practice.
For more than 18 years, Bruno has assisted multinational groups with operations in different industries, including mining, manufacturing, real estate and retail, among others. He advises on the design, implementation and/or defence of their TP policies. Additionally, he has a broad experience coordinating regional TP documentation and planning projects for multinational groups that have operations in South and North America.
Before joining Deloitte Colombia, Bruno was part of the Mexican TP practice, where he participated in different projects for some of the largest Mexican multinational and national groups and subsidiaries of US and Canadian companies.
Bruno is a member of Deloitte's technology, media and entertainment and telecommunications (TMT) tax practice, and has worked closely in compliance and planning projects with some of the major players in the Mexican and South American advertising, media and entertainment markets.
T: +51 1 2118585
Jenny Morón is a partner based in Peru with more than 16 years of experience in TP matters.
Jenny has participated in several TP audit and controversy processes; as well as numerous planning and restructuring projects that required complex economic and financial analyses and entailed significant interaction between TP and other tax practices.
Jenny has also led regional TP compliance projects, gaining important experience in essential TP issues for Latin America. She also serves as the director of the International Fiscal Association (IFA) in Peru.
T: +58 212 206 8778
Iliana Salcedo is a partner based in Venezuela. She has more than 20 years of experience providing tax technical advisory in TP matters. She is part of Deloitte's Andean region TP practices.
Iliana has wide experience in the preparation and review of TP documentation in different industry sectors, including automotive, pharmaceutical, basic materials, mining, chemicals, and services, among others. She has been actively involved in the development of projects for documenting and designing TP policies, strategies and structures for multinational groups.
Iliana is also experienced in defence preparation in TP audits in Venezuela. She is a speaker in different TP regime-related conferences across the Andean region.