Increased Latin American audit activity focuses on payments for intercompany services

There is a general auditing trend in Latin America towards targeting payments for intercompany services. The focus starts with an assessment of whether the general deductibility requirements are met; if not, the full expense may be disallowed. If the requirements are met, the focus turns to whether the service was actually rendered, the benefit for the recipient, and the calculation of the amounts invoiced to Latin American countries.

Latin America is facing a general economic slowdown, with challenges for governments to increase revenue collection to fund expenditure, investment, and expanding social programmes. Tax authorities are under pressure to reduce tax avoidance, as well as increase collection, in an always evolving and more sophisticated tax landscape.

Against this background, there has been an increased number of audits triggered by special intercompany transaction programmes, with the aim of controlling the payment and deductibility of service (administrative, technical, etc.) and intangible transactions (royalties, know-how, etc.).

It is quite common that a transfer pricing audit starts a couple of years after the transaction concerned took place. In that regard, the main challenges that companies have faced in an audit may be summarised as follows.

The increasing mobility of the workforce means that the personnel of the company in attendance at the time of the visit may not have been employed there when the service was received, and accessing information and obtaining comments on the service rendered is therefore difficult. In addition, accounting systems have sometimes been changed, so detailed accounting statements or registries may not be available.

Demonstrating that the service yielded a benefit for the recipient is another issue. Intercompany services provide benefits in relation to centralised functions, efficiencies, economics of scale, and consistency; however, the challenge is being able to explain the benefit, or the problems if services were not received.

As intercompany services tend to be rendered to multiple recipients by the same team, tax authorities are very keen to enquire into how the cost base was calculated rather than the markup applied on said base. Providing Excel sheets with allocation keys seems to be insufficient and detailed accounting registries are often requested, as well as certified financial information.

Successful preparation for an audit starts before entering a transaction. There are several steps to be considered when engaging in an intercompany transaction. The main characteristics could be:

• The purpose of the transaction;

• How is the price going to be determined;

• What is the benefit for the recipient; and

• What supporting documentation will be necessary to ensure deductibility from a tax (e.g., registration of the agreement, withholding, reverse VAT) and transfer pricing perspective (i.e., the arm’s-length principle).

Once the audit has started, having supporting documentation in place will go a long way in the defence of the transaction. However, it is strongly advisable to attend the visit of the tax authority’s auditors along with your tax and transfer pricing advisers to avoid any misunderstanding about the transaction, as well as the tax and transfer pricing methodology used to claim the deduction and the arm’s-length nature of the expense. Experience has shown that misunderstandings in the initial stages of an audit are difficult to resolve if incomplete or mistaken documents and explanations were given.

Expenses incurred outside Argentina are not deemed associated with Argentine-source income. Therefore, they are not deductible from those revenues, unless the tax office can “properly verify” that those expenses are “associated with trade or business in Argentina”.

The allocation of expenses incurred abroad has little chance of passing that test, which is very much confirmed by court precedents.

As a general approach, services provided by foreign companies to Argentine affiliates can be broken down into two groups, each of which is subject to a different tax treatment:

• Services that are considered “advice” for local tax purposes – these comprise services commonly referred to as “technical assistance”, “consulting services”, and the like. These services are considered as being sourced in Argentina irrespective of whether they are rendered in the country or abroad.

• Services not falling in the above group that are generally rendered outside Argentina – these usually comprise what are commonly referred to as “pure services” (e.g., data processing, accounting, tax, and legal services).

The basic principle to determine taxable income starts with the premise that to calculate net income, expenses may be deducted, and such expenses should have certain characteristics. They should be:

• Necessary for local trade or business;

• Admitted as deductible expenses by general laws, with the restrictions that such laws may set forth (for example, being necessary for earning taxable income); and

• Adequately documented.

It is highly beneficial to have evidence that proves the supply of services and the nature of disbursements, and in which concrete activities such services have contributed to taxable income. It should also be proved that the services rendered and the disbursements made are required and are related to the operation of the local affiliate, and they are not items that judges have qualified as being “carried out in the head office’s own interest aiming at ensuring their investment abroad”.

It is important to highlight that, in the case of transactions between related entities or those located in low-tax or non-cooperative jurisdictions, there is an obligation to comply with the transfer pricing regulations. General Resolution 4717/2000 (May 15 2020) provides specific criteria for the analysis of intragroup services. In the provision of services, the following elements are among those considered:

• Their nature and scope;

• The need for their provision for the policyholder of the service or services;

• The conduct of the parties;

• The terms of the provision;

• That the service has provided, or is expected to provide, a benefit or an economic value to the entity that pays for it; and

• Whether they involve industrial, commercial, or scientific experience; technical assistance; or the transfer or assignment of intangibles.

Companies in Argentina should carefully assess the obligations with which they must comply and consider implementing alternative processes for intercompany transactions, factoring in the new definitions and criteria established for different issues. Companies may have to perform a detailed analysis of service provisions and transactions involving intangibles. Failure to comply with this legislation may increase the chance of being audited by the tax authorities.

For several years, issues related to transfer pricing have gained prominence in audits conducted by the General Tax Directorate (Dirección General Impositiva) in Uruguay. Key areas of controversy include subsidiaries that have reported losses, with substantial charges for intercompany services; making significant royalty payments; and engaging in commodity transactions to which the ‘sixth method’ of analysing transactions with related entities is applied.

Another significant point of discrepancy between the tax authority and taxpayers is the selection of comparable companies. In this context, the tax authority increasingly favours the use of local comparables over those obtained from international databases.

This trend is reinforced by a court ruling that upheld the tax authority’s criteria, rejecting all the foreign comparables selected by the taxpayer and replacing them with a set of local comparables.

This scenario presents a significant challenge for local entities that are part of multinational groups, as these entities often define their transfer pricing policies based on sets of common comparables for all group affiliates, which naturally do not include Uruguayan companies.

Taking the foregoing into account, it is recommend that, as a key defensive measure, the documentation related to royalty and service payments (the Benefit Test) is strengthened and a benchmarking analysis for local comparables is conducted, to complement the corresponding international one.

In recent years, the Colombian tax authority (Dirección de Impuestos y Aduanas Nacionales, or DIAN) has significantly intensified its transfer pricing audit efforts. This trend reflects the need to increase tax revenue and the institutional strengthening of DIAN, which has improved its technical and analytical capabilities to review transactions between related parties.

A more rigorous focus has been observed, particularly in the review of intragroup service payments, royalties (especially in variable calculations), and transactions that result in recurring losses, aiming to ensure that such transactions comply with the arm’s-length principle. In addition, DIAN has paid special attention to accurately defining functional profiles and assessing the economic substance of transactions, seeking to prevent artificial structures that erode the country’s tax base. In this context, there has been an increase in information requests and supporting documentation requirements, along with the development of more sophisticated analytical tools to identify risks and select taxpayers for audit.

This enhanced audit environment has also been supported by increased international cooperation, aligned with OECD guidelines and the BEPS Action Plan, facilitating the exchange of information and the detection of inconsistencies in profit allocation across jurisdictions. As a result, companies engaging in cross-border related-party transactions must prepare for a more demanding environment, where documentation, substance, and the economic rationale of transactions will be key elements in managing tax risks.

Over the past two years, the National Superintendence of Customs and Tax Administration (Superintendencia Nacional de Aduanas y de Administración Tributaria, or SUNAT) has significantly increased its audit activity related to intercompany service payments. A main area of focus has been the Benefit Test, established under Section 32-A(i) of the Income Tax Law and further developed by Section 118-A of its regulations. The rules require taxpayers to demonstrate that services received from related parties have generated – or can generate – an economic benefit, and to substantiate the relationship between the service rendered, the compensation paid, and the costs incurred by the provider.

Although the law conditions the deductibility of the expense on the taxpayer having documentation to support the service received, SUNAT has adopted a particularly strict interpretation in practice, demanding a level of detail that exceeds what is reasonably expected. Requests often include payroll records, individual payslips, and time-tracking data for each person involved in the provision of the service by the foreign affiliate. These requirements are extremely difficult to meet due to legal, operational, and confidentiality constraints.

Moreover, this approach was recently confirmed by the Tax Court in Resolution 2374-4-2025, issued in 2025 – the first Peruvian decision to directly address the Benefit Test. In the case, SUNAT denied the deduction of intercompany service payments on the basis that the taxpayer failed to sufficiently substantiate the provider’s cost structure and margin. The Tax Court upheld this view, relying on the statute and its regulations, and did not question the reasonableness or practical feasibility of the documentation requested by SUNAT.

Given this environment, taxpayers must maintain a technically and operationally robust defence file. Early planning and effective coordination with foreign affiliates is now essential to manage audit risk in Peru’s increasingly demanding transfer pricing landscape.

In recent years, Ecuador’s Internal Revenue Service (Servicio de Rentas Internas, or SRI) has heightened its focus on transfer pricing audits, particularly scrutinising transactions involving services and royalties. A central aspect of these evaluations is the verification of compliance with filing requirements and the demonstration of economic substance in intercompany transactions. Corporations are required to provide comprehensive documentation that substantiates the pricing or markup of their intercompany transactions and their economic substance, thereby demonstrating alignment with prevailing market conditions.

The SRI’s focus in transfer pricing audits includes the application of capital adjustments, aiming to align working capital rotation days to zero through cash cycle analysis. This involves evaluating the working capital rotation days of the tested party and making necessary adjustments to ensure that financial results are comparable to those of selected comparable companies.

Furthermore, a review is placed on ensuring the consistency of values and information reported across the local file, the transfer pricing annex, and the income tax return. Discrepancies among these documents can trigger further investigation and potentially result in fines of up to $15,000. It is therefore essential for companies to ensure congruence in their reported figures, supported by a robust analytical foundation.

The tax authority in Ecuador, within their faculties, has adopted an initiative-taking stance in examining transfer pricing practices. There is an increased focus on the supporting documentation provided within the transfer pricing report. This enhanced scrutiny underscores the necessity for corporations to ensure that their documentation is meticulous, precise, and in strict compliance with regulatory expectations.

In Venezuela, a pioneer in adopting the transfer pricing regime within the Andean region, the tax authority has highlighted several key aspects during audits.

First, special attention is given to interest rates on loans between related companies, ensuring they align with market references. This compliance with the arm’s-length principle helps to prevent adverse tax adjustments.

Second, a detailed transactional analysis is required, evaluating each transaction with related parties individually. The Venezuelan Income Tax Law prioritises the comparable uncontrolled price method, ensuring transactions reflect fair market value.

The third important aspect is the segmentation of financial statements. The administration requires companies to break down their statements by product lines and activities, reviewing the basis and allocations used. This level of detail allows for a clear understanding of the financial contributions of each segment and their fiscal compliance.

Companies with operating losses are also under scrutiny, as the administration seeks to ensure these losses do not arise from inadequate transfer pricing practices.

Currently, the tax administration focuses on the compliance of formal duties, such as the information return for operations with related parties (the PT-99 Form) and documentation supporting compliance, with the arm’s-length principle.

The review of these formal duties is the first step before initiating a comprehensive audit. Thus, the tax authority demonstrates its active commitment to transfer pricing audits in multinational companies, underscoring their crucial importance in determining taxable profits across different jurisdictions.

An audit that emphasises scrutinising expenses due to an inability to demonstrate the actual rendering of services and their benefits tends to be more effective than focusing on other analytical aspects. These other aspects could include rejecting or adding comparable transactions or examining the arm’s-length nature of the markup applied.

Transfer pricing is a fundamental area for tax planning. It is crucial to comply with the formal obligations applicable in each country and to anticipate any potential review. Establishing appropriate supporting documentation should begin from the initial planning or actual rendering of the service. Doing so, rather than waiting until the audit begins, will enhance credibility and enable a timely response to information requests. This proactive approach ensures that the evidence is robust and aligns with regulatory expectations.

Being well prepared is essential. Advisers should be engaged in discussions about the strategy and preparation for the audit visit well in advance. This collaborative planning will help in anticipating potential challenges and developing a comprehensive approach to address them effectively during the audit process.