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Latin America 12th edition

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3 Regional overview | BEPSTransparency in focus: Latin American tax developments inspired by BEPSJorge Narváez-Hasfura, Simone Musa and Daniel Zugman of Trench Rossi e Watanabe, in coop-eration with Baker & McKenzie, explore changes in the tax regulatory environment, looking athow national policies are being influenced by important multilateral developments.

TRANSFER PRICING FOCUS7 TP focus | BrazilNavigating Brazilian transfer pricing complexity Brazil is one of the many non-member economies with which the OECD has strengthened itsrelationship over the last few years, but the country is still far from adopting much-needed taxpolicies that may contribute to economic growth. Carlos Ayub and Alexandro Tinoco ofDeloitte assess the current environment and look at what more could be done to attract invest-ment and spur growth.

12 TP focus | LATCOBEPS as a regional initiativeAdvisers from Deloitte LATCO (Latin America Countries Organisation – a cluster thatincludes all countries in the region except Brazil, Chile and Mexico) contribute to a regionalroundup of the major transfer pricing implications of reforms initiated to counter base erosionand profit shifting (BEPS).

21 TP Focus | MexicoDoing business in Mexico: MNE complexity and its effects on the local TP environmentSimón Somohano and Eduardo Campos Martínez of Deloitte Mexico assess the transfer pric-ing landscape in Mexico, taking into account recent national reforms and the incoming impactof the multilateral discussions on base erosion and profit shifting (BEPS).

27 Central AmericaTax bullying? When global tax trends clash with local realitiesRafael Sayagues, Isabel Chiri and Alexandre Barbellion of EY look at the role of Central Americancountries Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua andPanama in the global tax playground and whether a cascading ‘tax bullying’ effect can be seenwhen global trends are established.

32 ChileChilean tax reform and the effects of the change of domicile of foreign investorsRoberto Carlos Rivas and Josefina Casals of PwC Chile assess the Chilean Government’s progressin implementing the 2014 tax reform package, reflecting on how certain provisions are impactingforeign investors and looking ahead to see how these measures will sit alongside the implementa-tion of base erosion and profit shifting (BEPS) related measures.

37 MexicoAuthorities alter approach in light of external pressuresJose Carlos Silva and Bernardo Iberri of Chevez, Ruiz, Zamarripa y Cia analyse the Mexican taxenvironment, focusing on authority and tax audit trends and the impact of base erosion and profitshifting (BEPS) initiatives in Mexico.

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T he focus of many of the articles in this guideon issues tied to the multilateral efforts tocounter tax base erosion and profit shifting

(BEPS) shows that taxpayers across Latin Americaare keeping a close watch on global developments.Many of the countries in the region are not

OECD members, but the level of Latin Americanawareness and engagement is testament to thepotential impact the project will have on interna-tional tax rules.But taxpayers are also having to contend with

the effects of domestic reform packages imple-mented throughout the region in the past two or

three years. As new and updated national measures continue to settle in, tax-payers and advisers are ensuring they keep pace by continuing to tweak theircompliance systems and operational processes. This is particularly relevant inChile and Mexico, given the volume and significance of changes which weremade to the tax codes of these two countries during 2014.It is also evident in Brazil, where legislative updates are handed down

on a weekly, if not daily, basis. Such frequent changes contribute to an inse-cure environment since authorities and auditors do not always respect legalprovisions in the same way that authorities in other countries do.The most concerning recent example of this is July’s provisional measure

685, which shows the authorities’ willingness to shift the compliance burdenfurther onto taxpayers, by requiring them to disclose to the authorities anytransaction or tax planning structure where the business motive is “unclear”.This is somewhat ironic, given how unclear and ambiguous some of the mea-sure’s terminology is (for example, references to “transactions that were struc-tured in an unusual manner”). Taxpayers and advisers did not welcome themeasure, and a question remains over its conformity with the law.Other issues dominating taxpayer time and resources centre on technolo-

gy challenges and the volume of declarations required. Add to this high taxrates and it is clear the outlook is less than rosy for taxpayers in Brazil andbeyond. And with the Brazilian economy struggling, coupled with high lev-els of public debt, rate-raising, as well as base-broadening and the creation ofnew taxes, is set to continue into 2016.In this context, International Tax Review brings you the 12th edition of

its Latin America regional guide, published in association with Baker &McKenzie, Chevez Ruiz Zamarripa y Cia, Deloitte, EY and PwC.

Editorial

Matthew GilleardEditorInternational Tax Review

R E G I O N A L O V E R V I E W | B E P S


Transparency in focus: LatinAmerican tax developmentsinspired by BEPSJorge Narváez-Hasfura,Simone Musa andDaniel Zugman ofTrench Rossi eWatanabe, incooperation withBaker & McKenzie,explore changes in thetax regulatoryenvironment, lookingat how national policiesare being influenced byimportant multilateraldevelopments.

I n view of the globalisation process and considering the expanding inte-gration of national economies and the advent of the digital economy,opportunities have arisen for multinational enterprises (MNEs) to min-

imise their tax burden by structuring their business in jurisdictions wherethey are more favourably taxed.Therefore, nations have recognised the need to review existing tax rules

to effectively prevent double taxation, as well as cases of no or low taxationassociated with practices that artificially segregate taxable income from theactivities that generate it. These practices, deemed as aggressive tax plan-ning, are addressed as base erosion and profit shifting (BEPS).The G20 entrusted the OECD to develop an action plan to address

BEPS issues (Action Plan). On July 19 2013, the OECD published theAction Plan that provides countries with domestic and international instru-ments that will better align the right to tax with economic activity. In gen-eral, the Action Plan (i) identifies actions needed to address BEPS; (ii) setsdeadlines to implement these actions; and (iii) identifies the resourcesneeded and the methodology to implement these actions.Although this work on BEPS has not yet been concluded, new laws have

already passed in several countries around the world inspired by the ActionPlan’s objectives, including in countries which are not members of theOECD. In Latin America, tax authorities in several countries have alreadypublicly stated that new laws and procedures will be enforced in the nearfuture in a manner which is consistent with the OECD’s work. To date, sig-nificant developments can be seen in Mexico and Brazil, where impactinglegislation has been enacted, clearly inspired by the BEPS agenda.New BEPS-inspired legislation in Mexico includes a focus on the

enhancement of transparency of information for tax purposes, a concernthat is common among the tax authorities of almost all major worldeconomies. Such changes in Mexico are similar to those recently put inplace in Brazil.

Developments in MexicoIn 2015, in line with BEPS developments, the Mexican TaxAdministration Service (SAT) derogated the Criterion 97/2013/SATthat allowed entities residing in preferential tax regimes to pay taxes on anet income basis upon the transfer of Mexican shares, provided that thecorresponding income was not derived by a Mexican resident throughsuch legal entity. At that time, this Criterion appeared to have left the dooropen for foreign legal entities or vehicles located in low tax jurisdictions,



with no Mexican owners, to still benefit from the optional nettaxation treatment applicable upon the transfer of Mexicanshares.The derogation of this Criterion beginning in FY15 was in

line with the Mexican authorities’ BEPS-related position topunish transactions carried out with taxpayers incorporated inpreferential tax regimes. As such, by derogating thisCriterion, these taxpayers were denied the possibility to applythe optional net taxation treatment upon the transfer ofMexican shares, regardless of whether the beneficial ownerholding the foreign vehicle (directly or indirectly) was aMexican resident.Mexican tax authorities have also enacted legislation con-

sistent with Action 6 of the BEPS Action Plan, the mainobjective of which is to prevent the granting of treaty benefitsunder inappropriate circumstances, mainly to avoid the gen-eration of double non-taxation. In this regard, as of 2014 Mexico requires a ‘sworn decla-

ration’ to be issued by non-resident related parties certifyingthat a double juridical taxation exists on a given item ofMexican source income received from its Mexican counter-part, in order to be entitled to treaty benefits on said income.It should be noted that an administrative tax rule was issuedon December 30 2013 (amended on December 18 2014 toinclude an additional hypothesis) by the SAT to relieve thenon-resident in some specific cases from having to issue thesworn declaration, such as in the case where the taxpayer is aresident of a country with a territorial tax system with respectto income tax.With the issuance of this rule, the BEPS-inspired require-

ment set forth in cases of related-party transactions becameless severe and broadened the opportunity for foreign relatedparties to apply treaty benefits without the need to certify thatdouble juridical taxation exists in a given transaction. The most recent measure taken by the Mexican tax author-

ities was in January 2014, when Form 76 (‘Information aboutrelevant transactions’) was issued, inspired by Action 13 ofthe Action Plan. That action aims at providing guidance ontransfer pricing documentation and country-by-countryreporting (CbCR). Form 76 is also consistent with BEPSAction 5 mentioned above, as well as with Action 12, whichhas the objective of developing recommendations regardingthe design of mandatory disclosure rules for aggressive orabusive transactions, arrangements, or structures, taking intoconsideration the experience of the increasing number ofcountries that have such rules. In this context, since 2014, Mexican taxpayers have been

required to file an informative tax return depicting multipletypes of activities or transactions they have undertaken thatneed to be disclosed to the tax authorities. The idea behindthis is for the tax authorities to have more readily availableinformation about what taxpayers are doing – informationthat will be used by the tax authorities to find out if aggres-

sive planning schemes are behind those transactions reportedby the taxpayers. The filing of Form 76 is due within 30 daysof the date the transaction was carried out. Notwithstandingthe 30-day period established in the Tax Code, different duedates are provided in regulations issued by the tax authorities,in such a way that the taxpayers are likely to have a termlonger than the 30-day period to file the form.In terms of what has to be reported, derivative financial

transactions, transactions that trigger transfer pricing adjust-ments, direct or indirect changes of ownership in Mexicancorporations and the tax residence of the shareholders, corpo-rate restructuring and corporate reorganisations, changes oftax residence, transfers of intangibles or financial assets, trans-fers of goods whereby the seller reserves rights over the goodtransferred, transfers of assets triggered by mergers or spin-offs, transactions carried out with residents of countries withterritorial systems of taxation in which a double tax treaty hasbeen applied, financial transactions where the payment of theinterest is pushed out for more than one year, payments ofinterest payable after one year or more, transfers of tax lossesupon spin-offs, reductions of tax losses upon a merger, andcapital reimbursements or dividend payments with resourcescoming from loans are among the qualifying activities. Interestingly, Brazil is following a similar path of requiring

the disclosure of information regarding transactions whichpresumably have a tax planning inclination, and the Brazilian

Simone MusaTax partnerTrench, Rossi e WatanabeAdvogados, in cooperation withBaker & McKenzie

Rua Arq. Olavo Redig de Campos, 105– 31st floorEZ Towers Building, Tower A, 04711-904 São Paulo – SP – Brazil Tel.:+55 (11) 3048-6814 [email protected]

Simone Dias Musa is a tax partner in the São Paulo office ofTrench, Rossi & Watanabe. She concentrates on corporateincome tax matters, tax planning for inbound investments, taxa-tion of reorganisations, mergers and acquisitions. She also pro-vides skillful advice on international tax planning, includingoutbound investments of Brazilian multinationals, use of taxtreaties, transfer pricing and financing transactions.Frequently recognised for her practical advice, technical knowl-

edge and creativity, she has received numerous awards for herprofessional achievements.



tax authorities claim that such new legislation follows theexample of comparable countries like Mexico. However, ini-tial experiences with the Brazilian incarnation of this trans-parency measure indicate that it is a much more stringent andsevere regime than that which exists in Mexico.

Developments in BrazilSimilar to Form 76 in Mexico, the President of Brazil enactedProvisional Measure No. 685/2015 (MP 685/2015) in July2015. This measure establishes the obligation for taxpayers toreport to the Federal Revenue Department (RFB) informationregarding any acts or transactions performed in the previouscalendar year which may have eliminated, reduced or deferredcorporate taxation (DPLAT). The provision of this informa-tion has a deadline of September 30 of each year.Although Brazil is not a member of the OECD, the coun-

try participates in the discussions held by the OECD as anobserver and tends to follow the international trends on tax-ation. In this context, the explanations disclosed by theBrazilian presidency on the motivation of the new legislationexpressly stated that the obligation at hand is inspired by theBEPS Action Plan.MP 685/2015 provides that information regarding the

following situations shall be reported:• Acts and transactions performed without relevant non-taxreasons (that is, without relevant business purpose);

• Acts and transactions that adopt unusual structures, indi-rect legal transactions or that contain provisions that maydistort the effects of typical contracts; or

• Specific acts or legal transactions to be described by theRFB in normative rulings.In case the RFB has a disagreement about the tax impacts

attributed to the situations reported through DPLAT, thetaxpayer will be required to collect the corresponding addi-tional taxes plus interest for late payment. The tax authori-ties in Brazil have formally expressed their views that thisnew legislation is beneficial to the taxpayer, to the extentthat it creates an environment not previously existing inBrazil where the taxpayers and the tax authorities canexchange information on certain transactions and factualscenarios and in case the tax authorities disagree with the taxposition taken by the taxpayer, the latter has a chance to notbe subject to the aggravated penalty applicable in case of taxevasion and fraud.However, according to the current language of the MP, if the

DPLAT is not submitted or is declared ineffective (for examplein a case where it contains false information, which can be a sub-jective analysis), the tax authorities will presume the taxpayer hascommitted tax evasion or fraud and, thus, the taxes due will beincreased by interest for late payment and a fine of 150%. In a divergence from Mexico, in Brazil the taxpayer must

interpret the vague expressions used in the legislation (such

Jorge Narváez-Hasfura Tax partnerBaker & McKenzie Abogados

Edificio Virreyes Pedregal 24, piso 12 Lomas Virreyes / Col Molino del Rey 11040 México, DFTel: +52 (55) [email protected]

Jorge Narváez-Hasfura is a tax partner in the Mexico City office ofBaker & McKenzie. He focuses on the legal aspects of corporateincome tax, transfer pricing, international tax planning and corpo-rate reorganisations. He is proficient in tax rulings, tax treaties,personal income tax matters, estate planning, tax and customslitigation, as well as value-added tax. He also advises clients onissues involving special taxes on products and services, singlerate tax and customs duties.He has authored numerous publications on subjects related to

his field and is also a frequent speaker at key seminars andconferences, including those organised by the International FiscalAssociation.

Daniel ZugmanTax associateTrench, Rossi e Watanabe Advogados, in cooperation withBaker & McKenzie

Rua Arq. Olavo Redig de Campos, 105 – 31st floorEZ Towers Building, Tower A, 04711-904São Paulo – SP – BrazilTel:+55 (11) 5091-5929 [email protected]

Daniel Zugman is a tax associate in the São Paulo office ofTrench, Rossi & Watanabe. His practice concentrates on directtaxes, including tax planning, corporate reorganisations andcross-border investments.



as “relevant non-tax reasons”, “unusual structure” , and“indirect legal transactions”) in order to conclude whether agiven act or transaction should be reported. The transactionsto be disclosed by the RFB in normative rulings will bemandatorily reported, however such list will not be exhaustive– that is, other transactions may be subject to DPLAT if theyare deemed to lack business reasons or to be unusual. The deadline for the conversion of the MP into law is

November 22 2015. The Provisional Measure may or maynot be converted into law. In addition, the MP can still beamended. Members of the Brazilian Parliament havealready proposed more than 200 amendments to the text,and several organisations representing taxpayers are engag-ing in discussions with respect to the issue, in such a waythat there are chances of the current language of the MPbeing amended.In view of all the above, it appears that an increasing con-

cern is developing in Latin America with respect to trans-parency of information for tax purposes, especially regardingaggressive tax planning. It is hard to predict the practical implications derived from

the recent legislation enacted in Mexico and in Brazil.However, taxpayers are likely to start facing more in-depth taxaudits focusing more closely on the substance of the matterthan its form. Tax authorities of these countries will probably

now seek more comprehensive justification as to the businessreasons behind the transactions carried out by taxpayers.It is uncertain what the level of scrutiny will be and what

level of detail tax authorities will apply upon conducting taxaudits within the context of BEPS. We consider that today,more than ever, it is critical to prepare detailed documentationand keep it readily available for the tax authorities to review,including, in many circumstances, supporting documentationproduced in foreign countries. Tax audits which in LatinAmerica are still very much home country-focused tend toextrapolate the own-country facts and documentation to reachfacts and documents cross-border. Across Latin America it isclear to see that exchange of information between countries,including between countries which have not executed doubletax treaties (but which have exchange of information agree-ments in place) is becoming more frequent as transparencyincreases more generally.Ultimately, similar regulations to the ones enacted in

Mexico and in Brazil are likely to be implemented in otherLatin American countries because transparency for tax pur-poses is definitely an international trend and the OECD isworking hard to enhance it towards OECD members andnon-members. Furthermore, two of the largest economies inthe region have already taken the first step, in such a way thatother countries are likely to follow the lead.

T P F O C U S | B R A Z I L


Navigating Brazilian transferpricing complexity

Brazil is one of themany non-membereconomies with whichthe OECD hasstrengthened itsrelationship over thelast few years, but thecountry is still far fromadopting much-neededtax policies that maycontribute to economicgrowth. Carlos Ayuband Alexandro Tinocoof Deloitte assess thecurrent environmentand look at what morecould be done toattract investment andspur growth.

A s one specific starting point, Brazil needs a standardised tax environ-ment which ensures legal certainty and is more favourable toinvestors. Multinational groups would rather invest in jurisdictions

with reasonable and certainty-providing tax practices than in a locationthat deviates greatly from international tax standards. The Brazilian economy is going through its greatest downturn since the

1990s. Against this backdrop of economic hardship, the federal governmentis losing tax revenues. History has shown that when governments are unableto collect taxes due to slow economic activities, they tend to scrutinise tax-payers’ affairs more closely. Multinational corporations engaging in multibil-lion-dollar intercompany transactions tend to be a favoured starting point. The Brazilian revenue service (Secretería da Receita Federal do Brasil;

RFB) helps the government meet aggressive budget targets, relying onhigh-end technology to do so. The RFB was one of the first tax agenciesin the world to embrace the internet as a tax compliance, monitoring andcollection tool. The RFB has approximately 3,000 agents across the country and one of

their tasks is to make sure multinational corporations engaging in inter-company transactions fully comply with the complex Brazilian transferpricing rules. For that purpose alone, the RFB created a special team of taxauditors that monitors taxpayers engaging in cross-border intercompanytransactions.Through specific compliance systems such as SISCOMEX and SIS-

COSERV, which are acronyms for big database systems controlled by theRFB, the tax authorities have full visibility of every transaction of tangiblegoods, services, and licences (either inbound or outbound) entered into bylocal taxpayers. The RFB knows whether the buyer and seller, service recip-ient and service provider, payee and payor are part of the same economicgroup, or if any of the foreign parties is located in jurisdictions Brazil con-siders to be tax havens. The RFB also monitors whether transactions areusual or typical in the industry in which taxpayers operate. In 2007, the RFB created the public bookkeeping system (SPED),

whereby taxpayers must file their invoices and digital accounting recordswith the tax authority electronically. In 2014, SPED’s scope was extendedto include the electronic filing of tax books and records. With this signifi-cant change, Brazilian corporations no longer have to file annual incometax returns. Rather, they will simply provide the RFB with their electronicaccounting and tax books (ECF), which will give the RFB full visibility oftaxpayers’ operations and taxes due. The ECF is due on the last business



day of September, and includes transfer pricing disclosureforms in which taxpayers must summarise their intercompanytransactions, transfer pricing method application, and results.Local transfer pricing rules bear little (if any) resemblance

to the transfer pricing methods available under the OECDtransfer pricing guidelines. Of the methods available for

inbound transactions, the resale price minus margin (PRL)method remains the most egregious offender. The PRLmethod went through significant changes when Brazil pub-lished new transfer pricing rules in late 2012, back when theeconomy was growing steadily. The transfer pricing rules haveproven very efficient in discouraging taxpayers from enteringinto intercompany transactions at all. When applying the PRLmethod, for example, most taxpayers end up booking transferpricing adjustments. While safe harbour rules are available foreligible outbound transactions, under the 2012 rules taxpay-ers find it hard to meet any of the available safe harbour cri-teria. Most taxpayers now need to earn a minimum return of15% when selling goods, services, or rights to foreign relatedparties.In this context, it should be noted that a significant num-

ber of multinational corporations operating in Brazil havebeen through a transfer pricing audit conducted by the RFB.Unfortunately, most of those audits resulted in an additionaltax burden through transfer pricing adjustments. Transferpricing adjustments, per se, represent double taxation. Ideally,multinational groups operating in Brazil would take into con-sideration the role local transfer pricing rules play beforeestablishing their intercompany pricing policies for Brazil. Ofcourse, external factors outside the taxpayer’s control, such asforeign exchange rates, affect transfer pricing analyses.Transfer pricing adjustments have historically been an

important source of tax revenue for the Brazilian government.A report published by the RFB in March 2014 shows thattransfer pricing assessments by the tax authorities constitutedthe second largest source of tax credits during that year. Whilein most jurisdictions multinational corporations do not expectto book transfer pricing adjustments yearly, this is not the casefor those operating in Brazil. The good news is that it is pos-sible to mitigate – and even reduce to zero – transfer pricingadjustments through proactive planning and monitoring.

Brazilian transfer pricing rulesUnlike the methods sanctioned by the OECD transfer pricingguidelines, the Brazilian transfer pricing rules follow a formu-la-based approach. Oblivious taxpayers believe they are com-pliant by simply following the application of a mathematicalformula. However, the level of detail associated with theapplication of the Brazilian transfer pricing rules is enormous.The use of Excel spreadsheets or less sophisticated softwaretypically creates more problems than solutions. As a rule, the Brazilian transfer pricing legislation calls for

the comparison of two prices: ‘practiced prices’ (the actualprices paid or received by the Brazilian taxpayer entering intointercompany transactions) and the ‘parameter prices’ (theprices derived from the application of one of the availabletransfer pricing methods). Whenever the parameter price islower than the practiced price in intercompany inbound trans-actions, the difference represents an adjustment to the

Carlos Eduardo AyubTax partner – transfer pricingDeloitte Touche Tohmatsu

R. Henri Dunant, 13834th to 12th floorSão Paulo – SP – 04709-111Tel: +55 11 5186 1227Fax: +55 11 5181 3693;

+55 11 5181 [email protected]

Carlos Ayub is a tax partner based in São Paulo, Brazil, focusedon transfer pricing advisory services.

He provides services to local, European, Asian, Latin and NorthAmerican clients operating in various industries such as automo-biles, chemicals, pharmaceuticals, and electronics, among others.

Carlos has more than 25 years of professional experience,also including accounting audit, corporate tax and transfer pric-ing services.

In 2001, Carlos Ayub was transferred to the Mexico City officeto work with transfer pricing projects under the OECD approach,matching Brazilian and international rules.

He has authored various articles on transfer pricing for rep-utable magazines, newspapers and other publications of nation-al and international circulation.

Carlos is a member of the Brazilian transfer pricing group,which has been recognised by different institutions for severalyears as among the best transfer pricing teams in Brazil.

He has been recently quoted as one of the best references intransfer pricing in the Brazilian territory by the renowned publica-tion Expert Guides.

Carlos is registered at the CRC Accounting Regional Council, aswell as being a coordinator of the tax commission for theFrench-Brazilian Chamber of Commerce and a member of thetransfer pricing technical group of the Federação das Indústriasdo Estado de São Paulo (FIESP).

Carlos holds a bachelor’s degree in accounting from theFaculdade de Ciências Econômicas de São Paulo – FundaçãoÁlvares Penteado, achieved in 1993; MBA controller – FundaçãoGetúlio Vargas (2004); and a law degree from the UniversidadePaulista (2008).

On top of his native Portuguese, Carlos speaks English andSpanish.



Brazilian tax basis. Conversely, whenever the parameter priceis higher than the practiced price in intercompany outboundtransactions, the difference represents an adjustment to theBrazilian tax basis.The Brazilian transfer pricing rules provide three methods

to analyse and document intercompany import transactionsand four methods to analyse and document intercompanyexport transactions. Two additional methods are available andmust be applied to assess transfer pricing in transactionsinvolving commodity-type products. Below, we summarisethe available transfer pricing methods.

Methods applicable to import transactionsThe three specified methods applicable to import transactionsare: • The comparable independent prices (PIC) method:Defined as the weighted average of uncontrolled prices ofsimilar goods, services, or rights as calculated in theBrazilian market or in other countries, in purchase or saletransactions carried out under similar circumstances. Theprices determined under the PIC method should be com-pared to the weighted-average intercompany price paid bythe Brazilian taxpayer for similar goods, services, or rights.Application of the PIC method depends on the taxpayer’sability to obtain and document comparable third-partytransaction prices.

• The PRL method: Defined as the weighted-average resaleprice for goods, services, or rights, minus (i) uncondition-al discounts granted; (ii) taxes and contributions levied onthe sales; (iii) commission and brokerage fees paid; and (iv)statutory gross margins that vary in accordance with thesector or activity in which the imported goods, services, orrights were applied. The statutory gross profit margins are20%, 30%, and 40%.

• The production cost plus profit (CPL) method: Defined asthe weighted-average production costs of equivalent orsimilar goods in the country of origin, increased by thetaxes and duties imposed on exports by the referred coun-try, and by a gross profit margin of 20% computed on theidentified cost base. To make the application of the CPLfeasible, foreign related parties should obtain detailedinformation regarding the production costs of the itemsimported by the Brazilian taxpayer.

Methods applicable to export transactions The four specified methods applicable to export transactionsare: • The export sales price (PVEx) method: This method is aversion of the comparable uncontrolled price (CUP)method applicable to export operations in that it requirescomparison of the average intercompany export price tothe average price charged in unrelated-party transactionsentered into by the company itself, or by another Brazilian

exporter of equivalent or similar products, under similarpayment conditions.

• The wholesale price in the country of destination minusprofit (PVA) method: The PVA is defined as the averageprice of equivalent or similar goods in sales between unrelat-ed parties in the wholesale market of the country of destina-tion, under similar payment conditions, reduced by the taxesincluded in the price and charged by the respective country,and by a gross profit margin of 15% of the wholesale price.

• The retail price in the country of destination minus profit(PVV) method: Similar to the PVA method, the PVV is

Alexandro TinocoBrazilian transfer pricingSenior managerDeloitte Touche Tohmatsu

São Paulo, SPTel: +55 11 5186 [email protected]

Alexandro, an experienced senior manager in São Paulo, isresponsible for assisting clients in the transfer pricing area.

Alexandro has been with Deloitte since 2000, when he joinedthe Brazilian firm as a direct tax trainee in the Rio de Janeirooffice. He joined Deloitte Brazil’s transfer pricing practice in 2004upon transferring to the São Paulo office. From February 2007 toMarch 2011, Alexandro worked as a manager at Deloitte SanJose, California, in the transfer pricing practice and was a mem-ber of Deloitte’s Technology, Media, and Telecommunications(TMT) Group.

Alexandro has several years of transfer pricing experience. Hehas provided hundreds of Brazilian, North American, European,and Asian companies with valuation and economic consultingservices involving mergers and acquisitions, international taxplanning, restructuring and reorganisation of international opera-tional services.

Throughout his career, Alexandro has received several top per-formance ratings and outstanding performance awards. He hasalso participated in a four-month rotation programme atDeloitte’s subsidiary in India where he provided technical trainingto local management and staff regarding international transferpricing rules. Alexandro has authored and co-authored severaltax and transfer pricing articles.

In addition to his experience in the TMT sector, Alexandro hasextensive hands-on experience in various industries, such as theautomotive, pharmaceutical, food and beverages, mining, andtransportation industries.

Alexandro holds a master’s degree in business administration(MBA) and a bachelor’s degree in accounting.


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defined as the average price of equivalent or similar goodsin sales between unrelated parties in the retail market ofthe country of destination, under similar payment condi-tions, reduced by the taxes included in the price andcharged by the respective country, and by a gross profitmargin of 30% of the price.

• The acquisition or production cost plus taxes and profit(CAP) method: Under this method, the basis for compar-ison is the average of the acquisition or production cost ofexported goods, increased by taxes and contributions paidin Brazil and by a 15% gross profit margin computed onthe aggregate of cost plus taxes and contributions.

Methods applicable to commodity-type transactions The available literature and Brazilian tax law provide littleguidance on what should be considered a commodity. In gen-eral, commodity is a term used to refer to products based onraw material or with a small degree of industrialisation, near-ly uniform quality, produced in large quantities, and by differ-ent producers. These ‘in natura’ products are usually fromvegetable or mineral origin and can be stored for a certainperiod without significant loss of quality. These products aretypically priced based on commodity exchange prices or basedon specific industry publications.The 2012 transfer pricing rules introduced two additional

methods to the existing Brazilian methods: the stockexchange import price (PCI) and the stock exchange exportprice (PECEX) methods for inbound and outbound transac-tions in commodities, respectively. Under the two methods, the basis for comparison is the

average stock exchange price for the relevant items adjustedfor any applicable upward or downward spreads. The stockprice that should be used corresponds to the average price onthe date of the transaction. In cases in which no stock priceexists for the relevant date, the analysis should be based onthe average stock price for the most recent date before thetransaction date. The PCI and PECEX are mandatory forintercompany transactions involving commodities. In otherwords, taxpayers cannot apply any of the remaining methodsto assess the reasonableness of their transfer prices.The Brazilian government provided a list of products that

qualify as commodities for transfer pricing purposes. The list failsto focus on the true nature of commodity-type products. Forinstance it includes, among several products, entire standardclassification group codes, such as industry code 76 for alumini-um. Aluminium is an important component for many industri-alised byproducts, such as soda cans. A soda can, ordinary as itis, has a significant level of technology involved in its manufac-turing process. It differs from the aluminium in natura, but forthe purposes of RFB classification it falls into the same basket. Recently, the RFB formally answered a couple of questions

posed by a taxpayer that develops, manufactures, and distrib-utes industrialised products based on iron ore, iron silicate,

calcium silicon barium, and other similar materials. The tax-payer explained the nature of its business, the level of researchand development associated with its products, as well as themanufacturing processes involved. Regardless of the taxpay-er’s arguments, the RFB concluded that its products qualify ascommodities despite the significant research and developmentand manufacturing process they go through.

What to expect in the transfer pricing area for 2015onwards?Over the last 12 months, during the downturn, the Braziliancurrency (Brazilian reais; BRL) lost approximately 55% of itsface value in relation to the US dollar. While this is good newsfor exporters, it represents a difficult situation for importersof goods, services, or intangibles such as rights. Because mostcross-border transactions are negotiated in US dollars, pur-chase costs and customs duties (when applicable) thereforeincreased. Taxpayers are unable to increase their price to cus-tomers to account for foreign exchange devaluations and cer-tain non-recoverable taxes due on inbound transactions.From a transfer pricing perspective, the application of the

PRL method will increase the chances of transfer pricingadjustments. The PRL method has historically been the mostadopted method to analyse and document intercompanyinbound transactions. This is mostly because application of thePRL method does not require taxpayers to obtain data fromforeign parties (either related or third parties). Further, underthe old transfer pricing rules (applicable until December 312012), taxpayers were able to rely on the application of thePRL method as per Law 9,959/00, which typically resulted inunwelcome but acceptable transfer pricing adjustments. Everything has changed now. The economy is in a dire state

and the new PRL formula tends to escalate transfer pricingadjustments. The table below demonstrates the role foreignexchange devaluation plays when applying the PRL method:As shown in Table 1, the purchase price in USD in August

2014 and August 2015 was set at US$100. Due to foreignexchange devaluation, the local currency price during thesame period increased from BRL 227 to BRL 352. TheCOGS [cost of goods sold] line also reflects the priceincrease. Assuming the taxpayer is unable to increase the priceto customers, application of the PRL method will generatetransfer pricing adjustments that were not due in 2014.Consider that transfer pricing adjustments are calculated atthe product level (stock-keeping unit (SKU)) and multipliedby the total quantity consumed during the year.Brazilian taxpayers should work closely with their related-

party suppliers and tax advisers to assess the applicability ofthe PIC and/or CPL methods to analyse and document theirintercompany pricing. Assuming that intercompany pricing is consistent between

controlled and uncontrolled parties, the PIC method shouldnot result in transfer pricing adjustments. The same applies to


W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 1 1

the CPL method. The CPL method allows the manufacturerto earn an overall return of up to 20%, which is generous con-sidering publicly available data for original equipment manu-facturers based in all continents. If the manufacturer of thegoods sold to a Brazilian taxpayer is part of the same econom-ic group, there is a good chance the CPL method will not

result in transfer pricing adjustments. It is important toremember that application of the CPL method requires a sig-nificant level of detail to support the foreign-party cost base.The question is, would a taxpayer rather reconsider its inter-company price policy and documentation or stick to the sameold PRL?

Table 1

PRL – Law 12.715/2012 August 2014 August 2015

(A) Imported product (FOB value in USD) 100.00 100.00

(B) Foreign exchange rate (USD to BRL) 2.27 3.52

(C) Imported product (FOB value in BRL) 227.00 352.00

(D) COGS for the finished product where the imported component is applied 500.00 625.00

(E) Net sales 600.00 600.00

Parameter price calculation

(F) Ratio (C/D) 45.40% 56.32%

(G) Basis for PRL (E×F) 272.40 337.92

(H) PRL margin (G×20%) 54.48 67.58

(I) Parameter price (G-H) 217.92 270.34

Transfer pricing adjustment

(J) Adjustment (C-I) 9.08 81.66

T P F O C U S | L A T C O


BEPS as a regional initiative

Advisers fromDeloitte LATCO(Latin AmericaCountries Organisation– a cluster that includesall countries in theregion except Brazil,Chile and Mexico)contribute to a regionalroundup of the majortransfer pricingimplications of reformsinitiated to counterbase erosion and profitshifting (BEPS).

S ince the BEPS report was issued by the Organisation for EconomicCooperation and Development (OECD) in 2013 and the subsequentpublication of the Action Plan with 15 measures, the international tax

landscape has changed dramatically. Below we provide a detail of those that according to the material of the

OECD’s July 2015 Public Consultation on Transfer Pricing Matters areconcrete actions related to transfer pricing (provisions taken mainly fromactions 8, 9, 10 and 13 of the Action Plan: • Delineation of the actual transaction, risk and recognition of the accu-rately delineated transaction;

• Commodity transactions;• TP documentation;• Intangibles including hard-to-value intangibles;• Low value-adding services; • Cost contribution arrangements;• Profit splits; and• Financial transactionsA Transfer Pricing Guidelines (TPG) amendment is expected before the

end of the year.While the countries included in this article are awaiting the final publi-

cation of those amendments, in order to take particular actions, there areprecedents of discussion on the matter at the Inter-American Centre of TaxAdministrations (CIAT).During February 2014 and 2015, two meetings were held in Colombia

and Peru that provide a framework for the changes mentioned above.It is recognised that BEPS is a global problem which is clearly affecting

the collection of domestic resources in developing countries and, as a resultof meetings specifically related to BEPS and its direct impact on transferpricing, the following issues were considered:• Preventing abusive taxation on income derived from extracting naturalresources and the analysis of legislative measures adopted by countriesin the region, among them the so-called ‘sixth method’ that is applica-ble in many countries (Action 10);

• Clarifying the tax treatment of intangibles, especially the treatment ofroyalties (Actions 8-10); and

• The convenience of a more efficient and harmonised transfer pricingdocumentation, including country-by-country reporting (CbCR),without imposing a heavy burden on companies and tax administrations(Action 13).



Considering this, it may be expected that once the changesto the TPG take place within the OECD, the countries fromthe region will consider measures in the same sense. This isreflected in the will of those countries involved in the CIATto maintain the “creation of a sustainable dialogue reportingthe BEPS debates”.

ArgentinaAs far as BEPS is concerned, in the case of Argentina, there havebeen no direct actions related specifically to transfer pricing.Nevertheless, in light of the global trend towards more

transparency in international transactions, the Argentineantax authority, AFIP, started to intensify tax controls on anytransaction that would be linked to harmful tax planningobjectives (in line with BEPS project actions). As a consequence of that, AFIP issued a series of standards

(from January 2014) that have been influenced by the inter-national framework described above and which have an indi-rect impact on transfer pricing:• AFIP, through General Ruling (GR) 3572, set up the‘Record of related parties’ for taxpayers residing in thecountry. This registry, as we described in the last edition ofthis guide, is an information regime by which taxpayersmust record all international and domestic related parties.This standard has been seen by the market as a pre-BEPSframework in connection with Action 13 where this reg-istry could be used in the near future to provide informa-tion on CbCR.

• GR 3577 established a new customs income tax collectionat source. This regime is applicable for export transactionsinvolving all type of products that qualify as a ‘triangula-tion’ (certain sales of goods where three different countriesare involved in the supply chain). The final impact of thisregime consists of a payment in advance of the annualincome tax return for taxpayers.The scheme is applicable to final export transactions forconsumption, provided that the destination countries forthe goods differ from countries or jurisdictions where theforeign person invoiced as a consequence of these transac-tions has its registered office (triangulation scheme). The tax rate to determine the amount of the payment forincome tax purposes is 0.5% on the taxable value definedin the customs duties assessment. If the client is domiciledin a jurisdiction deemed to be non-cooperating for fiscaltransparency purposes, the collection rate will increase to2.0% on the free on board (FOB) value. The CustomsAdministration serves as the collection agent at source.It should be pointed out that this GR makes express men-tion of the BEPS report as well as the OECD ‘DraftHandbook on Transfer Pricing Risk Assessment’ in its pre-amble.

• GR 3576 reflects the list of cooperating countries and/orjurisdictions as it stands for fiscal year 2014.

Applicability of the GR to transfer pricing: Over the lastfew years, there has been a change in the qualification ofwhat Argentina considered, for income tax purposes, a taxhaven or a low or nil taxation country in Argentina.In 2011, Argentina became part of the “Convention onMutual Administrative Assistance in Tax Matters, wherebycountries that are not members to any international organ-ization may adhere to the Convention, in line with the

Horacio DinicePartner, international tax and transferpricingDeloitte Argentina

Buenos AiresTel: +54 11 4321 3002Fax: +54 11 4320 4066Mobile: +54 9 11 [email protected]

Horacio Dinice is a tax partner at Deloitte Argentina. He hasengaged mainly in international tax consulting and transfer pric-ing matters. His experience covers a wide range of industries,but has been centred on the pharmaceutical sector for manyyears.

Horacio is in charge of the transfer pricing practice in BuenosAires & LATCO; he is one of the partners responsible for the inter-national tax area; and his experience encompasses advisingmultinational corporations on the tax implications of cross-borderacquisitions and transactions, and the establishment of foreignoperations in countries of the Latin American region (particularlyArgentina, Bolivia, Paraguay and Uruguay).

His projects include being the lead partner on more than 100documentation studies per year; providing advisory services forthe international or regional reorganisation of various clients;specialising in cross-border structuring for Argentinean and LatinAmerican companies; participating in various mergers and acqui-sitions in Argentina; developing linked regional cross-border taxplanning and transfer pricing solutions; and participating in vari-ous regional and global transfer pricing projects.

Horacio has been a professor of tax at the University ofBuenos Aires (1986-1992) and CEMA (2006-2015). He is a fre-quent speaker at conferences focusing on tax and transfer pricingissues and is a member of the AAEF (IFA member) and a partici-pant of the Transfer Pricing Commission as well as participating intechnical meetings on the improvement of professional develop-ment in other countries and dictating advanced training courses.He has also authored articles in international tax publications.

Horacio is a certified public accountant, having graduated fromthe School of Economic Sciences at the University of BuenosAires in 1986.



G20 mandate which is to create a framework of interna-tional cooperation through multilateral exchange of infor-mation (EoI) instruments. In other words, our countrymay have access to tax information from countries that donot have bilateral agreements with Argentina in place.With this in mind, AFIP has decided to give high impor-tance to EoI among countries in case of tax audits.According to this new point of view, a country that doesnot have a tax information exchange agreement (TIEA) or

a double tax avoidance treaty (DTT) with Argentina isconsidered non-cooperating and as a consequence of thatis included in what was previously the list of tax havens orlow or nil taxation countries for income tax purposes. Inthis respect, more regulatory requirements and EoIregimes are to be expected in the future.Transfer pricing legislation considers, as part of the relatedparty definition, those that reside in a non-cooperatingcountry. Therefore those transactions carried out withcountries not included in GR 3576 will be considered relat-ed and subsequently subject to transfer pricing analysis.

BoliviaTransfer pricing regulations were completed and entered intoforce earlier this year.Resident companies should comply with the standard

depending on the year closing date. In this country, this datedepends on the activity carried out by companies and couldbe: December, March, June and September. According tothis, transfer pricing regulations could be in force fromJanuary, April, July 2015 and October 2014, respectively,depending on the closing year-end.

Silvana BlancoTransfer pricing partnerDeloitte Argentina

Florida 234, Floor 5Ciudad Autonoma de BuenosBuenos Aires C1005AAFTel: +54 11 4320 [email protected]

Silvana Blanco is a partner in the transfer pricing service team ofDeloitte Argentina. She has been working within the transfer pric-ing department since its inception. Since the beginning of theapplication of transfer pricing standards in Argentina, Silvana hasparticipated actively with the tax administration officers.

She has more than 15 years of experience in the applicationof tax, economic and financial criteria in transfer pricing, valua-tion analysis of intangibles, planning, business model optimiza-tion (BMO), structuring and economic consulting. Silvana has alarge experience in fields such as the coordination of multi-coun-try transfer pricing assignments for multinational groups, optimi-sation of the tax burden, and information requests posed by taxauthorities in major industries such as the automotive industry,the oil seeds industry and the pharmaceutical industry.

She has actively participated as a speaker in seminars andconferences at ‘Bolsa de Cereales de Buenos Aires’, ‘ConsejoProfesional de Ciencias Económicas de la Capital Federal’, ‘Bolsade Comercio de Rosario’, and ‘Asociación Argentina de EstudiosFiscales’, among others.

Silvana has written many articles in newspapers and local tax-specialised publications such as Ámbito Financiero, ColecciónErrepar, Buenos Aires Herald, World Trade Executive, and others.She is the co-author of ‘Manual de Precios de Transferencia enArgentina’ (published by La Ley in 2007).

Silvana Blanco graduated as a certified public accountant atSalvador University and holds a master’s degree in strategic busi-ness administration and marketing from ‘Universidad de CienciasEmpresariales y Sociales’ (UCES).

She is a member of the AAEF (IFA member) and is part of theassociation’s transfer pricing commission.

José Erney Guarín AlvaradoTransfer pricing partnerDeloitte Colombia

BogotáTel: +57 1 426 [email protected]

José Erney Guarín is a partner of the transfer pricing division ofDeloitte in Colombia. He has more than 10 years of experiencein the sectors of manufacturing, public utilities, services andclubs, oil and gas. His professional experience has included par-ticipating in, and supervising, various engagements such as: taxplanning; tax diagnosis; due diligence; tax outsourcing; andreview and preparation of individual and corporate tax returns.

He is a public accountant, having qualified at the Universidaddel Valle and participates in various courses and seminars,including: an international course for seniors at the training cen-tre in Chicago; a course in Miami on section 404 of theSarbanes-Oxley Act; training on the different types of taxes(income, VAT, withholdings, industry and commerce), held inBogota; training for the development of administrative abilities(time management, teamwork, efficient writing), and for the inte-gral inflation adjustments, also in Bogota; and analysis of taxprocesses and procedures, in Cali.

Jose Erney Guarin speaks English and Spanish.



Among the main differences between Bolivian legislationand legislation in other LATCO countries are the followingprovisions:• Scope of related party: ownership (being part of a multina-tional group or not) and tax havens are included.Economic relationship (exclusive distribution agreement)is not considered. In the case of ownership and its applica-tion to natural persons, to determine the extent of the rela-tionship, the ‘fourth degree of consanguinity and secondof affinity’ concept is applicable.

• The same transfer pricing methods as included in OECDTPG are considered. Similar to other countries across theregion, a specific method is applicable for commoditytransactions (Método del Precio Notorio en Transacciones enMercados Transparentes).

• Regarding compliance, materiality criteria are used to pre-pare the study and its subsequent filing with the taxauthorities (depending on the total amount of transactionswith related parties).

• The manner in which the interquartile range is calculateddiffers from the way it is done in countries elsewhere in theregion with similar legislation.

Costa RicaCosta Rica’s tax administration is increasingly placing greateremphasis on the transfer pricing analysis as an integral part ofits tax audits. Since year 2003 according to the 20-03 rule, the Costa

Rica tax administration has the possibility of questioning andanalysing the prices between related parties, to determine ifthe prices can be considered as market prices. It wasn’t untilthe publication of the Decree No 37898-H, in September2013, that the tax administration started to consistentlyreview the transactions between related parties using OECDmethodologies and guidelines.So far, only a few of the cases are being discussed in trials,

but the information requirements in every tax audit regardingrelated parties transactions and transfer pricing, are increasingexponentially. The preferred method of the Costa Rica taxadministration to date has been the CUP method, and forcompanies with operating losses the tax administration isbeginning to use the transactional net margin method(TNMM).

Alonso Erak VargasTax services manager /Transfer pricing leaderDeloitte Costa Rica

San JoséTel: +506 2246 [email protected]

Alonso is a manager in the tax services department and leaderof the transfer pricing practice at Deloitte Costa Rica, with morethan 12 years of experience in tax consultancy, including localand international tax planning, tax complience, due dilligence,restructuring proposals, tax litigation, intangibles valuation andtransfer pricing studies.

Before joining Deloitte, Alonso worked as manager of otherinternational tax consultancy fims, and was a leader in local andinterntational tax and audit projects.

Alonso has been tax professor of the Costa Rica CertifiedPublic Accountants Institute. He is a certified public accountant(CPA) and holds a master´s degree in tax advisory.

Richard TroncosoDirector partner and tax partner Deloitte Dominican Republic

Tel: +809 563 [email protected]

Richard Troncoso is in charge of the Dominican Republic practiceand of the office’s tax advisory services. He has more than 14years of experience participating and leading fiscal strategies andtax planning projects for local and international companies fromdifferent industries. He also provides tax advice related to specialprojects regarding mergers and acquisitions, due diligences andtax appeals, among others.

Richard also provides assistance to the financial audit servicesarea and other Deloitte offices, advice to multinationals onissues related to international transactions, fiscal strategies andfiscal minimisation projects. Richard has been part of differentprofessional training and updating programmes related to varioustax issues.

Richard is a member of the Instituto de Contadores PúblicosAutorizado de la República Dominicana; is a certified publicaccountant; holds a master’s degree in tax administration andpublic estate; completed postgraduate studies in financialadministration and in control and tax planning.

Throughout his professional career, Richard has worked withthe following clients, among others: due diligence financial insti-tutions, Asociación Popular de Ahorros y Prestamos, JamaicaMoney Market Brokers-DR, Banco ADOPEM, Banco Promerica-RD,Scotiacrecer AFP, Domicem, Banco de Ahorro de Crédito Unión,Kimberly Clark Dominican Republic, Generadora Palamara LaVega, ChevronTexaco, and Monte Rio Power Corporation.



Costa Rica’s ordinary fiscal year 2015 is about to end onSeptember 30, and this will be the second fiscal year since theimplementation of the transfer pricing rules. No majorchanges have occurred since the publication of the decreeregarding the rules, but a major increase in tax reviews, and intax collection using transfer pricing methods, is alreadybecoming evident.

El SalvadorTax authorities have marked an aggressive position regardingtheir audit procedures as an alternative source of tax collection.In April 2015, the tax administration published a report –‘Information of debtors of the state’ which was made publiclyavailable. This report presents audit resolutions to taxpayers thathave been under audit procedures initiated by the tax adminis-tration, which are in the administrative and judicial phase. It alsoincludes six resolutions issued for income tax adjustments basedon transfer pricing rules. This action triggered demands to thetax administration that have not yet been resolved.It�s worth mentioning that although El Salvador is not a

member country of the OECD, in the last reform of theSalvadorian Tax Code in June 2014, the tax legislation wasextended to include the use of the OECD’s transfer pricingmethodologies and technical procedures.On the other hand, in June 2015, El Salvador joined the

group of signatory states of the Multilateral Convention onMutual Administrative Assistance in Tax Matters, promotedby the OECD and the G20, pending its entry into force viathe corresponding legislative process. This instrument is intended to be the suitable tool to sup-

port the implementation of the country-by-country report forautomatic exchange of tax information (AEoI), included inthe G20/OECD BEPS project.For its part, the tax administration actively participates in

initiatives of the Latin American region promoted by theOECD and the G20 as part of the plan to support the strate-gy for deepening the participation of developing countries inthe BEPS project.

GuatemalaAfter being suspended for a year, transfer pricing rules tookeffect again on January 2015. The tax authority made theofficial criteria clear in the sense that the suspension was onlyfor 2014; therefore the taxpayer should have a TP study for2013 and 2015 on. For fiscal year 2015 the income tax return is expected to

require an informative annex to be filled with informationabout cross-border related party transactions.Despite the fact that the rules were not in force in 2014,

since June 2014 the tax authority has been requiring taxpay-ers to provide information on their transfer pricing situationfor the 2013 period. This information was to be sent in anelectronic form. This form included information require-

ments about shareholders, related parties and the conditionsthat were met to be considered a related party, transactionsperformed with related parties, amounts involved, SIC [stan-dard industrial classification] codes and transfer pricing meth-ods applied.Also, in respect to 2013, only taxpayers from the agricul-

tural sector have been initially required to file the 2013 TPstudy to the tax authority within 20 business days. Taxpayersfrom this sector remain under audit and no tax assessmentshave been made yet. It is expected that the initial objective ofthe tax authority is to validate export prices for commoditiesagainst prices in transparent international markets. Finally, in the second semester of 2015, it has been publi-

cised by the media that the tax authority is suffering an insti-tutional crisis derived from corruption acts linked to taxavoidance in import operations. This crisis produces uncer-tainty about how TP audits and tax audits in general will beoriented in the near future.

ParaguayA transfer pricing complementary regulation entered intoforce during 2014. The regulation introduces some clarifica-

Byron MartinezTransfer pricing partner Deloitte Guatemala

5 Avenida 5-55 zona 14, EuroplazaTorre IV, Nivel 8Guatemala 01014Tel/Direct +502 2384 [email protected] www.deloitte.com/gt

Byron Martinez is the leader of Deloitte Guatemala’s transfer pric-ing practice. In addition, he is the tax risk leader for DeloitteLATCO, the cluster organisation comprising 15 Latin Americacountries.

With the first time adoption of transfer pricing regulations byGuatemala in 2012, Byron took charge of developing the DeloitteGuatemala transfer pricing practice. Along his 25-year practice asa tax and transfer pricing consultant, his industry experience hascovered: banking and finance, consumer business (retail, foodand beverages, pharmaceutical, among others) oil and gas, utili-ties, telecommunications, services, manufacturing, transportation,real estate, exporting and free trade zones.

Byron has published numerous articles on transfer pricing andfrequently speaks on transfer pricing issues.

He holds a public accountant and auditor degree from theUniversidad Rafael Landivar and a master’s degree in financefrom Universidad Galileo, both in Guatemala City.



tions regarding how the price adjustment of the exports of theagricultural commodities have to be done, including thedeductible costs (that is, port services, quality control, insur-ance and freight).The changes also introduced the requirement of an annu-

al external tax audit report which must be filed by taxpayers.The report must include the reasonability of the value of100% of the goods exported during the reviewed period.Fiscal authorities also established the due date for ‘Price

Adjustment Informative Return’ due dates. The fiscal year2014 must be filed in August 2015, the first semester of fis-cal year 2015 is September 2015, and the next returns in a bi-monthly timeframe considering the effective date of theexport.

PanamaUntil June 2014, the Panamanian tax authority (DGI) main-tained a rather passive position regarding the verification ofcompliance with transfer pricing rules; with this being thedate when they began to require the supporting documenta-tion of operations held by taxpayers with related parties. Fromthese requests, the first formal audit processes arose, which

gave way to the first scope on the matter, a case that is underdiscussion in the Administrative Court.In these audit processes, DGI has adopted specific criteria

for the analysis of transfer pricing, among which are: • Rejection of comparables not belonging to the Americancontinent;

• Rejection of comparable companies with losses or lowprofitability;

• Rejection of the use of average financial information by thetaxpayer;

• Use of segmented information;• Inquiry about the application of working capital adjust-ments;

• Requiring adjustments for differences in geographic mar-kets; and

• Rejection of qualitative arguments to justify the sense offinancial losses.Regarding fiscal year 2015, the DGI has publicly stated its

intention to intensify the process of reviewing compliance

Rita Maria SilvaCountry managing partnerDeloitte Honduras


Rita Maria Silva is the country managing partner, specialising incross-border tax planning for multinational corporations.

She has more than 19 years of experience in various tax serv-ices, including: international M&A restructurings; supply chainoptimisation; cross-border planning; effective tax rate planning;and foreign earnings repatriation techniques. She has been aninternational consultant for tax matters for the Inter-AmericanDevelopment Bank, as the Honduras counterpart.

Rita Maria holds a law degree from the Universidad NacionalAutonoma de Honduras with specialisation in business law. Sheholds a master’s degree in international relations from OhioUniversity USA and is a former Fulbright scholar, as well as hold-ing qualifications in business administration from UniversidadeFederal do Parana Brazil, and in tax administration fromUniversidade Castilla La Mancha Spain.

Rita Maria has written articles for specialist publications andhas participated in various seminars, including on internationalfraud at Internal Revenue Services (IRS), Glynco Georgia USA.

Daniel Fariña Paraguay tax partnerDeloitte Paraguay


Daniel has served international firms such as Dow Agro SciencesParaguay, Kimberly-Clark, Cervepar, Automovil Suppy, CCRParaguay, PepsiCo Del Paraguay, Agro silos El Productor, CompañíaDekalpar, and Fujikura Automotive.

His clients include BBVA, Banco Itau Paraguay, Regional BankSAECA, Banco Amambay, La Blanca, Sumidenso Paraguay, SanofiAventis Paraguay and UABL Paraguay, among others.

Daniel has worked with tax consulting for the past 12 years,supervising work for clients in various sectors, such as financial,commercial and agribusiness.

He has developed projects related to corporate and personaltax consulting, processing of the foreign inversion and payments,calculation of the corporate income tax and VAT, recovery of VATrelated to exports and annual tax returns.

Daniel now directs tax teams as partner, participating in theplanning, development and conclusion of works for local andinternational clients.

Daniel is a member of the executive committee and of the taxcommittee of the Council of Paraguayan Professional Accountantsand is also a member of the Paraguayan Institute of FiscalStudies.



with the transfer pricing rules. Therefore, it is expected thatnew audit processes and reports requests will be initiated.These audits would be focused primarily on taxpayersengaged in providing non-financial services andmarketing/distribution operations; the main elements attract-ing attention for DGI would be: operating losses, significantdecline in profitability compared with the previous fiscal yearand breaches or inconsistencies in the transfer pricing inform-ative report.Additionally, during 2015 it has been unofficially reported

(off-the–record) that DGI (Panamanian tax authorities) mayamend the criteria according to which it had considered thatcompanies established in tax-free areas are not subject totransfer pricing regulations.The transfer pricing system seeks to increase tax collection,

preventing taxpayers from intentionally manipulating theprice of transactions agreed upon with related companies out-side Panama, to the detriment of qualifying taxable income.Thus far, it would seem to be clear that companies establishedin tax-free zones or with transactions under special regimes(not subject to income tax), should not be subject to compli-ance with the transfer pricing requirements, because no tax-able income is generated in the national territory.The concern arises in the context of the supplementary tax

that is automatically calculated upon uploading the incometax return to the tax authority website based on the incomefor the period.In such connection, past tax authorities pointed out in a

written consultation about the applicability of these stan-dards that such taxpayers, because they are only located intax-free areas, act “as mere income tax withholding agentsfor dividends […] and therefore, transfer pricing rules donot apply to them for transactions carried out betweenrelated parties”.However, in a recently held forum, officials from the cur-

rent administration pointed out that such position would bereviewed and that it may be amended in the near future. As aconsequence of this situation, as far as the changes may takeplace, taxpayers would be required to file an informative taxreturn (Form 930) and to prepare the transfer pricing studyfor the tax period ending December 31 2014.

PeruAccording to the International Taxation and Transfer PricingOffice of the Peruvian tax administration (SUNAT), taxauthorities have been applying a detailed procedure to identi-fy which cases should be subject to a transfer pricing audit.First of all, tax authorities perform a quantitative analysis

based on information provided by taxpayers on an annualbasis (every June), when they submit the transfer pricinginformative return to SUNAT. Afterwards, a risk assessment ismade through a review of the transfer pricing report (TPR)and information from databases available to SUNAT. This risk

Gloria GuevaraTransfer pricing partnerDeloitte Peru

LimaTel: +51 (1) 211 [email protected]

Gloria Guevara is a partner responsible for the transfer pricingpractice in Deloitte Perú. Gloria has more than 13 years of expe-rience with Deloitte, during which time she has advised multina-tional companies and key local groups operating in diverseindustries such as: mining, oil and gas, energy, manufacturing,pharmaceutical, consumer business and telecom, media andtechnology (TMT), among others.

Gloria has extensive experience advising her clients on strate-gic planning design and transfer pricing policies. She has activelyparticipated in high level complex transfer pricing issues (valua-tion of intangibles, valuation of mining properties, damages valu-ation and residual profit split application), as well as diverseaudit defences in this field.

She is currently advising and representing one of the firm’smain clients in the telecom industry for the negotiation of anadvance pricing agreement (APA) with the National TaxAdministration (probably the first one to be signed in the country).

Her experience includes advising strategic clients from mining,telecom and media industries on audit defence, transfer pricingplanning for shared service centres and intangible valuation forhigh level complex operations related to business restructuring forclients in the consumer business, mining, and TMT industries.

Gloria is also the TMT industry leader at Deloitte Peru. In thisrole, she is responsible for coordinating and promoting all theservices that the firm can offer to current and potential clients inthe TMT sector. Her responsibilities also extend to coordinationwith the regional and global TMT leaders to better serve ourglobal TMT clients.

Gloria qualified from the Universidad Adolfo Ibáñez in Chile andwas an executive MBA candidate, class of 2016. She also holds adegree in economics (from July 2006) from Pontificia UniversidadCatólica del Perú, graduating with the highest score of the gradu-ation class, as well as a postgraduate degree in business eco-nomic management (December 2004) from Universidad de Limain Perú and a social sciences degree with a major in economicsfrom Pontificia Universidad Católica del Perú (1998-2002).

Gloria is a frequent speaker on transfer pricing seminars at dif-ferent renowned universities, at trainings organised by theNational Tax Administration, and at events organised by Deloitteand other tax organisations, as well authoring various articles ontransfer pricing.



assessment could imply a request of additional informationand, sometimes, technical meetings with taxpayers to clarifycertain technical issues. Once SUNAT confirms whether ataxpayer should be audited, they initiate a procedure in whichtax authorities thoroughly review all the additional documen-tation requested from the taxpayer; perform visits and indus-try comparisons; and so on.It is worth mentioning that audit processes undertaken by

SUNAT have significantly increased over the last year. In fact,most of the companies considered as ‘main taxpayers’ bySUNAT have already been, or are now being, audited ontransfer pricing matters. Fiscal years subject to review are pri-marily 2009, 2010 and 2011 and the main topics include: • Selection of the transfer pricing methodology;• Application of comparable uncontrolled price (CUP)method in certain industries (commodities in particular);

• Use of the interquartile range when applying the CUPmethod;

• Review of service operations received from foreign relatedparties;

• Criteria to apply when performing the TNMM;• One of the main issues on which SUNAT has focused inrecent examination processes is the documentation of costsand expenses allocated on services received by taxpayersfrom foreign related parties. For this purpose SUNAT hasrequested segmented financial information of the non-domiciled company (the service provider);

• SUNAT has also focused on companies that have madecomparability adjustments in the application of the transferpricing methods. In those cases, SUNAT has shown areluctant position to accept the different comparabilityadjustments that may have been performed in the TPRs;and

• Another important matter, in which SUNAT has not yettaken a definitive standpoint, is the use of audited financialstatements (financial statements presented in the function-al currency of the company) to calculate the profit levelindicator (PLI) used in the application of the TNMM. Insome audits, SUNAT has calculated PLIs using financialinformation provided in the income tax return, which isalways in local currency (Nuevos Soles). This could lead toa significant distortion of the operating margin of taxpay-ers whose functional currency is the US dollar. The effectsof exchange rate variation on the booking of manyaccounts of the financial statements can imply that PLIscalculated using financial statements in local currency dif-fer from PLIs calculated with the financial statements inthe functional currency (US dollar).Simultaneously, some negotiation processes for subscrib-

ing advance pricing agreements (APA) have been graduallyinitiated. As part of these processes, some preliminary meet-ings between taxpayers and the tax administration have beenheld. Furthermore, some APA proposals have already been

submitted to SUNAT, and are now under evaluation by thetransfer pricing team in charge of APAs. SUNAT is actively participating in several international

events related to BEPS. SUNAT has participated in theseevents and has shown particular interest in Actions 4, 8, 9 and10 and 13, which are expected to generate the greatest impacton the country. Likewise, important issues that have beenmentioned in connection with this are: documentation, lackof comparability and need for Latin American regional data-bases, tax incentives, and commodities. In particular, asregards to commodities, SUNAT has mentioned the possibil-ity of developing a database of agreements which would con-tain the conditions of the settlement of commodities prices,shipment dates, among others.

VenezuelaBefore 2006, the tax administration (SENIAT) began torequest the documentation on transfer pricing from certaintaxpayers without issuing any pronouncement in this regard.This process consisted of the express request of the informa-tion contained in Article 169 of the Income Tax Law for thepurposes of verifying taxpayer compliance with formal obliga-tions on this matter. These formal obligations include, amongothers: • A list of fixed assets used in the production of income; • Risks involved in the activities carried out by the entity; • Organisational chart;• Information on operations carried out with related parties;and

• Financial statements.The automotive sector was the first industrial sector

reviewed. In 2006, the first Assessment Certificate on transfer pric-

ing matters was notified to an oil company. In other words,the first formal procedure as a consequence of a tax audit wasopened in this field. Since 2006 SENIAT began to focus on the review of

functional and economic analysis included in transfer pric-ing studies, as well as pricing policies with their foreignrelated parties in comparison with the financial results frompeer companies.Under the practice of recent years, after receiving a writ

objection, taxpayers file a notice of disclaimer. Once SENIATanswers and makes the resolution of the indictment (it has atwo-year term) taxpayers have two possible options:• Agree on the adjustment determined by the administra-tion; or

• Continue with the defence process (that is, by pursuing thenext administrative stage – hierarchical appeal).In conclusion, although the fines for non-compliance with

formal obligations for transfer pricing are considered low, thereview of formal obligations represents the first step beforebeginning a thorough audit by the tax administration.



It can be observed that the SENIAT is actively participat-ing in audits of multinational companies. In tax reviews con-ducted during the most recent years we can observe that theirpurpose extends beyond the type of traditional reviews con-ducted in the past, as is evidenced by the review of compliancewith formal obligations in this matter.Transfer pricing is undeniably a fundamental and very sig-

nificant issue from a tax efficiency and a tax compliance per-spective, both for taxpayers and tax administrations as itdetermines the taxable income of related companies withinthe different jurisdictions where entities operate or generateincome.As with most international regimes, transfer pricing

becomes more complex as it involves more than one jurisdic-tion, and therefore, in case of an adjustment in one jurisdic-tion the effect generated should be considered with thejurisdiction with which the transaction was carried out.

Iliana SalcedoTransfer pricing partnerDeloitte Venezuela

CaracasTel: +58 212 206 [email protected]

Iliana is a partner in the tax department at Deloitte Venezuela,with more than 16 years of experience providing tax technicaladvisory in transfer pricing matters.

She has provided consulting services on a variety of tax andtransfer pricing matters, including preparation and review oftransfer pricing documentation in different industry sectorsincluding automotive, pharmaceutical, basic materials, mining,chemicals, and services, among others.

She has been actively involved in the development of projectsfor documenting and designing transfer pricing policies, strate-gies and structures for multinational groups.

She holds a master’s degree in tax from the MetropolitanUniversity of Venezuela, is a graduate in accounting and is a cer-tified public accountant (CPA).

T P F O C U S | M E X I C O


Doing business in Mexico:MNE complexity and its effectson the local TP environmentSimón Somohano andEduardo CamposMartínez of DeloitteMexico assess thetransfer pricinglandscape in Mexico,taking into accountrecent national reformsand the incomingimpact of themultilateral discussionson base erosion andprofit shifting (BEPS).

S ince President Enrique Peña Nieto’s administration took office inMexico in 2012, the need to perform key structural reforms wasdefined as one of the priorities in the new government’s agenda.

Among such structural overhauls, the tax changes were expected to consti-tute one of the most important reforms in decades.

The Mexican Congress finally approved the long-awaited tax reformpackage in 2013 and it became effective on January 1 2014. The taxreform is broad and covered practically every single tax and tax-relatedaspect in the fiscal regulations, from increasing the top bracket of person-al income tax rates (to 35%) to BEPS-inspired anti-abuse legislation, tonew special excise taxes on carbonated soft drinks and high-calories snacks.Initially, it appeared that the tax reform would also addressed the muchneeded changes and clarifications to local transfer pricing rules.Practitioners, taxpayers and tax authorities have discussed the necessity ofamending the existing transfer pricing legal framework mainly because ofits high degree of uncertainty when applied to the business models ofmultinational enterprises (MNEs) operating in Mexico. Several proposalsto enhance the transfer pricing regime were submitted by business organ-isations and professional associations. But sadly, Mexican tax authoritiesand legislators missed this opportunity to revamp the local transfer pricingregime in order to face the upcoming challenges that the BEPS initiativewill bring to taxpayers and tax authorities alike [for further reading on this,read Deloitte’s insights on ‘BEPS in Mexico: Transfer pricing challengesfor taxpayers and tax authorities’ in 2014’s ‘Latin America: Spotlight ontransfer pricing issues’, published by International Tax Review].

However, the tax reform introduced changes affecting transfer pricing,both directly and indirectly. The most relevant include: (1) the elimina-tion of the Annual Statutory Tax Return for certain taxpayers that wereobliged to file this in the past – which include two detailed annexes specif-ically for transfer pricing matters and two questionnaires, one for the tax-payer and another for the external auditor; (2) a new informative returnon relevant transactions (Form 76) – including a section for transfer pric-ing issues; (3) a new annex 9 of the special tax return (DeclaraciónInformativa Múltiple) with an extended number of questions andrequests regarding intercompany transactions carried out with foreignrelated parties – which might look to summarise the documentationreport; and (4) the Maquiladora regime returned to the original compli-ance options – where taxpayers can request an advance pricing agreement(APA) or apply the safe harbour rules.



The Mexican transfer pricing environment is in a maturestage, but is also becoming a complex, time-consuming andmoney-intensive issue for MNEs when doing business inMexico. Aside from the fiscal core purposes of transfer pric-ing, other financial regulatory local agencies seem to be inter-ested in applying transfer pricing regulations for non-taxpurposes. As an example of the expanding focus on transferpricing from regulators other than the tax authorities, in2013, Mexico’s Central Bank – Banco de México (Banxico) –issued a rule requesting all banking institutions to preparetransfer pricing documentation that should be filed beforeselling portfolios of loans when their market value surpassescertain thresholds.

Mexico’s National Insurance and Surety BondCommission (CNSF) requests entities subject to its regula-tion to prepare specific transfer pricing documentation beforeperforming “relevant” intercompany transactions. The finan-cial markets and stock market regulator, the National Bankingand Securities Commission (CNBV) and the NationalCommission for the Pension System (CONSAR) also requestthat certain financial institutions file their full transfer pricingdocumentation studies on an annual basis. For this last case,certain transfer pricing reviews are already underway, mainlyfor years between 2011 and 2014. Although their superviso-ry staff ’s expertise and knowledge regarding transfer pricingtopics is still in progress, they do have strong knowledge offinancial institutions and markets and it is expected to increasetheir reviews and assessments for the following years, mainlyfocusing in certain financial derivatives transactions, debtswaps, and inter-banking loans between related parties.

The new Maquiladora regime for income tax purposes,which is designed to protect the Maquiladora’s parent com-pany from a permanent establishment characterisation, is alsouncertain. The Maquiladora industry seems to be applyingfor APAs, although – as also applied to all the aforementionedtransfer pricing local regulations – guidance is very limitedand the tax authorities, particularly the Tax AdministrationService (SAT) is still in the process of establishing an actionplan to process the large number of requests (more than 650)in order to limit the information requests to data and infor-mation that is relevant to the economic analysis of each case.While there is an expectation that the first APAs would beissued at the end of 2015 or early 2016, it is unclear for manyMaquiladoras – particularly for small and mid-size companieswith limited resources to process large amount of data that isfrequently requested by the SAT– how much time this nego-tiation would take.

Transfer pricing is now of great relevance in Mexico, notonly for fiscal compliance purposes, but also because its appli-cation is spreading to other fields, even if it is not entirelyclear what the purpose, benefits or effectiveness from a regu-latory standpoint will be. It seems like several governmentagencies are convinced of the positive regulatory effects of the

application of the arm’s-length principle to protect minorityinvestors and the public in general, but none of them is actu-ally applying their inspection powers properly. On the otherhand, it is not uncommon that taxpayers feel confused with allthese transfer pricing related compliance documentationrequirements; costs are increasing and practitioners are nowstarting to be deeply specialised in certain industries.

MNEs doing business in Mexico During the last few years, Mexico gained international atten-tion because of its relatively high economic growth andmacroeconomic stability. The country managed to be one ofthe emerging economies that came out of the 2008-2009global financial crisis relatively unscathed.

Since the mid-1990s, Mexico has opened its economy toadapt to the globalisation trend and is now a major player inglobal business. Recently, some specific industries have shownremarkably strong growth, including the automotive, aero-space and energy industries – this last one derived from thereforms opening up the oil and gas industry to private invest-ment and offering international-level terms and conditions topublic-private partnerships.

This new economic outlook is yielding complicated busi-ness structures not precisely designed to fit traditional trans-fer pricing arrangements, but rather operating according tothe competitive challenges of the modern international tradeand investments flows. To be more aligned with other coun-tries that follow the OECD Transfer Pricing Guidelines forMultinational Enterprises and Tax Administrations (OECDGuidelines) and to increase the country’s competitivenessfrom a tax point of view, in 2014 the Mexican Supreme Courtissued a landmark ruling that expenses incurred on a pro ratabasis with non-residents may be deductible if some require-ments are met, despite a provision in the Mexican Income TaxLaw (MITL) that specifically disallows the deductibility ofsuch expenses. This interpretation is consistent with currentinternational practices and shows that the tax authoritiesurgently need to understand that the complexity of businessin Mexico is increasing and that, therefore, they should stayaway from key interpretations on common matters such ascorporate services rendered between MNEs.

Under the new regulations, the MITL provision disallow-ing the deduction of shared expenses with non-residents willnot apply if a Mexican taxpayer complies with the require-ments set forth in the regulations. In addition to the generaldeductibility requirements included in the regulations (theexpenses must be essential for the company to carry out itsbusiness activities; there must be a justifiable connectionbetween the expenses incurred and the benefit received, orexpected to be received, by the company; if the expenses wereincurred between related parties, the taxpayer must demon-strate that the allocation was agreed upon at arm’s-lengthterms, and so on), transfer pricing documentation must be



maintained for pro-rated expense transactions between relat-ed parties on contemporaneous basis.

Although this ruling was welcomed by taxpayers and prac-titioners, there are new business structures with more com-plex issues that will arise in the following years whenassessments are performed on the present fiscal years and thesophistication from the tax authorities will be crucial for per-forming the right questions and solving controversies.

Derived from the changes to the Maquiladora regime forpurposes of MITL, many taxpayers had to rapidly adapt to thenew rules for avoiding any risks of non-compliance. Suchchanges had to be made because many MNEs were operatingunder several hybrid models (for example, manufacturing andthen both exporting and selling locally; or establishing anadditional legal entity for performing distributor or serviceactivities). After restructuring operations, taxpayers shouldopt to apply the safe harbour rates (6.5% on total manufactur-ing costs and 6.9% of total operating assets, including foreign-owned machinery and equipment (M&E) and inventory) orthey should apply for an advance pricing agreement (APA).The guidance for the APA process is not clear, but there is animportant interaction between the business representatives,particularly between the National Export Manufacturing andMaquiladora Industry Council (INDEX) representing theMaquiladora industry, the tax authorities and practitioners.This interaction is driven mainly because of the high numberof companies operating under this Maquiladora regime inMexico and it is an important process that helped to file alarge number of APAs.

Energy reformThe energy reform also entered into action also during 2014,adding more changes and complexity to the business environ-ment in Mexico. The liberalisation of the energy sectorbecame one of the most controversial reforms probably of thelast 50 years in Mexico. Once the amendments to theConstitution and other laws were approved, most of the largenational oil companies (NOC) and major energy MNEsturned to Mexico to analyse possible investment opportuni-ties, although the recent downturn of the oil barrel interna-tional price has cooled down the high expectations placed onthe promised reform that should supposedly play the majorrole in the recovery and growth of the Mexican economy.

At the end of 2014 the Mexican government released thebidding rules for the production sharing contracts for explo-ration and extraction of hydrocarbons in shallow waters,called Round One. These rules establish that the private com-panies acting as contractors for Mexico’s state-owned oilcompany – Petróleos Mexicanos or PEMEX – that carry outtransactions with related parties for the sale and commerciali-sation of hydrocarbons, as well as for supplying goods andservices, would be subject to the transfer pricing regulationsestablished in the MITL and in the OECD Guidelines.

Simón SomohanoLead partner, transfer pricing services,Latin America & the Caribbean RegionDeloitteGalaz, Yamazaki, Ruiz Urquiza, S.C.

Paseo de la Reforma 489, piso 6,Col. Cuauhtémoc, 06500, México DFTel: +52 (664) 622 [email protected]

Simón Somohano is a tax partner based in in Mexico City andTijuana responsible for Deloitte’s Transfer Pricing practice in LatinAmerica and the Caribbean Region.He has more than 24 years of experience in the application of

tax, economic and financial criteria in transfer pricing, anti-dump-ing/subsidy investigations, valuation analysis of intangibles, dou-ble tax treaty issues, tax planning, business model optimization(BMO), structuring and economic consulting. Under his leadership, Deloitte’s regional transfer pricing prac-

tice has been consistently recognised as one of the leadingpractices in Latin America.He has consistently been named as one of the World’s

Leading Transfer Pricing Advisors by the prestigious Legal MediaGroup/Euromoney.His clients include several Fortune 500 multinational compa-

nies doing business in Mexico. He has extensive experience anda successful track record leading the Mexican negotiations ofadvance pricing agreements (APAs) and transfer pricing examina-tions with Mexican and foreign authorities, teaming with col-leagues in Deloitte’s global transfer pricing network.Simón advises in a variety of industry sectors, including manufactur-

ing, retail and consumer goods, real estate, technology, and the ener-gy and resources market where he co-leads the tax & legal services. He also provides specialised counseling to clients in several anti-

dumping and subsidy investigations. Simón is a frequent guestspeaker in international business forums in Mexico and abroad.He has authored various articles on transfer pricing in specialised

journals and is a co-author of Transfer pricing international hand-book: A country-by-country guide published by the International TaxInstitute and Transfer pricing: A theoretical, legal and practice frame-work, published by the Institute of Chartered Accountants (Mexico).His professional accreditations and affiliations include: board

member of the transfer pricing committee of the Institute ofChartered Accountants and lead transfer pricing adviser to theNational Export Manufacturing and Maquiladora Council (INDEX).He has also been certified as a qualified financial consultantfrom Mexico’s Securities and Banking Commission.He holds an MSc degree in economics and finance from

Warwick University’s Business School in the UK and a BA in eco-nomics from Universidad Panamericana (Mexico City).



Transfer pricing related issues for the energy sector arehighly complex and if the main legal framework is uncertain,all tax related issues (still under discussion) will also reflect ahigher level of uncertainty.

In a welcome development, in early September 2015, theFederal Executive sent to Congress the economic package for2016 that includes a proposal to reinstate the exemption ofthe application of thin capitalisation rules to companiesengaged in the generation of electricity. Thin capitalisation

rules limit the deduction of interest expense with foreignrelated parties to a debt-to-equity ratio of 3:1. The constitu-tional reform to the electric industry that allowed privateinvestment in this industry also removed the generation ofelectricity from the list of strategic activities of the Mexicanstate, thus eliminating the exemption of thin capitalisationrules that the industry enjoyed until then.

Transfer pricing and financial servicesIn recent years, the local financial services industry in Mexicohas been increasingly subject to tighter regulations. The gov-ernment’s main regulation agencies have constantly arguedsuch measures are one of the main reasons why the Mexicanfinancial system is healthy even after the inevitable 2008-2009stress tests derived from the world financial crisis.

According to information published on the statistical bul-letins of the CNBV, in 2015 the financial sector has shown anoverall growth of 17.91% from June 2014 to June 2015,measured by the growth in total assets. Stock brokerage hadthe largest growth of 46.97%, followed by development bank-ing with 29.64%, financial groups with 13.72% and commer-cial banking with a 13.42% growth rate.

Based on continuing to increase the security of theMexican financial system, several regulatory bodies within thesystem are starting to implement transfer pricing regulationsfor non-fiscal purposes. These institutions include Banxico,CNBV, CNSF, and CONSAR.

In October 2012, Banxico introduced Bulletin 15/2012,which requires multiple banking institutions to obtain an autho-risation for the transmission of rights or debt to related parties,where the related value exceeds the equivalent of 25% of thebasic equity of the entity. Such authorisation should include atransfer pricing study based on the OECD Guidelines, preparedby a practitioner with experience of at least 10 years and with aclient portfolio of tier-one financial entities.

The CNBV, through the Credit Institutions Law – whichrepresents the legal framework for issuing regulations to thecredit and banking institutions – under its Article 45-S men-tions that the board of directors of Mexican commercialbanks, or an ad-hoc committee, composed of at least oneindependent director (who should preside), must approve theconclusion on the analysis for any transaction carried out withrelated parties to which such institutions belong, or carriedout with entities engaged in business activities with which theinstitution maintains business links.

The pricing of the aforementioned transactions shall beagreed on a fair market value principle. Additionally, all trans-actions that are of significant importance to the banking insti-tution should be agreed upon a previous transfer pricinganalysis, prepared by a suitably qualified third party expert.Such expert should be independent to the corporate group towhich the financial institution belongs. The informationreferred shall be available at all times to the CNBV, which may

Eduardo Campos MartínezTransfer pricing partnerDeloitteGalaz, Yamazaki, Ruiz Urquiza

Paseo de la Reforma # 489 piso 6Col CuauhtemocCP 06500, México DFTel: +52 55 50 80 66 [email protected]

Eduardo Campos is a transfer pricing partner in Deloitte Mexico,based in the Mexico City office. He has more than 13 years ofexperience assisting multinational companies in transfer pricingmatters including valuation analysis of intangibles, structuringnew business models, acquisitions, business valuations, andportfolio valuations, among other topics. He joined the firm inJanuary 2003.His clients includes several Fortune 500 clients with sub-

sidiaries in Mexico and multinational Mexican companies withpresence in more than 30 different countries according to thelatest data published by Forbes Mexico. He has successfully rep-resented different clients in transfer pricing audits performed bythe Mexican tax authorities and, over the past year, has alsobeen negotiating advance pricing agreements (APA) and mutualagreement procedures (MAP) for the automotive industry.He has specialised in transfer pricing topics for the finance,

chemical and automotive industries assisting important multina-tional enterprises with the implementation of new transfer pric-ing policies. He has worked with two of the major commercialbanks in Mexico with new transfer pricing documentationrequirements set up by the Central Bank and the NationalBanking and Securities Commission.He holds a bachelor’s degree in economics from Instituto

Teconológico y de Estudios Superiores de Monterrey (ITESM) witha specialism in corporate finance and financial markets. He hasalso participated in different tax seminars in Mexico and per-formed as a guest speaker for the Chinese Chamber ofCommerce in Mexico. He has participated as speaker atUniversidad La Salle and ITESM on the topic of financial deriva-tive transactions.



suspend or limit, partially or completely, the transactionsdescribed in the preceding paragraph, if in their opinion suchtransactions were not agreed under market conditions.

When transactions of relative importance involve the trans-fer of risks – measured as a ratio of the assets subject to trans-fer versus the equity of the banking entity – by any memberof the corporate group to which it belongs, the chief execu-tive officer must prepare a report with the proper analysis andsubmit it to the CNBV within 20 working days from the exe-cution date of such transactions.

Also, the CNBV requests that all multiple banking institu-tions prepare annual transfer pricing documentation based onthe OECD Guidelines. Such documentation should be filedto the CNBV during the first three months after the close ofthe previous fiscal year.

The main purpose of the CNBV is to keep track of all rel-evant transactions between related parties for all financialinstitutions and confirm that operations comply with thearm’s-length principle. It is expected that CNBV increases thenumber of transfer pricing audits for the following years.

The CONSAR, through the Law of the Pension Systems,requests its regulated entities to prepare a transfer pricingreport carried out by an independent adviser, in which the pric-ing of intercompany transactions is certifies to be agreed inaccordance with the arm’s-length principle. A similar obligationis also imposed on insurance and surety bonds companies bythe CNSF through the Law of Insurance and Surety Bonds.

Based on all the aforementioned legal frameworks andcompliance requirements, the main entities engaged in busi-ness activities within the Mexican financial services industryare facing significant administrative burdens related to trans-fer pricing regulations, both fiscal and non-fiscal related –despite the fact that the OECD Guidelines indicates thatthese should be avoided. Such compliance stipulations alsorequire practitioners to be highly specialised and taxpayers tohave personnel with a certain degree of knowledge on suchmatters for them to understand what is requested and incor-porate them into their routine business practices.

Taxpayers and practitioners are expecting the CNBV toincrease its levels of review and assessment in the comingyears, on top of the compliance developments that havealready taken place in recent years, which are now widely dis-cussed among the industry.

Transfer pricing audits by the Mexican tax authoritiesTransfer pricing audits in Mexico are considered to be in adeveloping phase, although they continue to focus primarilyon formality issues. A typical examination would challengedeductions of payments mainly regarding services, or royaltiesamong other tangible transactions, such as purchase of raw ofmaterials or finished products. The ruling of the court for thecase related to pro rata expense mentioned earlier is in linewith this strong position of rejection from the tax authorities.

Taxpayers continue to invest a disproportionate amount ofeffort to obtain the not-so-clear documentation for demonstrat-ing: (1) the service was effectively rendered; and (2) the localentity benefit and business reason for engaging in the provisionof services from related parties. MNEs’ headquarters find it hardto understand the purpose of such requests through audits per-formed by the Mexican tax authorities and have to struggle tocover the excessive administrative burden that this implies.

This new trend seems to be consistent through the lasttransfer pricing audits: opening multi-year audits to taxpayerswith several consistent losses and challenging the businessnature or rationale of such losses. Normally, MNEs establishlimited-risk entities in Mexico, and therefore the tax authori-ties expect them to have a consistent guaranteed return.Although this might not happen for a variety of economic rea-sons, the tax authorities’ position is clear regarding loss-mak-ing entities; this being that they will challenge taxpayers withrecurring losses. These kind of positions are being initiallyquestioned using the global annual reports of the headquar-ters of the taxpayers, arguing that if the MNE is profitable onan aggregated basis, losses could be allocated without any rea-sonable justification to the Mexican subsidiaries.

Segmented financial information must be prepared fortesting the controlled transactions on a common basis whenassessing the arm’s-length compliance of many local taxpay-ers. Such information is constantly challenged also by the taxauthorities and is expected to be prepared based on Mexicangenerally accepted accounting practices (GAAP). Althoughtaxpayers confirm such accounts were indeed prepared on therequested rules, an independent auditor might be needed tocertify its effective compliance with such principles.Moreover, information submitted in a foreign language isrequested to be re-submitted in Spanish and the translationperformed by a certified translator. This once again increasesthe already high investment of resources by taxpayers in theireffort to prepare a strong defence for the audit procedures.

As of September 2013 (the most recent data publiclyreleased), the SAT indicated that 45 audits were in process,26 resolutions were finalised with tax adjustments, and eightappeal cases were underway.

BEPS implementation in MexicoMexico has been one of the early adopter countries of theBEPS Action Plan. Certain tax amendments for 2014 wereapproved by the Congress to address BEPS issues directly.Among others, these related to the recommendation to neu-tralise the effects of hybrid instruments and entities underwhich taxpayers take advantage of the mismatching betweenthe local and foreign tax authorities (BEPS Action 2). Forexample, the MITL establishes that interest, royalty and tech-nical assistance payments made by Mexican taxpayers to for-eign resident entities that are deemed related parties would bedeemed non-deductible in any of the following cases:



• When the foreign resident entity that receives the paymentis regarded as tax transparent, except if the shareholders ormembers of such entity are subject to taxation with respectto the income realised through such entity and the pay-ment is determined at fair market value;

• The payment is deemed inexistent in the country or juris-diction where the recipient resided; or

• The payment is not considered as taxable income by therecipient.In addition, the tax law updates establish that payments

made by a Mexican resident taxpayer, which are also deduct-ed by a related party, are deemed non-deductible for theMexican party carrying out the payments.

The SAT tries to identify BEPS strategies through certainmechanisms, such as the aforementioned Form 76, where thetaxpayer must declare: financial operations established in arti-cles 20 and 21 of the MITL; transfer pricing operations(adjustments); equity participation and tax residence; reor-ganisations and restructures; and other relevant transactions,such as sales of intangible and financial assets or the transferor goods through mergers or spin-offs.

The economic package for 2016 also includes a legislativeproposal to include the country-by-country report outlined aspart of BEPS Action 13, the guidance documents on transferpricing documentation and country-by-country reportingand the country-by-country implementation package issuedby the OECD in September 2014 and June 2015 respective-ly. The proposal includes the reporting of three-tier globalstandard for transfer pricing documentation: (1) master file,(2) local file and (3) country-by country report. The masterfile requires key information about group operations, includ-ing a high-level overview of business operations, in additionto important information of global transfer pricing policiesregarding intangibles and financing. The local file requiresentity level analysis – local entity description, detailed analysisof controlled transactions, and financial information at thelocal entity level. The country-by-country reporting require-ments for Mexican-based MNEs demand the annual provi-

sion of aggregate information, in each jurisdiction where theydo business, relating to the global allocation of income andtaxes paid, together with other indicators of the location ofeconomic activity within the MNE group, as well as informa-tion about which entities do business in a particular jurisdic-tion and the business activities each entity engages in.

The proposal, if approved, will require that the disclosurestatements for fiscal year 2016 would be submitted no laterthan December 31 2017.

In this sense, other measures implemented by the Mexicangovernment to challenge what are perceived to be base erod-ing or profit shifting actions of MNEs are the negotiation ofseveral agreements to facilitate information exchange betweencountries, and the prevention of abusive practices in the appli-cation of double tax treaties.

Going forwardMNEs should carefully plan their intercompany transactionsbefore implementation. This might add some challenges sincethe dynamics of the current international trade and invest-ment flows require MNEs to quickly adapt to satisfy the cus-tomer’s demands. Establishing proper flexible intercompanyglobal policies helps to provide a solution that can quicklyanswer such immediate demands and practitioners need tohave a deep understanding of the entire supply chain and theindustry of the analysed MNEs.

The Mexican tax authorities and other local regulatoryagencies have traditionally been focusing primarily on the for-mal requirements contained in the transfer pricing relatedlocal legislation but they are now broadening the scope oftheir reviews, not only for tax purposes but for other regula-tory matters, too. Preparing the diverse multi-purpose docu-mentation might be time-consuming and resource-intensivefor MNEs, but will continue to be needed for opening a dis-cussion on the substance of intercompany transactions or anydeeper discussion that might arise from any reform for adapt-ing the recently released OECD’s working papers withregards to BEPS, transfer pricing and anti-abuse measures.

C E N T R A L A M E R I C A


Tax bullying? When global taxtrends clash with local realities

Rafael Sayagues,Isabel Chiri andAlexandre Barbellion ofEY look at the role ofCentral Americancountries Costa Rica,Dominican Republic,El Salvador, Guatemala,Honduras, Nicaraguaand Panama in theglobal tax playgroundand whether acascading ‘tax bullying’effect can be seen whenglobal trends areestablished.

T he OECD is on track to finalise its extremely ambitious and contro-versial Base Erosion and Profit Shifting (BEPS) Action Plan this year.The final package of the 15 action items is expected in October.

The G20 finance ministers and central bank governors said in the clos-ing communiqué of their last meeting held in Turkey on September 4 and5, 2015: “We call on the OECD to prepare a framework by early 2016 withthe involvement of interested non-G20 countries and jurisdictions, particu-larly developing economies, on an equal footing. We welcome the efforts by theIMF, WBG [World Bank Group], UN and OECD to provide appropriatetechnical assistance to interested developing economies in tackling the domes-tic resource mobilization challenges they face, including from BEPS. We con-tinue to work to enhance the transparency of our tax systems (…).”This statement reflects the reality that if certain OECD members and

other large economies will have issues implementing the proposedchanges, certain developing economies will definitely not be ready toimplement BEPS recommendations. We certainly view this as being thecase for Central America and, several of the initiatives should not even bea priority for countries in this region in the first place. The influence of global tax trends in Central America that we have

observed in the recent past will continue to grow; it is an inevitable processthat stems from the overall globalisation of economies in an increasinglyborderless world. Who would have thought just a couple of years ago thateven a Central American country – Costa Rica – would be in the processof becoming an OECD member? It is a process that calls for extreme cau-tiousness. There cannot be a one-size-fits-all approach in addressing issuessuch as base erosion or, in particular, the exchange of information (EoI).With this in mind, solutions should also be crafted through the lens of localrealities and take into account local sovereignty.

Regional involvement with global tax organisations, forums andmultilateral instrumentsAs a starting point and for context, it is important to be mindful of theCentral American countries’ involvement in international tax organisationsand forums, and their adoption of international instruments.None of the Central American countries are OECD members, but

Costa Rica is in discussions to join – after membership discussions with theOECD Council opened on April 9 2015, a roadmap outlining the processCosta Rica must follow was issued on July 15 2015 – and is to date thefourth Latin American country to pursue membership, following in the



footsteps of Chile and Mexico (members since 2010 and1994, respectively) and Colombia (opened discussions in2013). Panama, Costa Rica, the Dominican Republic, ElSalvador and Guatemala are members of the Global Forumon Transparency and Exchange of Information. Costa Ricaand El Salvador are deemed compliant with the minimuminternational standards of transparency. And then there is thecase of Panama, which is particularly interesting given itsimportance as a financial centre. It is worth mentioning thecountry’s commitment to pass the Phase 1 review of theGlobal Forum’s peer review process that evaluates the legaland regulatory framework in connection with the jurisdic-tion’s compliance with the standards of transparency and EoIon request. Panama took the following steps in April 2015:• It accelerated the implementation of the custody regimefor bearer shares. The compliance due date for bearershares certificates issued before the law’s effective date(May 4 2015) is now December 31 2015, instead ofAugust 2018. These will have to be delivered to a custodi-an or replaced by registered share certificates.

• A new anti-money laundering and terrorist financing(AML) regime was introduced to allow access to the finalbeneficiary information. It was supplemented on August21 2015 with the issuance of 14 resolutions by theMinistry of Economy and Finance including AML guide-lines and requirements directed to specific activities andsectors (for example, construction companies, attorneys,certified public accountants).

• Penalties for non-compliance with certain corporaterecord-keeping obligations were also introduced. With these changes, in addition to its existing bilateral

undertakings to exchange information (29 such treaties andagreements have been signed to date), Panama should be ableto move to the Phase 2 review which looks into the imple-mentation of the framework in practice and rates the jurisdic-tion’s overall compliance with the standards. However, asreality could demonstrate, standards and expectations aresometimes not equal for all reviewed parties.Costa Rica, El Salvador and Guatemala have signed the

OECD Multilateral Convention on Mutual AdministrativeAssistance in Tax Matters which provides for EoI foreseeablyrelevant in the administration or enforcement of taxes. Thisconvention is one of the possible legal frameworks to imple-ment the Standard for Automatic Exchange of Information inTax Matters (Common Reporting Standard (CRS)) devel-oped and approved by the OECD Council on July 15 2014in response to a request made by the G20 countries. The stan-dard has been described as a global ‘FATCA-like’ regime.Costa Rica was the first country from the region to committo automatic exchange of information (AEoI). It endorsedthe OECD Declaration on Automatic Exchange ofInformation in Tax Matters in May 2014. The country mod-ified its tax code in May 2015 to facilitate its implementation

and signed the Multilateral Competent Authority Agreement(MCAA) in June 2015. Costa Rica, which may be deemed an‘early adopter’ in the region, committed to all these impor-tant processes in the absence of any local clarity on its practi-cal and realistic capability of completing the exchanges. Theprotection and related privacy rights of the data to be collect-ed to this end is still uncertain.

Key BEPS issues and related policy changes At a time when the OECD is about to issue its final BEPSreport on 15 action items with recommendations on complexand controversial issues, taxpayers should consider some ofthese actions items in the context of the local landscape.

Action 1 (Addressing the tax challenges of the digital economy)There are no specific provisions with respect to the digitaleconomy included in the tax legislations of Central America.The local taxation of digital goods and services when the sell-er does not have local presence is therefore very limited.Where transactions are taxable, there is generally a lack ofappropriate mechanisms to allow non-domiciled entities toreport and pay their tax liabilities. While authorities grapplewith the new challenges of the digital economy, the lack ofexperience in dealing with such issues means there is a limit tothe understanding and technical capabilities at the authoritylevel to comprehend the issues and requirements to deal withthis new model of economic transaction.

Action 3 (Strengthening controlled foreign corporation (CFC)rules)Most of the countries of the region have a territorial systemand the domestic legislations therefore do not include CFCrules. Even Honduras, which operates a worldwide system ofincome taxation, or the Dominican Republic or El Salvador,which have some extended definitions of local sources thatcover certain types of foreign passive income, have no CFCrules. This is an alien concept to the local authorities and tax-payers. In spite of this, some of these jurisdictions, whichalready struggle to deal with their domestic collections, areconsidering including such rules.

Action 4 (Limiting base erosion via interest deductions andother financial payments)The Dominican Republic has thin capitalisation rules with adebt-to-equity ratio of 3:1. Furthermore, it adopted a com-plex rule that establishes a limitation on interest deductions ifthe corporate income tax rate in the jurisdiction of the lenderis lower than the 28% income tax rate applicable in theDominican Republic.In Costa Rica, the Executive Branch sent to Congress in

August 2015 a Bill that would replace the Income Tax Law,which includes (i) thin capitalisation rules with a non-typicaldebt-to-equity ratio of 2:1; and (ii) a rule for the non-



deductibility of expenses paid to entities that are residents oftax havens or non-cooperating jurisdictions (defined as juris-dictions where the corporate tax rate is less than 40% of theCosta Rican corporate tax rate (30%); or which do not have aTIEA or double tax treaty including EoI provisions). Todeduct expenses, taxpayers would bear the burden of provingthat a given expense corresponds to a transaction actually car-ried out and may be subject to undefined or ambiguous crite-ria of the tax authorities.El Salvador has thin capitalisation rules with a debt-to-

equity ratio of 3:1. In addition, payments to tax havens aresubject to increased withholding tax rates. Thin capitalisationrules also apply in Guatemala. Unfortunately, most of these provisions were simply

adopted as general ‘templates’ borrowed from other coun-tries’ experiences and recommendations from multilateralorganisations, without truly analysing the impact they mayhave on their domestic economies and the realities of theirtaxpayers. In countries where the economies depend onindustries that need constant access to capital (for example,agriculture and tourism) and that are subject to uncontrolledfactors (for example, geography and weather) to survive, notrecognising that debt-to-equity ratios may impose additionalincreased costs of operation is an example of how localauthorities adopt rules because they are ‘trendy’ or in vogueand “it’s what others are doing”, rather than basing them ona comprehensive plan to promote economic growth.

Action 6 (Preventing treaty abuse)• Panama has the most extensive treaty network with 15double taxation treaties (DTT) in force to date.

• Costa Rica has one DTT in force with Spain, three DTTssigned but not in force (with Germany, Mexico andRomania) and is engaged in several DTT negotiations (forexample, with the Netherlands and Switzerland).

• El Salvador has one DTT in force with Spain. • The Dominican Republic has two DTTs in force withCanada and Spain.

• In March 2015 Guatemala signed a DTT with Mexicowhich is not yet in force.

• Nicaragua and Honduras have no DTTs.Some of the DTTs adopted general anti-avoidance rules

(GAAR) – similar to the ones recommended by the BEPSproject (limitation of benefits, purpose test). A number of theregion’s DTTs also make express references to the domesticlegislation’s anti-avoidance rules to ensure the treaty provi-sions do not impede their application. In this respect CostaRica, the Dominican Republic, El Salvador and Hondurashave a substance-over-form principle.But is it worrisome that to date, with very few exceptions,

the authorities have not developed the necessary technicalresources and expertise to effectively deal with these newcomplex tax rules and concepts. Despite what may be argued

by local governments, this should not be a ‘chicken or egg’discussion where one can pick and choose one or the other.Issuing rules without having the proper technical capabilitiesto deal with their consequences is not the right order of idealevolution and may be irresponsible. One does not first man-ufacture products, sell them and then start testing them.Doctors do not perform brain surgery until they have com-pleted the necessary training; Merely being a doctor is notenough and specialisation is also needed. The same shouldapply to taxation. There has to be a logical order and processbetween the definition of the infrastructure and resourcesnecessary to implement laws and their enforcement.

Actions 8, 9 and 10 (Changing transfer pricing on intangibles,documentation requirements, risks and capital and otherhigh-risk transactions)Panama, Costa Rica, El Salvador, Guatemala, Honduras andDominican Republic have TP rules in force, which are large-ly in line with the OECD TP guidelines. Nicaragua’s formalregime is still pending. And in Costa Rica, existing rules orig-inate from a very unique legal precedent. The OECDGuidelines can be applicable to TP provisions because theyare either formally incorporated by reference in the local reg-ulations (as in Panama, El Salvador and the DominicanRepublic) or are widely used in practice by the local taxauthorities (Costa Rica).But these countries have barely been able to fully imple-

ment a TP system under existing OECD Guidelines. Andnow they will have to deal with the pressure of adopting newrules that would require even more complex technical capa-bilities and infrastructure to be properly implemented andmanaged.

Action 13 (Transfer pricing documentation and country-by-country reporting (CbCR)The requirement to maintain a master file and CbCR wouldentail amending domestic laws across the region. Taxpayerinformation is protected and in principle remains confidential,except in the case of fraud or as a result of other criminal pro-ceedings. This should apply to information collected as partof CbCR. The tax authorities would only disclose taxpayerinformation to other tax authorities within the frame of atreaty or EoI agreement. This would require major adjustments to be properly

implemented. The reality is that these jurisdictions still do nothave clearly defined documentation requirements even undercurrent standards. To date, countries like Costa Rica (which,as noted is on track to become a full OECD member) passedrules requiring compliance with the arm’s-length principle,but without then clearly defining, more than two years after,how taxpayers should document their transactions, creating astate of legal limbo. Some countries require preparation andmaintenance of annual documentation and others additional-



ly require the annual filing of TP information returns. But thenew added requirements would likely over-stretch the alreadylimited internal capacity to deal with existing rules.

The real needs of Central AmericaThe OECD’s BEPS project contains practical guidelines andactions to minimise base erosion and profit shifting issues thatare more focused towards dealing with the matter at a broad,cross-border level. But the problem is that the concept of‘guidelines’ or ‘recommendations’ is not being interpreted assuch by some. They are taken as binding and mandatory byauthorities or even as excuses to shape local policy.As an example, Central America is primarily a recipient of

services (for example, consulting, know-how, technical sup-port). Some of the countries contain provisions allowingthem to tax non-residents on services performed abroad andused locally, but the rules could be improved. There is noBEPS action item addressing this issue of supply of (tradition-al) services and how it contributes to eroding the tax base ofcountries. Even before dealing with this issue, the countries inthe region should focus on enhancing existing domestic col-lection and on implementing or enhancing existing rules,rather than adopting tax trends that are not tailored to theirsituation (for example, by complicating access to foreignfinancing to fund local business development). Developing countries should therefore only adopt such

actions to the extent they respond to their specific fiscal prob-lems, which entails making some adjustments to link them tothe local reality and needs, while understanding that thisprocess requires investment in resources and knowledgebefore changes are enforced. Foreign investment plays a large role in total revenues and

it is attracted in part by the fiscal incentives available underthe domestic laws of each country. As a consequence, CentralAmerican taxation issues primarily derive from domestic baseerosion rather than international profit shifting. This triggers the question as to whether BEPS should be a

priority in the tax policy agendas of the Central Americancountries, which face issues far more basic than those of devel-oped countries. In this respect, we view these as among the key challenges

that Central American countries face today:• The absence of simple yet robust tax systems with clear andprecise regulations that facilitate compliance.

• Difficulty to predict the tax treatment applicable to trans-actions. Legal uncertainty is a reality.

• If these countries’ authorities lack resources and struggleto deal with a territorial system, shifting towards world-wide income principles is not the solution to fiscal deficits.

• An overall difficulty in paying taxes. It is remarkable to seehow the Central American countries, with the exception ofGuatemala, rank really low in the World Bank’s ‘PayingTaxes’ annual survey, which ranks 189 economies and

measures the ease of paying taxes. According to the 2015survey, Guatemala ranks 54th, the Dominican Republic80th, Costa Rica 121st, Honduras 153rd, El Salvador161st, Nicaragua 164th, Panama 166th.

• Lack of well-defined policies that contain control methodsand risk management strategies to maximise the limitedresources of the tax authorities.

• Absence of high performance units that focus on high risksegments and taxpayers.

• Lack of consolidated tax legislation, which is particularlyacute in the case of Honduras but also affects other juris-dictions such as Panama.

• Corruption within a government can weaken the overallsystem and subsequently jeopardise the attraction of for-eign investments. The Central American countries scorelow in the Corruption Perceptions Index of TransparencyInternational, which ranks countries based on how corrupttheir public sector is perceived to be. The last survey eval-uated 175 countries and territories graded on a scale of 0(highly corrupt) to 100 (very clean). According to the2014 survey, Nicaragua ranked 133rd with a score of 28,Honduras 126th with a score of 29, Guatemala and theDominican Republic 115th with a score of 32, Panama94th with a score of 37, El Salvador 80th with a score of39 and Costa Rica 47th with a score of 54. Guatemala pro-vides an extreme example of this issue. In April 2015 theUN-backed International Commission against Impunity,along with the country’s prosecutor, revealed a criminalnetwork known as La Línea by reference to the telephonenumber that importers were required to dial as part of ascheme in which they could pay a bribe to this organisationto avoid paying customs duties. Several public servantswere initially arrested including the tax authorities’ super-intendent. The country’s vice president and president wereforced to resign and are now behind bars facing a trial. Additionally, a common issue shared by the Central

American countries that facilitates base erosion is the lack ofqualified personnel in the tax authorities. There is a generalneed for more investment in the training and recruiting ofexpertise that can ensure that fundamental guarantees andtaxation principals are taken into account during the elabora-tion and the establishment of domestic tax provisions and col-lection efforts, which in turn enhances the possibility ofdeveloping tax regimes more structured and consistent withthe minimum international requirements. Matters of this nature are not of great concern to devel-

oped countries as they have already overcome most of thesecapacity building issues, though some big economies have stillexpressed concerns with some of the OECD proposals.Central American countries still have to address these areasand, until they can do this effectively, they will not be able tomeaningfully stem base erosion that affects their national rev-enues.



Despite the gulf in the levels of technical expertise availablein developed and developing countries, global tax trends stillimpact the way the tax authorities apply existing tax rules inCentral America. There have been cases where the tax authori-ties have applied concepts they may not have fully grasped andwhich were not even formalised in the law in the first place. Asan example, there were no official transfer pricing rules in CostaRica until September 2013. Up to then and as of 2003, the taxauthorities had instructed its auditors to review inter-companytransactions under the general economic reality and by applyingsubstance-over–form and OECD principles. It resulted in abu-sive positions taken by the tax authorities that conflicted withthe rule of law. And several changes to domestic tax legislationand policy have been ushered in or justified using BEPS, eventhough final recommendations have not yet been issued.The rule of law is actually increasingly being challenged. Tax

bullying is having cascade effects. Local countries get bullied bythe global forums and organisations into assuming recipes thatdo not fit with their realities. Taxpayers are in turn bullied by thelocal tax authorities. As an example, in September 2014 theConstitutional Chamber of the Supreme Court of Justice ofCosta Rica ordered the tax authorities to temporarily suspendthe issuance of letters of determination while a case on the mat-ter was pending. To date the case has not been resolved and noruling has been rendered. In this context, the tax authoritieshave been forcing taxpayers to make extra-judicial paymentagreements at the administrative level to avoid being indicted fortax fraud, which creates friction with the rule of law.

The flow of taxpayer information that authorities willreceive in the upcoming years is going to increase dramatical-ly with the automatic exchange of information becoming thenorm when it comes to tools to fight tax evasion. But the cur-rent systems are not ready to receive or deliver it properly.Question marks also hang over whether authorities in theregion are suitably prepared to guarantee the confidentialityand legitimate use of all the information they will be receiv-ing. In a region where, unfortunately, crimes such as kidnap-ping are still a reality, misuse of financial information is a riskthat transcends tax considerations. In conclusion, global tax trends will continue to have a

growing and significant impact on businesses and individualsin Central America. Some of these trends, such as the BEPSproject, do not seem to be sufficiently tailored and adapted tothe immediate and pressing needs of the region. Others suchas the automatic exchange of information will test the coun-tries’ capacity and commitment to respect and uphold therule of law. The key issues faced by the Central American countries in

the tax space are the weakness of the tax and judicial systems,the lack of technical expertise of the tax authorities, and cor-ruption. The priority should be the strengthening of the basesof local institutions and then focus should be shifted ontobroader concepts.Some global tax trends will have unintended consequences

that could raise constitutional rights issues and this could cre-ate increased space for tax bullying across the region.

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Chilean tax reform and theeffects of the change ofdomicile of foreign investorsRoberto Carlos Rivasand Josefina Casals ofPwC Chile assess theChilean Government’sprogress inimplementing the 2014tax reform package,reflecting on howcertain provisions areimpacting foreigninvestors and lookingahead to see how thesemeasures will sitalongside theimplementation of baseerosion and profitshifting (BEPS) relatedmeasures.

I n 2014, the Chilean Parliament began the enactment of an ambitious taxreform that changes the features of the country’s taxation structure.Among other aspects, this reform eliminates the existing taxation

method, establishing two co-existing income tax regimes; graduallyincreases the corporate tax (first category tax (FCT)) rate (from 20% to upto 27% in 2018); and incorporates the controlled foreign corporation(CFC) rules, a general anti-avoidance rule (GAAR), and new thin capital-isation rules into legislation.Until the end of 2016, Chilean taxation will be governed by the inte-

grated tax system, where final taxpayers pay income tax upon distributionof profits materially received from the respective companies, with a fullcredit for the corporate tax paid at such level. However, starting onJanuary 1 2017 two new tax systems will replace it: a) Attributed income method, which automatically attributes certain typeof income generated at the company level (with a full corporate taxcredit if available) to the final taxpayer, regardless of an actual distribu-tion of profits, and;

b) Partially-integrated system, similar to the current tax situation, that is,using the distribution-based method, but with a credit of only 65% ofthe corporate tax paid by the company. This limitation is not applicable to taxpayers domiciled in a country witha double tax convention in force with Chile under certain conditionsdescribed below (article 63, Income Tax Law); should those require-ments be fulfilled the income tax rate will remain at 35%, whereas forother foreign taxpayers the effective rate will increase to 44.45% in 2018.The complexity of this tax reform has caused the local Internal Revenue

Service to issue several –and often controversial – rulings to construe a for-mal interpretation of some of its aspects, increasing the sense of uncertain-ty among the local industry, tax advisers, and foreign investors. For thisreason, the government already announced a new Bill to clarify and simpli-fy key features of the reform before they come into force.What is clear at this point is that from 2017 onwards it will be different

tax treatments for foreign taxpayers under the partially-integrated system,depending on the jurisdiction of residence for tax purposes.

Requirements under the partially-integrated system for the preferredAdditional Tax rateAccording to article 63 of the Income Tax Law, the limitation set forth inthe new partially-integrated system will not apply if:

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a) Chile has a double tax convention in force with the respec-tive country, whereby the contracting states have agreedthe full application of the Chilean Additional Tax (AT) rateover dividends distributed by local companies as long asthe corporate tax remains deductible from the former tax. To date, every tax treaty signed by Chile contains the socalled ‘Chile Clause’, which allows the application of theAT at its full rate upon distribution of dividends as long asthe FCT is fully creditable from it.

b) The shareholder recipient of the distribution of dividendsfrom the Chilean company is a resident of the respectivecountry.There is no special definition of the term ‘resident’ for the

purposes of article 63 of the Income Tax Law. We understandthat as long as the foreigner is considered as a resident accord-ing to the provisions of the relevant double tax convention,this requirement should be satisfied. Generally speaking,Chile’s tax treaty network determines the residence status ifthe involved person is liable to tax by reason of its domicile orresidence under the laws of the contracting state.

Effects of the change of domicile of a foreigncorporation in ChileIn broad terms, changing the domicile of a corporationimplies the cancellation of the registry in one country and anew registration in another foreign jurisdiction.Our legislation does not provide for any specific legal or

tax treatment in connection to the change of domicile of aforeign company that holds shares of a Chilean entity, eitherregarding the relocation of the place of incorporation, or themigration of the place of effective management and control. From an administrative standpoint, the change of domicile

has been accepted by the Chilean Internal Revenue Service,which has considered the new country of residence of a cor-poration as its tax domicile (Ruling No. 3531/2012); in thiscase, the new tax domicile of a second-tier subsidiary of aChilean parent company was recognised for the purpose ofusing the foreign tax credit in our country.However, recently the tax authority has stated its position

about the change of tax residence of a foreign taxpayer for thespecific application of the preferred AT rate provided in newarticle 63 of the Income Tax Law. In Ruling 1985/2015 theChilean regulator accepts that if a company incorporated in acountry that has no tax treaty with Chile changes its domicileto a jurisdiction with an in-force double tax convention, andit is considered a resident under the relevant treaty, therequirements set forth in article 63 should be satisfied. This iscertainly positive news for the international community.Regarding the Chilean tax effects of the change of domicile,

the tax authority has considered that when a corporation is liq-uidated, and its shareholders receive assets located in Chile as aconsequence of such liquidation, any capital gain derived fromthis transaction may be subject to taxes in our country.

Therefore, the tax consequences in Chile would depend on theparticular effects of the cancellation of the registration accord-ing to the relevant foreign jurisdiction, in terms of liquidationof the company and transfer of shares or interest of Chileanentities.In the case of the migration of the place of effective man-

agement, our opinion is that such event would not trigger anytaxable event in Chile, since no liquidation of the foreign cor-poration takes place.

Other considerations It should be noted that some of the tax treaties signed byChile contain a main purpose test rule that denies access tothe benefits set forth in the convention if the main purpose orone of the main purposes is taking advantage of the preferredrates set forth in the corresponding treaty. Moreover, the recent tax reform package incorporates a

general anti-avoidance rule (GAAR) into the Chilean legisla-tion, which allows the Internal Revenue Service to challengeacts performed by taxpayers if the authorities consider thatthey have entered into them to avoid taxable events under thedomestic law, by means of abuse or simulation.

Roberto Carlos RivasPwC Chile

Tel: +562 2940 0151Email: [email protected]

Roberto Carlos Rivas is a partner of the Tax and Legal Servicesdepartment of PricewaterhouseCoopers Chile.

During 2001 and 2002 he obtained a master’s degree in law,specialising in international taxation, from Leiden University, theNetherlands.

During 2002 and 2003 he was attached on a secondment tothe International Taxation department ofPricewaterhouseCoopers, Rotterdam, the Netherlands, takingactive part in international tax planning projects concerninginvestments between Europe and Latin America.

He joined PricewaterhouseCoopers in April 1993 and he hasalso been assigned to PwC Buenos Aires. He is a transfer pricingexpert.

Roberto is a member of the International Fiscal Association inChile and he has written many articles on international tax mat-ters. He has lectured on topics of international taxation at semi-nars taking place in Rotterdam, Amsterdam, Barcelona, BuenosAires, Punta del Este and Santiago.

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The existence of the abuse must be declared by a TaxCourt upon the request of the Internal Revenue Service. Ifsuch a declaration is made, the taxpayer is obliged to pay thetaxes that should have been paid in case the abuse or simula-tion has not taken place, plus interest and fines. The GAAR applies to facts, acts, or business performed or

concluded after September 30 2015. The tax authority unilat-erally extended the application of this provision to such trans-actions that, though formally performed or concluded as acts,have not fully produced their tax effects, such as a lease con-tract, or a reorganisation process.In consequence, the scope of application of the preferred

rates of article 63 will require a detailed and careful analysisincluding other provisions under domestic law or tax treatiessigned by our country.

Commentaries on Action 6 of the BEPS projectThe base erosion and profit shifting (BEPS) project is led bythe Organisation for Economic Co-operation andDevelopment (OECD) and the G20 and is intended toensure the allocation of profits generated by multinationalenterprises in the jurisdiction of origin. For this purpose,

there is a 15-point action plan established by the OECDwhich is aimed to be implemented in two years. Action 6�s objective is to prevent the granting of treaty

benefits in inappropriate circumstances, addressing treatyshopping and other treaty abuse cases, through the inclusionof certain anti-avoidance clauses in the OECD Double TaxConvention Model. Draft versions of Action 6 have beenreleased for discussion, with the final document expected tobe published in October 2015. Among other recommenda-tions, the report includes clauses on limitation on benefits(LoB), principal purpose test (PPT), and on tie-breaker rulesfor dual resident corporations.Implementation of these clauses into in-force tax treaties

would be performed through a multilateral convention asprovided in Action 15. However, it is not clear whether all theparticipating countries would agree on the wording of thereferred anti-avoidance clauses as suggested in the Action 6deliverable. In case of disagreement with Action 6 clausedrafting, the implementation should be made under a bilater-al basis. In any case, it is difficult to predict how long the exe-cution of these changes would take. Special attention should be given to the impact of the LoB

clause and PPT in connection with the change of domicile offoreign corporations. An LoB clause is already found in tax treaties concluded by

the US, India, and Japan. According to the proposed LoBclause, although a person is considered a tax resident accord-ing to the relevant treaty, it may not be entitled to the bene-fits provided therein unless it is also considered as a ‘qualifiedperson’. The character of qualified person must be deter-mined at the time the benefit would be accorded. The proposed draft considered that a resident is a qualified

person if it is: i) an individual; ii) a company listed in a recog-nised stock exchange of the relevant jurisdiction; iii) unlistedcompanies if at least 50% of their voting shares is held by qual-ified persons; iv) non-profit organisations; and v) a contract-ing state or a political subdivision, among others.PPT limits the application of some benefits of the corre-

sponding convention, if the only, or one of the main, objec-tives of a transaction was to take advantage of such treaty. What is relevant here is that the drafting of Action 6 specif-

ically addresses cases when a company engages in certaintransactions to become a resident of a country with a doubletax convention in order to obtain the benefits included in it.Though compliance with the requirements of article 63 of theIncome Tax Law is a matter of the application of domesticlaw, it will be necessary to conduct a deeper analysis whenboth rules come into force, and once our tax regulator issuesan official interpretation in this regard.

Domestic reforms and multilateral developments; theneed for harmonisationAccess to the preferred tax treatment under the new partially-

Josefina CasalsPwC Chile

Tel: +56-2 2940 0152Email: [email protected]

Josefina is a supervisor at PwC Chile, with more than sevenyears of experience with the firm. Her tax practice includes con-sulting services in tax planning and reorganisations, financingstructures, cross-border transactions, and analysis of corporatetax, customs and VAT issues.

In the legal field, Josefina has participated in due diligences ofpublic and private companies, contract analysis and drafting, cor-porate secretarial affairs, and legal compliance for local and for-eign clients. In the past, Josefina also held the position ofin-house legal counsel, providing assistance in legal and corpo-rate affairs, global governance, and regulatory matters within thefirm.

Josefina holds a master’s degree in law from New YorkUniversity, USA (2013), and a bachelor’s degree in law fromPontificia Universidad Catolica de Chile (2006). She also followedstudies in tax planning and analysis at Pontificia UniversidadCatolica de Chile (2011) and Universidad del Desarrollo (2010),Chile.

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integrated system would depend not only on the fulfillmentof the requirements set forth in the new article 63 of theIncome Tax Law but also on its interaction with other pro-visions under Chilean domestic law and signed treaties. Theharmonisation of this rule with the upcoming changes in the

international tax arena through the BEPS project, and itsinterpretation by the Chilean Internal Revenue Service will,of course, be highly relevant and taxpayers will need to lookat the potential need to realign structures for continuingcompliance.

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Authorities alter approach inlight of external pressures

Jose Carlos Silva andBernardo Iberri ofChevez, Ruiz,Zamarripa y Ciaanalyse the Mexican taxenvironment, focusingon authority and taxaudit trends and theimpact of base erosionand profit shifting(BEPS) initiatives inMexico.

O ver the past several months, oil prices have dropped substantially,leading to material revenue shortfalls in oil exporting countries. Thiseffect has impacted the Mexican economy, since exports of crude oil

represent fiscal revenue in the hands of Petroleos Mexicanos, which isowned by the Mexican state. Income from oil exports represents nearly one-fifth (19.7%) of Mexican

GDP, according to OECD figures from 2014. Historically, the price ofcrude is used as an economic indicator and a public policy planning tool.Throughout 2015 the Mexican blend of crude oil has been traded at anaverage price of less than US $50 per barrel, which compares with the max-imum value of more than US $102 per barrel that was reached in the firstquarter of 2012.In late 2013, after the Congress approved the tax reform for 2014,

President Enrique Peña Nieto publicly committed not to propose newtaxes or tax increases in the remainder of his administration, unless macro-economic conditions underwent a significant change. Despite the sus-tained drop in oil revenues, on September 2 2015 Peña Nieto reaffirmedthis commitment not to pursue tax increases.The decrease in revenues and the inability to counteract this with new

taxes or through tax rate increases has led the Mexican tax authorities totake base-broadening measures that may allow them to increase tax rev-enue by utilising the already-existing taxes and collecting larger amounts oftaxes from those who have usually been regular taxpayers. This approach explains why, in the last two years, Mexican taxpayers

have seen a significant increase in the number of tax audit processes, andwhy the procedures and measures used by the tax authorities to assess taxesin such audits have been tightened.

Tax audit trendsTax audits conducted by the tax authorities in recent years have focusedstrongly on verifying the materiality of transactions reported by taxpayers.To do so, the authorities adopt a substance-over-form approach that insome cases goes beyond the powers granted to them in the relevant provi-sions.The authorities collect information from the taxpayers’ annual tax

reports, from their file of annual tax returns and from general data publiclyavailable at the Mexican Stock Exchange (Bolsa Mexicana de Valores). Theauthorities have publicly stated that, by processing data obtained fromthese sources, they have been able to identify common patterns allowing

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them to set well-identified criteria to determine when auditprocesses should be initiated for a specific taxpayer or for acollection of taxpayers belonging to a common group(grouped, for example, by type of industry or by level of rev-enue).According to information provided by the tax authorities in

public fora, such criteria may be classified as shown in Table 1.

Tax and financial indicators to which the authorities pay par-ticular interest include whether a taxpayer reported havingincurred in tax losses in the preceding years, a decrease in tax-able revenue with respect to the preceding tax year, a decreasein the annual tax profit, and the amount paid to non-residentrelated parties.In line with this, the authorities have recently been per-

forming tax audits on groups of taxpayers by focusing ontransactions they have identified a as ‘aggressive’, accordingto their criteria. The authorities have continued to keep spe-cial interest not only in these identified transactions but morerecently also on deductions claimed by taxpayers derived fromintragroup services. Relevant issues identified in recent tax audits include the

following:• Leasing of commercial equipment. The issue has beenraised as to whether rental payments made by taxpayersshould be treated as royalty payments, and whether any taxshould be withheld on such amounts when dealing withpayments made abroad. Mexico does not follow the posi-tion of the OECD Model Convention, and therefore pay-ments for the lease of industrial, commercial and scientificequipment are treated as payments of taxable royalties.

• Supply chain restructures. Focus continues to be centredon determining whether the decision to reallocate assets

out of Mexico is primarily tax driven. In recent years, theauthorities have made significant assessments of multina-tional groups which, in their view, failed to demonstratethe substance of the restructures. Such decisions have ulti-mately been upheld by the relevant courts.

• Pro-rata expenses. In 2014, the courts established that acomprehensive and well-defined set of requirements mustbe met in order for taxpayers to be allowed to deductexpenses allocated on a pro-rata basis. To the extent thattaxpayers are able to demonstrate – through the relevantdocumentations – that such requirements are met,deductibility should be allowed. Thus, when dealing withthis issue, taxpayers are forced to provide substantial argu-ments as well as thorough supporting documentation todemonstrate full compliance.

• Cash pooling. Business reasons for the setting up an intra-group financing entity are challenged. If authorities deemthat the transaction lacks substance, deductibility of inter-est payments arising thereof may be disallowed.

• Country risk adjustments. In one of the most recent trendsshown by the authorities, they have tried to argue thatarrangements between related parties do not properly con-sider Mexico’s country risk exposure. Accordingly, theyhave sought to adjust upwards payments on which addi-tional tax can be assessed.

• Royalties should include advertisement expenses. Whenpayments are made to a non-resident who owns the legalproperty of an intangible asset (for example, trademarksand patents), the authorities have sustained that only suchowner of the intangible is allowed to deduct advertisementexpenses that may increase the value of the intangible assetin Mexico. The authorities have thus sought to disallowthe deduction made by the Mexican subsidiary who ulti-mately made use of the intangible asset in the country.

• Dividends. The authorities have intended to re-charac-terise dividends paid to non-resident shareholders as a dif-ferent kind of income on which Mexican income tax couldbe assessed (for example, interest payments). Additionally,they try to verify that dividend withholding tax (in forcesince 2014) is properly withheld by Mexican dividend pay-ing entities.

Focus on formal requirementsFollowing its civil law tradition, Mexico continues to be a veryformalistic country for tax purposes and prioritises documen-tary evidence to support a transaction. For instance, the lack ofdocumentation may cause the Mexican tax authorities to disal-low a deduction that does not meet certain minimum evidencerequirements. In other cases, failure to provide the informationrequested in an audit process has resulted in the re-characteri-sation of specific transactions or the denial of valid deductions.Therefore, while focusing on proving the materiality of

transactions, the authorities have not lost sight of the formal

Table 1

Financial data Business-related

1. Tax and financial results2. Debt-equity structure3. Transactions with relatedparties

4. Acquisitions, sales andrestructures

5. Unusual and complextransactions

6. Cross-border transactions7. Growth of assets vs. revenueratio

8. Growth of liabilities vs.revenue ratio

9. Analysis of expenses incurred

1. Track record of previous taxaudit processes

2. Participation in ‘aggressive taxplanning’

3. Openness and transparency4. Lack of corporate governance

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requirements that are to be met in order for taxpayers toproperly support transactions.One example is the refund requests for VAT. Taxpayers

must face complex and thorough verification processes todemonstrate that the transactions from which favourable VATbalances derive were actually carried out and at the same timeaim to verify that all formal requirements provided in the rel-evant provisions were met while carrying out such transac-tions and while requesting the refund of the amounts. Thebusiness rationale provided for amounts paid by taxpayers isalso questioned during this process.The interest of the authorities on (related or unrelated) par-

ties with which the taxpayer carried out transactions and onwhether such parties properly meet their tax payment obliga-tions has also increased. Consequently, it has became a commonpractice for the authorities to request information from suchthird parties. The scope of the reviews has even sought to verifywhether these third parties have ultimately remitted the VATcollected by them from the taxpayer who requests the refund.These processes mean it can take the authorities more than

one year to review and ultimately authorise the refunds. Inthis way, the tax authorities have been able to retain, forlonger periods, indirect taxes collected from taxpayers, whichhas certainly represented for them additional short-termfinancing shortfalls.

ResolutionTaxpayers may sue the tax administration for this practice, butlitigation is costly and time consuming, and therefore morecommonly mediation by the tax ombudsman or PRODE-CON is sought.

Possible arbitration through conclusive agreementsIn 2014, an alternative dispute settlement method for fiscalmatters known as ‘conclusive agreement’ was included in theFederal Fiscal Code. This method intends to allow settle-ments between the authorities and taxpayers related to taxaudit processes to be reached with the participation of thePRODECON as an unbiased mediator between the parties.The procedure to request the adoption of a conclusive

agreement can be initiated at any moment once the powers ofverification of the tax authorities have been exerted, as long asacts and omissions related to the taxpayer’s tax situation havebeen detected by the authorities. This occurs in the last inter-im report that in its case is issued and before the provision ofa document notifying the taxpayer of pending assessment.It is important to notice that the adoption of a conclusive

agreement by the taxpayer suspends the terms provided in thelaw for the termination of the respective audit process from themoment in which adoption is requested and until it is settled.When an agreement between the parties is reached, the

conclusive agreement is signed and the dispute is deemedconcluded under the terms agreed. The fact that the partiesreach an agreement does not imply that the taxpayer con-sents to the observations made by the authority during theaudit process.When an agreement is reached, 100% of the penalties that

would otherwise be applicable are waived. This is applicableonly in the first conclusive agreement entered into by thetaxpayer.Furthermore, if the parties do not reach an agreement, the

audit process resumes from the time of its suspension. Whenan assessment is made, the taxpayer’s right to challenge such

José Carlos SilvaChevez, Ruiz, Zamarripa y Cía

Vasco de Quiroga 2121 4° Piso, PeñaBlanca Santa FeCP 01210 México, DFTel: +5255 5257 7022Fax: +5255 5257 7001/[email protected]

José Carlos Silva is a partner at Chevez, Ruiz, Zamarripa y Cía inMexico City. His main areas of specialisation are internationaltaxation matters and tax treaty practices.He is member of the faculty of the Accounting Department of

the Instituto Tecnologico Autonomo de México (ITAM). Jose Carlosis an active member of the International Fiscal Association (IFA)and is a member of the association’s Permanent ScientificCommittee.

Bernardo IberriChevez, Ruiz, Zamarripa y Cía

Vasco de Quiroga 2121 4° Piso, Peña Blanca Santa FeCP 01210 México, DFTel: +5255 52 57 70 [email protected]

Bernardo is an associate at Chevez, Ruiz, Zamarripa y Cía inMexico City. He is specialised in federal taxation matters inMexico, with emphasis in cross-border transactions and invest-ment structures. Bernardo is a public accountant from InstitutoTecnológico Autónomo de Mexico (ITAM) in Mexico City, wherehe took a postgraduate course in corporate advisory. He holds amaster’s degree in international taxation from the University ofSydney in Sydney, New South Wales, Australia and took a post-graduate course in energy law at the Escuela Libre de Derechoin Mexico City.

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assessment through the applicable legal remedies would bepreserved.Based on information provided by the PRODECON for

2014, 873 conclusive agreement adoption requests were filedfrom the period of January 1 2014 to November 30 2014.

Influence of BEPS Action Plan in MexicoIn 2013, before the first draft of the tax reform for 2014 wassubmitted to the Congress for discussion, the Mexican taxauthorities anticipated their intention to include BEPS-basedrules within the Mexican tax legislation. Accordingly, in 2014Mexico became the first OECD member country to incorpo-rate into its tax legislation rules considering the BEPS ActionPlan published by the OECD.Indeed, in the comprehensive tax reform, approved by

Congress in late 2013 and entering into force on January 12014, different BEPS-based rules, primarily intended to cur-tail deductions, were incorporated into the Mexican IncomeTax Law, namely:• Limitations of deductibility of payments made to entitieson which the corresponding income is subject to preferen-tial tax regimes (anti-tax haven legislation);

• Limitation to deduct payments made that are alsodeductible for a related party resident in Mexico or abroad;and

• Limitations of interest, royalty and technical assistance pay-ments made to non-resident related parties when the recip-ient of the payments is disregarded or tax transparent in itscountry of residence, or where the income is disregarded. Additionally, as of 2014 the application of benefits derived

from tax treaties Mexico has entered into is subordinated bythe ability of non-resident taxpayers to demonstrate that theyare actually subject to juridical double taxation with respect tothe transaction in which they wish to claim treaty benefits.It is notable that despite the recent visible focus of the

Mexican tax authorities on transfer pricing issues related tocross-border transactions, as of today no specific measureshave been incorporated into Mexican legislation in line withwhat is set out in BEPS Action 13: Guidance on the imple-mentation of transfer pricing documentation and country-by-country reporting. However, the tax Bill that was recently filled by the execu-

tive branch to the Congress included an obligation forMexican-resident taxpayers to file new informative tax returnsof related parties:

• master file of the business multinational group; • local informative file of related parties; and • country-by-country informative return of the businessmultinational group.

2016 tax reformOn September 8 2015, the executive branch submitted a taxBill to the Mexican Congress, which contains several amend-ments to the federal tax laws already in force. If approved, theproposed amendments would apply in 2016. The proposedBill for tax year 2016 will be subject to discussion andapproval by the Mexican Congress.Some of the most important modifications that are being

proposed in connection with income tax are the following:• To eliminate the generality principle applicable to fringebenefits granted to non-union workers, as well as the limitto deduct such benefits;

• To exclude from thin capitalisation computation the debtsincurred in connection with the investment in infrastruc-ture related to electric power generation;

• To include the obligation of filing the aforementionedtransfer pricing informative returns of related parties;

• To entitle taxpayers engaged exclusively in the generation ofenergy from renewable sources or cogeneration system ofefficient electricity to maintain a profit account for invest-ment on energy sources, instead of the CUFIN [net after-tax profit account]. Additional tax on dividends would notapply for dividends distributed from such account;

• To allow to small taxpayers, for tax years 2016 and 2017,the net present value deduction of assets;

• To eliminate the requirements applicable to trusts forinvestment in venture capital (FICAPs) that implies thattheir maximum duration must be of 10 years;

• To establish a temporary procedure for legal entities andindividuals to repatriate offshore investments held untilDecember 31 2014 for which income was generated,including that from tax havens. Interest and penalties arewaived if the taxpayer chooses to repatriate the funds andinvest them in Mexico; and

• To incorporate several rules with the purpose of accelerat-ing and simplifying the exit process from the tax consoli-dation regime.It is necessary to stress that, after discussion by the

Mexican Congress, these modification proposals may besubject to change.

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