Andean states embrace tax transparency
Colombia, Peru, and Venezuela have taken steps to update their tax legislation, suggesting that the Andean states are paying closer attention to compliance, write Bruno Urrieta Farías, Jenny Morón and Iliana Salcedo of Deloitte.
On April 28 2020, Colombia formally became a member of the OECD. It is the 37th member, and the third country from Latin America to join, following Mexico and Chile.
It is hoped that membership will kick-start the implementation of different economic, educational, political, and tax reforms to improve the country’s position not only within Latin America but also globally.
Developing transfer pricing audits
In the transfer pricing (TP) space, the Colombian tax authority, 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 and the Inter-American Center of Tax Administrations.
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 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 other than the one that prepared the documentation as a defence mechanism during discussions with the authorities;
Comparability adjustments with no technical, economic, or business support;
When the tested party is a foreign-related party and its financial information is not available or cannot be supported;
The allocation keys that support charges for intra-group services; and
When a taxpayer has paid an important amount of penalty for modification or inaccuracies in its TP documentation.
Finally, in the past 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 No. 2120 of December 15 2017.
Therefore, a significant increase in the number of applications for this agreement can be expected soon, with a further rise due to the COVID-19 pandemic.
Recently, SUNAT (Peruvian Tax Administration) has intensified the audits of service operations, reaching questions of various kinds that put economic groups at risk of important contingencies. Since the introduction of the rules of the benefit test, SUNAT has greater tools to request from taxpayers more sensitive information of a different nature that allows to the Tax Administration to execute a more comprehensive review of operations. Therefore, the objective of these audits has a greater scope, that is, they are not only limited to proving the market value of the operation but also to be able to prove compliance with a series of elements to guarantee the deduction of costs or expenses for intra-group services.
Within the framework of the regulations of the benefit test, the taxpayer must have the ability to demonstrate the economic benefit of the operation, the effective provision of services as well as provide detailed information on the valuation of services based on the costs and expenses of the provider, among other requirements. Also, with the rules of the anti-elusive standard, the Tax Administration has another front to be able to attack this type of operations where the risks are higher because the SUNAT can re-characterize the operation if the business purpose of the operation is not proven.
It is hoped that Colombia’s OECD membership will kick-start economic, educational, political, and tax reforms.
Definitely, from recent experience, one of the biggest challenges for taxpayers is to be able to document the costs and expenses incurred by the service provider in the transactions under review. This information is usually prepared by groups in a context of auditing, and it has to be worked with a level of detail which in some cases becomes very complicated by the level of thoroughness that the auditor may demand. This type of information may consider the documentation of the source costs and expenses with their due formal support, the application of the criteria or drivers of allocation of such costs and expenses and the respective calculation of each driver, as well as the traceability of this segmented information of costs and expenses with the audited financial statements of the service provider, among other types of information.
The other field that is a challenge for taxpayers is related to documentation that demonstrates the existence of the economic benefit of the operation, which implies delivering information that shows the commercial value or need of the services within the framework of the taxpayer’s business, as well as sharing information on the reasonableness of the existence of the service in the context of the group’s business model, documentation on the organizational structures of both the service provider and the taxpayer in order to reject that they are duplicate services or activities or that they can be considered as activities that benefit only the shareholder and therefore be rejected for the purposes of their deduction by SUNAT.
Another element that the Tax Administration questions in the framework of the inspection of services is linked to the evidentiary documentation that accredits the effective provision of the service, which is a very difficult element to handle because the norm does not specifically indicate the type and amount of evidence to be available to comply with this front, so it can often result in an infinite task to gather as much documentation as possible in order to satisfy the auditor’s criteria.
Additionally, within the framework of anti-elusive standard audits, the discussion focuses on proving the business reason for the operation and therefore documenting that the service operation does not obey a fiscal purpose. In these cases, it is usual for SUNAT to question the business model chosen by the taxpayer by proposing an alternative model that from its perspective would prove to be the most reasonable to carry out the operation. That is why these reviews involve demonstrating in depth the economic benefit of the operation by documenting that the model followed by the group is the best alternative from the business perspective, quantifying the synergies or benefits of the taxpayer model and demonstrating to SUNAT that said model does not cause tax damage.
Therefore, this shows that SUNAT has a more robust structure to be able to supervise service operations and therefore question from various fronts the deductibility of costs or expenses for services. In this sense, it is necessary for taxpayers to proactively prepare and as completely as possible the supporting documentation that allows them to better cope with these audit processes with the Treasury.
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.
Not having TP documentation might make the company liable to revisions by the tax administration.
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.
More recently, in 2020, the initial year of the COVID-19 pandemic, an active attitude was also observed by tax administration officials, who requested from various entities, from the interior of the country and the capital city, the formal duties of TP disclosure (Informative Return or PT99 Form and Transfer Pricing Report), as well as the supporting work papers.
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.