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Global transfer pricing guide

Transfer pricing - El Salvador

01 Oct 2023

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Introduction to transfer pricing in El Salvador
Transfer pricing rules
  • The transfer pricing (TP) legislation were introduced to the Salvadoran Tax Code since November 2009, effective as of 2010 fiscal year, in articles 62-A, 124-A, 135 literal f), 147 literal e), 199-A, 199-B, 199-C, 199-D and 244 literal I).
  • TP rules in El Salvador are mainly based in the OCDE Guidelines, however there are other specific domestic considerations that taxpayers needs to addressed, such as the definition of related party which include transactions conducted with entities located in preferential tax regimes and domestic transactions, local methods, among others.
  • The General Directorate of Internal Taxes (DGII) issued in 2018, the “Transfer Pricing Guide” aiming to facilitate the transfer pricing determination, as well as to address the relevant regulations around transactions between related parties. This document is based in the OECD Guidelines and local regulations.
  • Taxpayers must comply whit documentation requirements such as the transfer pricing report and the informative TP return.
  • The DGII annually issues a guide to facilitate the recognition of preferential tax regimes, listing several countries, states or territories that are considered by the Tax Administration as having low, no taxation or "tax heaven". Transfer pricing rules also applies to transactions conducted with a subject located or stablished in any of these territories.
OECD guidance
  • The Salvadoran Transfer pricing rules are not completely aligned to the OECD Guidelines. Although OECD Guidelines where mentioned previously in the reform of article 62-A of July 2014, in May of 2018 the Constitutional Hall of El Salvador’s Supreme Court of justice issued a judiciary resolution leaving without effect that reform, which includes among others, the reference to the OECD Guidelines.
  • In March 2018, the Tax Authority issued the Transfer Pricing Guide, which is a general orientation for taxpayers required to comply with the TP rules, replacing the 2012 version. This guide includes the OECD methods for transfer pricing analysis, comparability analysis process and recommendations for preparing the TP documentation.
Transfer pricing methods
  • The OECD Methods are generally acceptable, preferably in a transaction by transaction basis, following the most appropriate method principles.
  • There is a local method used by the Tax Authority called the "Market Price" which is similar to the CUP method but with much more restriction in the number and type of comparable transactions. This method does not accept a range of comparable values and is generally applied by the tax authorities in the cases that the taxpayer fails to prepare the TP supporting documentation. For taxpayers, this method is inapplicable in most cases.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • According to article 147, literal C) of the Tax Code, it is mandatory for taxpayers to document the transactions conducted with related parties or subjects located in preferential tax regimes (transfer pricing report) and the pricing analysis. In case of a transfer pricing audit the documentation must be available for the Tax Administration. Any documentation must be prepared in Spanish and be keep for a period of 10 years.
  • The transfer pricing report must be prepared regardless of the transactions amount in the year.
  • The documentation must also be available for the External Tax Auditor prior to May 31st (in case the company appoints a tax auditor).  
  • When transactions conducted with related parties in a fiscal year exceed USD 571K, taxpayer must prepare the TP informative return prior March 31st (for companies whose fiscal year ends in December).
  • The Transfer Pricing Guide of the Tax Authority refers to the supporting TP documentation that should include: background to the group and the company, the group legal and operative structure, an outline of the key intercompany transactions under analysis, an analysis of the key functions, assets and risks of the company, an industry analysis and an economic analysis including the comparables supporting evidence.
  • TP documentation must be prepared in Spanish and be kept by the taxpayer for a period of 10 years.
Master and local file
  • To the date, El Salvador has not incorporated into the TP legislation the documentation scheme proposed by the OECD in the framework of BEPS. And although the Master and Local file structure is best and standardized practice, there are local elements of the transfer pricing regulation that would be left out and could end in non-compliance with the TP rules.
  • The scope of TP rules applies for domestic transactions, transactions carried out with any subject that is located in preferential regimes, any subject with an exclusive distribution contract and a foreign supplier that represents more than 50% of total purchases. There is also a local method that should be analyzed, if applicable, or be discarded.
Some risk factors for challenge
  • Intercompany Services or royalty payments with lack of documentation, benefit test, and materialisation.
  • Sale of tangible goods at a unit value below cost (even commodities).
  • Business restructurings without taking into consideration an anticipated TP analysis.
  • Persistent losses.
  • Payments or transactions through low tax jurisdictions.
Penalties
  • Penalties in relation to transfer pricing informative return are derived from failure in submitting the form, submitting it out of the legal term (31 March) and/or referring it without specifications contained in the tax code. In any of these cases, the penalty will be of 0.5% over the equity or capital stock of balance sheet.
  • Daily interest may also apply.
Economic analysis and how to demonstrate an arm’s length result
  • If there are internal comparable transactions, whether they are accepted or rejected, it is recommended to perform a comparability analysis before resorting to external sources.
  • Transactional analysis is preferred over resorting to aggregate or pooled analysis. If an aggregate analysis is used, it is recommended to detail the reasons.
  • When segmented financial information is used, keep in mind to have robust support and consistency in allocation criteria.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • There is no Advanced Pricing Agreements (APAs) regime applicable in El Salvador.
Exemptions
  • There are no exemptions for preparing the transfer pricing documentation, regardless size of the company or volume or transactions.
  • There are exemptions for submitting the TP informative return F-982, if the transactions conducted with related parties does not exceed the amount of US $571,429 in a year.

For further information on transfer pricing in El Salvador please contact:

Georgina Cuellar.png

Georgina Cuellar
T +503 2267 7900
E georgina.cuellar@sv.gt.com

  
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