Transfer Pricing in El Salvador
Transfer pricing regulations in El Salvador were included in 2009, through the enactment of Legislative Decree No. 233, which amends and adds articles 62-A, 124-A, 199-B, 199-C, 199-D of the Tax Code, which frame this regime.
Subsequently, in 2014, an amendment was made to Article 62-A of the Tax Code of El Salvador, incorporating for the first time the mention to the transfer pricing guidelines given by the Organization for Economic Cooperation and Development (OECD).
Definition of Transfer Pricing
Transfer prices are understood to be the prices or values agreed for operations carried out between related parties or also called intercompany transactions.
Principle of Full Competition
This principle, also known as the “arm’s length” principle that governs transfer pricing, is based on the fact that the prices or considerations agreed between related parties are at market value.
In El Salvador’s transfer pricing legislation, this principle can be found in Article 62-A of the Tax Code, which states that taxpayers who enter into transactions with related parties must determine their prices based on market prices, i.e., at prices that would have been agreed upon by independent parties.
Scope of Application of Transfer Pricing in El Salvador
According to Article 62-A, of the Tax Code, taxpayers who are in any of the following situations will be within the scope of the transfer pricing rules in El Salvador.
- Carry out operations with related subjects.
- Carry out operations with subjects that are domiciled, constituted or located in countries, states or territories of low or null taxation or tax havens, or that have preferential tax regimes.
Definition of Related Subjects in El Salvador
Article 199-C, of the Tax Code of El Salvador, stipulates who will be understood as related subjects.
Said norm indicates the following:
- When one of them directs, controls or possesses, directly or indirectly, equal or more than 25% of the corporate capital or voting rights of the other.
- When both parties have five or less persons in common that direct, control or possess jointly the percentage indicated above, either directly or indirectly.
- Companies that are part of the same Business Group.
- For the purposes of the first two cases of relationship described above, a natural person will also be considered to hold the indicated percentage of the capital, when the ownership of the holding, whether directly or indirectly, corresponds to the spouse or person by blood relationship, up to the fourth degree and by affinity up to the second degree.
- When any of the contracting parties or associates in a union of persons, de facto companies, business collaboration contracts or joint venture participate, directly or indirectly, in more than 25% of the result or profit of the contract.
- The person domiciled in El Salvador with respect to its exclusive agent or distributor resident abroad.
- An exclusive agent or distributor domiciled in the country, with respect to an entity abroad.
- The person domiciled in the country with its supplier resident abroad, when the former makes purchases for more than 50% of its volume.
- The person resident in El Salvador with respect to its permanent establishments abroad.
- A permanent establishment in the country with respect to its parent company abroad.
Definition of Tax Havens or Preferential Regimes in El Salvador
According to the last paragraph of Article 62-A of the Tax Code, countries or territories with low or no taxation or preferential tax regimes are considered as such when:
- When they are not taxed abroad, or when they have an income tax calculated 80% lower than the one that would have been paid in El Salvador.
- Those classified by the OECD and the Financial Action Task Force (FATF) as such.
Additionally, the General Directorate of Internal Taxes (DGII) will publish a list indicating the countries that qualify as such.
Transfer Pricing Methods in El Salvador
Article 199-B, of the Tax Code indicates what should be considered as market price, pointing out rules in case of local and international operations.
Thus, in case of local operations, the market price will be determined based on the price agreed upon by the unrelated local businesses, as to the same goods or services.
In case of transfer of goods or services to foreign subjects, the market price will be determined by the price at which other unrelated subjects would have agreed for goods or services of the same kind, from El Salvador to the same place of destination.
For imports, the market price will be the price for such operations in the country where they were acquired or provided, plus the costs or expenses, if any.
It should also be noted that Article 62-A, after the amendment made in 2014, states that the methods contained in the Transfer Pricing Guidelines established by the OECD may also be used to determine the market price.
Therefore, the following methods would also be applicable to it:
- Comparable Uncontrolled Price Method.
- Resale Price Method.
- Added Cost Method.
- Profit Sharing Method.
- Net Transaction Margin Method.
Comparability Analysis in El Salvador
In order to be able to analyze whether two or more operations are comparable, article 199-D of the Tax Code has established the following comparability criteria to be taken into consideration:
- Characteristics of the transactions.
- Analysis of functions, assets and risks in the transactions by each of the parties.
- Contractual terms.
- Economic circumstances.
- Business strategies.
Transfer Pricing Affidavit in El Salvador
Article 124-A, of the Tax Code establishes that those taxpayers who carry out operations under the scope of transfer pricing rules must submit a report of such operations to the Tax Administration.
In addition to performing these transactions with related parties or tax havens, in order to be obliged to file such return, the transactions indicated separately or jointly must be equal to or greater than five hundred seventy-one thousand four hundred twenty-nine dollars ($571,429.00).
This declaration shall be made through Form 982, with a deadline for filing no later than within the first three months of the fiscal year.
In order to file such a declaration, the DGII makes available the general guidance guide for transfer pricing.
Transfer Pricing Documentation in El Salvador
Taxpayers must keep the documentation related to operations with related parties and/or tax havens, which may be required by the Tax Administration.
Sanctions for Noncompliance with Transfer Pricing in El Salvador
Failure to submit the transfer pricing report or statement generates the infringement defined in paragraph b) of Article 241 of the Tax Code for submitting the reports established by the Tax Administration out of time.
This is sanctioned with a fine equivalent to 0.5% of the patrimony of the taxpayer who commits the infraction.
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