Newsletter TAX – Transfer Pricing Ecuador1
The Internal Revenue Service in Ecuador (hereinafter, "SRI" for its acronym in Spanish) established regulations in regards to indirect expenses in order to apply a deductibility threshold for these expenses when calculating the Income Tax for Ecuadorian taxpayers, when expenses have been allocated from abroad by their related entities.
Following the resolution published by the SRI, indirect expenses will be those incurred by any member2 of the international group and allocated to the taxpayer in Ecuador, if:
- The same basis for the allocation of costs or expenses has been applied to more than one member of the group or related party; or
- In the event a different allocation basis has been applied, the functions, assets or risks related to the entity which directly incurred in such costs or expenses do not imply a significant profit margin, in compliance to the required analysis established by the Transfer Pricing Regime.
This rule has to be applied following principles of economic essence, regardless of the amount, number of participants, means and ways of payment.
The taxpayers that have in place agreements for the exploitation and transport of non-renewable resources, have to apply the same treatment of the indirect expenses to technical and administrative services (including advisory).
Considering the deductibility of indirect expenses, the SRI has established the following thresholds:
- When the taxable amount of the period plus the amount of the direct expenses allocated from abroad by related entities is less than zero, said expenses will not be deductible;
- In the event that the taxable amount of the period plus the amount of the indirect expenses allocated from abroad by related entities is greater than zero, a deductibility threshold of 5% of this sum will be applied.
- For the taxpayers that are in a start-up phase the limit will be 5% of the amount recorded as assets, as of December 31 of the year prior to that under review.
Calculation, should only consider the allocated indirect expenses from abroad for the taxable year under review, regardless of the accounting treatment (Balance Sheet and/or Profit & Loss).
Regarding indirect expenses recorded within asset accounts to be amortized in future periods, the threshhold should be applied on each of the taxable years in which the amount to be depreciated or amortized has been recorded.
Transactions outside of the scope of the Threshold
The expenses mentioned below are outside of the threshold of the resolution, to the extent they are subject to the rule included in numeral 16 of section 28 of the Internal Tax Regime:
- Technical and administrative services (including advisory), rendered to taxpayers that do not have in place agreements for the exploration, exploitation and transport of non-renewable resources; and
- Royalties recorded as asset, cost or expense by the taxpayers.
Additionally, the indirect expenses allocated by related parties located or which have permanent establishments in Ecuador, will not be subject to the thresholds of this Resolution.
Application of Double Taxation Treaties (DTT)
To apply the benefits included in the DTT regarding indirect expenses and reimbursements, the general and specific dispositions for the application and avoidance of abuse in this type of treaties will be attended, being dispositions of the treaty or other applicable regulation, including:
- Substance over form;
- Good faith in the interpretation of treaties;
- The conditions of main purpose, activity and/or substantial presence and effective beneficiary;
- The limitation of benefits; and
- The certification of tax residence.
This resolution became enforceable on August 11, 2016.
If you are under the obligation of complying with the Transfer Pricing Regime in Ecuador, our tax department can analyze your situation and if necessary prepare the corresponding formats.
Dentons Cardenas & Cardenas has always supported its clients in any and every type of transactions, providing a service of quality and procuring the timely compliance with the obligations generated by them.
We remain at your disposal for any additional information that you may require.
1 Official Resolution No.NAC-DGERCGC16-00000332, published on August 10/2016 in the Official Records Journal No. 816.
2 Foreing related entities of the taxpayer located abroad.
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