Beyond the price: key transfer pricing controversies in the Andean region

In the Andean region, transfer pricing risk has evolved beyond the preparation of compliant documentation. Today, the key challenge for taxpayers is demonstrating that related-party transactions are supported by genuine economic substance, can be operationally verified, and are consistently reflected across tax, accounting, and business records.

In recent years, transfer pricing has gained increasing importance within tax audit processes in the Andean region. Amid pressure to boost tax revenue and the strengthening of fiscal control mechanisms, the tax administrations of Colombia, Peru, Ecuador, and Venezuela have intensified their scrutiny of transactions between related parties, making this a primary area of risk for taxpayers.

Although these countries share the arm’s-length principle as the foundation of their transfer pricing regimes, differences in audit approaches and interpretive criteria have led to significant disputes between taxpayers and tax authorities. Audits now go beyond merely validating the terms agreed upon by related parties; they incorporate analyses regarding the economic substance of transactions, the actual provision of services, the benefits received by the recipient, value creation, and the reasonableness of the structures implemented by multinational groups.

As a result, the focus of transfer pricing audits has progressively shifted from formal compliance towards evidentiary support for the economic substance and business rationale of related-party transactions. The increasing sophistication of audits has prompted tax authorities to demand higher levels of documentation and evidence to substantiate intercompany transactions. Consequently, matters traditionally viewed as technical issues are now subject to comprehensive analysis – encompassing financial, operational, and tax elements – leading to a rise in adjustments, litigation, and disputes across the region.

Key areas of debate include:

• Intercompany services and management fees, particularly regarding proof of actual service delivery and the benefit received;

• Payments for intangibles, royalties, and know-how, especially concerning value creation and the reasonableness of agreed-upon compensation;

• The allocation of regional corporate costs and the criteria used for their distribution; and

• The precedence of economic substance over mere formal compliance with transfer pricing obligations.

While such disputes are common throughout the Andean region, the approach to handling them varies across jurisdictions. Colombia and Peru have developed increasingly sophisticated audit criteria regarding the economic substance of transactions and the documentary evidence required to substantiate them. Meanwhile, Ecuador and Venezuela present unique characteristics linked to their regulatory frameworks and economic environments, creating specific challenges for taxpayers. These differences reflect varying levels of development and audit approaches, as well as a regional trend towards greater scrutiny of intercompany transactions and value-creation processes within multinational groups.

These issues remain central to tax audits and represent significant areas of risk for taxpayers. Understanding the trends and criteria adopted by the various tax authorities is essential for anticipating potential liabilities, strengthening compliance strategies, and effectively managing tax risk in an increasingly demanding environment.

Although Colombia is an OECD member, its transfer pricing compliance regime includes several local requirements that can create a higher documentation burden than multinational groups may expect, triggering penalties and income tax adjustments. The main challenges are the following:

• Materiality threshold – it is relatively low and operates at two levels: taxpayer size and transaction value, with analysis required for non-core group transactions.

• Comparable companies’ benchmarks – the analysis must be conducted in a year-by-year financial information comparison, while the usual standard is one year for the tested party and an average of three for the comparables.

• Local GAAP and currency – the accounting standards and currency must be those used in Colombia to ensure consistency with other tax obligations, particularly corporate income tax and magnetic media (electronic information reporting).

• Certified financial information – when the analysis requires the use of segmented financial information, it must be certified by the statutory auditor as well as the legal representative of the company. Where the tested party is the foreign related entity, it is also required to test actual certified results.

• Group policy and simplified approach – it is common that some transactions are supported by compliance with the group’s arm’s-length policy, or low value-added services transactions with a simplified approach. In Colombia, this is not possible as actual results must be tested.

The above are some of the most scrutinised contents of the local file. This increases the documentation burden significantly as well as the time invested to have a robust document, both in terms of the formal content and the substantial compliance. When auditing, tax authorities usually have a two-pronged approach: formality and substance.

In relation to the formal contents of the local file, the requirements are intended to ensure completeness, consistency with other tax obligations, and reliability of the financial data of the comparables. This initial review is particularly important because inconsistencies and omissions may result in harsh penalties that require amendments and even income tax challenges as the updating of financial data for a year-by-year analysis may leave the results below range.

As the statute of limitations is five years, substance usually takes longer to be challenged, and the focus is usually on services received and intangibles, mainly royalty payments. In intercompany services, the ability to demonstrate the actual rendering and the benefit becomes paramount as the discussion will not be on the price of the service but on its actual existence, resulting in the challenge of the full amount. For royalties, taxpayers should be able to demonstrate that there is no local intellectual property being built that will impair the payment. In particular, publicity and marketing activities may lead to rejection of the expense as it may be deemed brand creation.

Penalties in Colombia are significant and are designed to make incomplete compliance more costly than preparing robust documentation from the outset. In this regard, transfer pricing in Colombia requires additional investment both in time and materials, as well as the involvement of local personnel and advisers to work jointly with global teams to ensure consistency in figures, methodology, and supporting documents.

In Ecuador, the principal audit risk lies not merely in whether documentation exists but whether the taxpayer can connect agreements, invoices, deliverables, allocation keys, and financial reporting into a coherent evidentiary file. The main challenges for business groups with operations in Ecuador include the following:

• Intercompany services and management fees – one of the most sensitive areas in transfer pricing audits is the deductibility and arm’s-length nature of intercompany service charges. Agreements and invoices are generally not sufficient to support the deduction or the transfer pricing position. Taxpayers are expected to demonstrate that the services were effectively rendered, that the Ecuadorian entity obtained a concrete economic or commercial benefit, and that the charge reflects services actually rendered rather than duplicated local functions. In practice, a defensible position requires contemporaneous evidence such as deliverables, reports, correspondence, descriptions of activities performed, cost allocation calculations, and documentation linking the services to the local business.

• Intangibles, royalties, technical assistance, and know-how – payments related to intangibles are also subject to close review. Beyond proving the existence or legal ownership of the intangible, taxpayers should be able to demonstrate its actual use in Ecuador, the value generated for the local entity, and its impact on the pricing, margins, or profitability of the relevant goods or services. The tax administration may also assess whether the foreign related party receiving the payment has the functional substance required to justify the remuneration. Therefore, agreements should be consistent with the conduct of the parties and the value-creation process.

• Working capital adjustments – another Ecuador-specific audit exposure relates to the application of working capital adjustments. In prior audit experience, the tax administration has paid particular attention to adjustments aimed at aligning working capital rotation days to zero through cash cycle analysis. Taxpayers applying these adjustments should ensure that the methodology is technically supported, consistently applied, and reconciled with the financial information used in the transfer pricing analysis.

• Consistency of information across tax filings – information consistency is a frequent audit trigger in Ecuador. The tax administration reviews whether the amounts reported in the local file, the transfer pricing annex, the income tax return, the Compliance Tax Report (Informe de Cumplimiento Tributario), accounting records, and supporting invoices are aligned. Differences among these sources may lead to information requests, penalties, or broader tax reviews. Accordingly, transfer pricing documentation in Ecuador should be prepared as part of an integrated tax compliance process rather than as a standalone report.

• Amount B under pillar one – a relevant development for 2026 is the tax administration’s position regarding amount B under pillar one. Ecuador has not incorporated this simplified approach into its domestic transfer pricing framework. Consequently, amount B should not be treated as a safe harbour or as a substitute for the traditional transfer pricing analysis required under Ecuadorian law. The critical consideration is that amount B should not be interpreted in Ecuador as a shortcut, safe harbour mechanism, or alternative to a transaction-by-transaction transfer pricing analysis.

Transfer pricing in Ecuador therefore requires more than formal compliance. Business groups should ensure that their related-party transactions are supported by economic substance, benefit evidence, reliable comparability analyses, and consistent information across accounting, tax, and transfer pricing documentation.

The most relevant transfer pricing controversies in Peru centre on two areas: intra-group services – a cross-sector issue affecting banking, telecommunications, and consumer goods – and typical mining sector transactions, particularly mineral exports.

Since the benefit test was incorporated into Article 32-A(i) of the Income Tax Law, the National Tax and Customs Administration (SUNAT) has scrutinised whether intra-group charges reflect services of real economic or commercial value. In practice, it demands cost build-ups and cost detail from the service provider even where the method applied is not cost-based – a cost-oriented presumption the OECD guidelines do not impose – so taxpayers must substantiate the charge using a logic different from that of their own method.

A recent Tax Court resolution (RTF No. 08313-9-2025) shows how far the consequences extend. The effective rendering of the services, their necessity, and the generation of economic benefit were not in dispute. The expense was nonetheless fully disallowed because, in the court’s view, the taxpayer failed to evidence with sufficient traceability the costs actually incurred by the related providers and the allocation criteria explaining the amount invoiced. A documentary shortfall on the cost side can thus lead to full disallowance of the deduction, even where the benefit itself is acknowledged.

This resolution confirms a demanding evidentiary standard, in which the traceability of the provider’s costs, rather than the reality of the service or the benefit obtained, becomes decisive for the deductibility of the expense. Approaches of this kind, once consolidated in one jurisdiction’s audit practice, can inform how tax administrations elsewhere in the region assess intra-group services, which makes the Peruvian experience relevant beyond its borders.

Transfer pricing disputes in mining rarely turn on a single question; SUNAT challenges taxpayers on several planes at once. At the method level, it disputes the taxpayer’s selection where it considers another more appropriate – proposing the comparable uncontrolled price (CUP) method in place of the transactional net margin method (TNMM).

Even where the method is accepted, every parameter of its application may be contested. Under the TNMM, SUNAT has rejected comparables reporting losses or low profitability and has disputed the profit level indicator selected, proposing the net cost-plus margin in place of the Berry ratio. Under the CUP method, it has replaced external comparables with internally constructed ones – derived from the price its customer agrees with the end customer, adjusted for functional differences – and, in other cases, questioned discounts to benchmark prices as not reflecting a related-party trader’s contribution.

On the other side, enforcement has intensified around the commodity regime under Article 113-A of the Income Tax Regulations, which requires communicating the transaction terms to SUNAT before shipment. SUNAT is actively auditing compliance – for missing, late, incomplete, or inaccurate filings – and, in such cases, applying the ‘sixth method’: resetting the quotation date to the end-of-shipment date for mineral exports, regardless of the agreed pricing period. These audits reach back to periods in which certain fields of the ‘communication’ lacked guidance and advance filing was often impracticable because contractual terms were not yet defined – aspects the 2022 amendment clarified.

The practical implication is that a mining position must hold on every plane simultaneously – method, application parameters, and formal compliance; a defence may prevail on one front and fail on another.

Across both fronts, technical merit and evidentiary discipline carry equal weight; documentary rigour increasingly determines the audit’s economic outcome.

Venezuela has one of the longest-standing transfer pricing regimes in the Andean region, based on the arm’s-length principle. However, increasing audit activity by the National Integrated Service for Customs and Tax Administration (SENIAT), coupled with the country’s economic environment, has heightened transfer pricing risks for multinational groups operating in the jurisdiction. As a result, taxpayers are facing greater scrutiny not only of their transfer pricing outcomes but also of the evidence supporting the economic rationale and consistency of related-party transactions.

One of the most frequently challenged areas involves intra-group financing transactions. SENIAT closely reviews the interest rates applied to loans between related parties and whether they reflect arm’s-length conditions. Given Venezuela’s country risk, limited access to external financing, and economic volatility, taxpayers often face difficulties in identifying reliable comparable transactions.

In practice, companies should ensure that transfer pricing documentation includes a robust explanation of the financing arrangement, the borrower’s financial profile, the business purpose of the loan, and the methodology used to determine the interest rate. Failure to provide sufficient support may expose taxpayers to adjustments, even where the agreed rate appears commercially reasonable.

Another challenge arises from the limited alignment of the local regulatory framework with more recent international transfer pricing developments. While Venezuelan rules are based on OECD principles, they do not formally incorporate several concepts introduced through the BEPS Project. This creates practical challenges for multinational groups that prepare transfer pricing documentation under global standards but must also satisfy local requirements. Taxpayers should therefore ensure that local studies clearly explain the functions performed, risks assumed, and economic substance of transactions, even where such analyses are primarily developed to meet foreign reporting obligations.

In addition, financial segmentation and consistency among different sources of information have become key audit issues. SENIAT increasingly cross-checks information reported in transfer pricing filings, corporate income tax returns, and audited financial statements. Companies with multiple business lines or complex operating structures should be prepared to demonstrate how revenues, costs, and expenses have been allocated for transfer pricing purposes and maintain contemporaneous supporting documentation for those allocations. Even minor inconsistencies between tax and financial information may trigger additional information requests or challenges during an audit.

In this context, transfer pricing risk management in Venezuela extends beyond the preparation of a transfer pricing study. Taxpayers should periodically review financing arrangements, validate the consistency of financial and tax information, and maintain documentation that clearly demonstrates the commercial rationale and economic substance of intercompany transactions. These measures are increasingly important to mitigate the risk of adjustments, penalties, and prolonged tax disputes with the Venezuelan tax administration.

Across the Andean region, transfer pricing controversies increasingly extend beyond the determination of arm’s-length prices and focus on the economic substance, consistency, and evidentiary support of related-party transactions. Although Colombia, Ecuador, Peru, and Venezuela share common transfer pricing principles, regional consistency does not necessarily translate into local uniformity. Each jurisdiction has developed distinct audit priorities and interpretative approaches, creating different compliance challenges and controversy risks for taxpayers operating across multiple countries.

A common theme nevertheless emerges across the region: evidence has become the new transfer pricing battleground. Tax authorities are no longer satisfied with the existence of transfer pricing documentation alone; they increasingly seek to verify that related-party transactions are supported by credible evidence demonstrating that services were actually rendered, benefits were received, risks were effectively assumed, and compensation reflects the underlying economic reality of the arrangement.

In this environment, documentation must be audit-ready, not merely compliant. Transfer pricing reports should be supported by contracts, operational records, financial data, internal approvals, and other contemporaneous evidence capable of withstanding increasingly sophisticated audit procedures. The ability to demonstrate consistency across tax filings, financial statements, and business records is becoming as important as the technical transfer pricing analysis itself.

As a practical matter, multinational groups operating in the Andean region should evaluate their intercompany transactions across four key dimensions:

• Legal;

• Operational;

• Economic; and

• Evidentiary.

A transaction that is properly documented from a legal perspective but cannot be operationally verified, economically justified, or adequately supported by evidence may face significant challenges during a tax audit. Organisations that proactively align these four dimensions will be better positioned to defend their transfer pricing policies, manage controversy risks, and navigate an increasingly demanding enforcement environment.