Luis Ugarelli is Managing Partner at Market Facilitators, an economic consulting facility with main offices in Lima, Peru. The company provides consulting services, advisory and economic studies for different sectors in key economic variables to foster competitiveness and development. Finance Monthly speaks to Luis about the Peruvian transfer pricing system.


Can you explain how the Peruvian transfer pricing system works? What type of documentation does a company have to prepare?

Arms’ length principles were incorporated in Peruvian Legislation in 2001. As the country is aspiring to join the OECD in the near future, Peru has been trying to follow OECD directives very closely. For instance, some of the BEPS actions have already been implemented. The size of the companies, measured by the level of sales (above US$3 million) plus the volume of controlled transactions (purchases plus sales above US$500 M), trigger the presentation of Local File. As of 2017, a condition to make deductible services received from related parties or tax heavens must pass the benefit test. Master Files apply for consolidated turnover of groups above US$27 million. CbC Reports would eventually reach around 10 Peruvian Multinational Groups only. BEPS reports in Peru are sworn informative declarations that may trigger voluntary or compulsory tax adjustments only when results prove to be detrimental for the treasury.


What are the potential penalties for companies if they fail to submit accurate information regarding transfer pricing? Is there an appeal process?

If company fails to present a Local File by due date each year (with the exception of this year, as taxpayers are expected to submit year 2016 in April 2018 and year 2017 in June 2018), fines for not complying are 0.6% of a company’s sales with a ceiling of US$32 thousand by report. The fines are the same if the filing is partial or inaccurate and applies to master files and CbC reports as well. There is a progressive fine reduction for voluntary filing as long as the taxpayer declares it before a transfer pricing audit is open. As conditions requested for the benefit test appear to be excessive, some companies are assuming that these expenses will be repaired on their income tax declaration. Resolutions as a result of transfer pricing audit may be appealed in three instances and may end up in the Tax Court.


What is the Peruvian Tax Authority’s current approach to transfer pricing? How often do they carry out audits?

Statute of limitations of tax obligations is five years. Although tax audits have not followed a particular pattern, some partial audits in transfer pricing have been carried out in the last three years, but have resulted in disputed items that may end up in the Tax Court. Since the government has observed a dramatic tax collection drop in the last five years, part of the blame goes to controlled transactions. Therefore, tax authorities are betting that the situation could be partially reversed with a closer attention and audits to transfer pricing matters. Parameters to define taxpayers under formal obligations have been raised and more revelation is asked, with the intention of focusing on a smaller number of taxpayers (a drop from 6,500 to 3,500) in material transactions with commodities and imports, particularly medicines, consumer goods, capital goods, grains; and in intra-group services and financial operations of all economic sectors.


How do you best help companies manage their transfer pricing issues and what services do you provide?

For Peruvian companies with significant transfer pricing operations, early advice and transfer pricing planning is by far the most effective approach for timely problem recognition and resolution – the sooner, the merrier, as I like to say. Companies do not need to act like they’re blindfolded regarding the market prices for specific material transactions they execute - for those purposes we do comprehensive benchmarking analysis of interest rates, royalties, rents, cost, etc. In some cases, an entire revamping of the controlled transactions is advisable, and this reshuffle can make wonders for the development of a streamlined operation and present a clear and transparent position before the tax authorities.


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