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Introduction to transfer pricing in Guatemala
Transfer pricing rules
- The transfer pricing legislation (TP) is contained in the Decree 10-2012 Book One of the Ley de Actualizacion Tributaria which contents the income tax standard. The law established the use of the arms-length principle in accordance with Article 54, which is similar to Article 9 of the OECD Model Tax Convention on Income and Capital, ie it follows the OECD Guidelines. The rules are not heavily formulaic but instead are principles-based.
- The TP rules apply to the transactions made between a domestic taxpayer with a related non-resident entity, and the domestic taxpayer has to review that those transactions meet with the arm’s length principle.
- The regimen allows adjust the domestic taxable income as a 'one-way street', due to the offsets may not be accepted.
- The TP regulations request to present a TP Annex together with the annual income tax each 31 March regarding the transaction of the previous year. The documentation (report) should be requested by the tax office and it must comply with the tax office guidelines n and must be submitted 20 business day after a formal request from the authorities.
- The Master File is considered a best practice, for larger groups some detailed information will be requested in the section related with the Business Corporate Information.
- The OECD Guidelines are not part of the standards applied in the country. Guatemala has not accepted the OECD rules for domestic purposes. The domestic tax office guidelines must be used. The OECD guidelines can be used only for illustrative purposes.
Transfer pricing methods
- The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The domestic methods contained in the law are similar to the OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted but the method used must be in line with the functional and risk profile of the entity. In addition, the domestic laws establish a sixth method to be used for the exportation/importation of commodities (like in South America).
- Guatemala has not adopted the BEPS Actions, but some of them are incorporated in the income tax law as thin capitalization with some changes, transfer pricing and permanent establishment.
- Guatemala has a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to. There is a ‘tick box’ on the tax return form for taxpayers to confirm their eligibility for the transfer pricing rule. There is no exemption for SMEs or amount to do not apply this type of regulation.
Transfer pricing documentation
Preparation of transfer pricing documentation
- Country by Country reports are not mandatory for Guatemalan purposes, but it is a best practice. A local documentation is necessary to comply with the domestic rules.
- Lack of carefully prepared documentation will generally be seen as (at least) 'careless' behavior and any adjustment will likely result in penalties. In this case, the local tax office guideline should be used.
- The documentation should be prepared in Spanish due the legal language is this and this should be signed by a local CPA, and be available by 12 months from the accounting period end.
- Currently, the domestic regulation request that the documentation that should include:
- primary accounting records
- tax adjustment records (if applicable)
- record of transactions with related entities
- documentation to demonstrate an arm’s length result.
Master and local file
- Although the Master structure is best practice, the local current documentation requirements are prescriptive. The Tax office view is that transfer pricing documentation should usually include a background to the company, a group structure, an outline of the key intercompany transactions under analysis, an analysis of the key functions, assets and risks of the company, industry analysis and economic analysis including supporting evidence such as comparables, if required. The key is that it explains the value driving activities and the management of risk in the group and shows that the policies are at arm’s length.
- Transfer pricing documentation must be preserved until the latest of four years from the end of the accounting period, the date on which any enquiry into the return is completed, or the date on which tax office is no longer able to open an enquiry.
Some risk factors for challenge
- The tax office has incremented the tax revisions on this type of matter since 2020.
- The sixth method, to commodities, is complicated due the value of the exportation product is connected with the 'day' of the transaction.
- The request of information on tax audit is very high and accounting segmented information is required to review the compliance with TP rules.
- The tax office is applying deep audits on this type of matter.
- Penalties in relation to transfer pricing documentation are derived from the general record-keeping requirements. Two main types of penalties may apply; a penalty for failure to keep or produce documentation and a tax geared penalty for a careless or deliberate error.
- The fixed penalty for failure to keep or produce documentation records is USD$700.
- The tax-geared penalty is as of 100% with a reduction of 85% or 75% depends.
- The potential tax adjustments will be made by the tax authorities up to the median.
Economic analysis and how to demonstrate an arm’s length result
- There is not a formal limitation to use internal or external comparable. But we understand that the tax office would request an explanation (disclosure) why the taxpayer would use an external database.
- External comparable can be used, it is important to select appropriate comparable regarding the size, economy, and numbers.
- There is no specific comparable or dataset to be used.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advanced Pricing Agreements (APAs) are written agreements between a business and tax office to govern the appropriate transfer pricing method for a forward-looking period. At this moment, even though there is tax legislation, we understand that there are no APAs authorised by the tax office.
- The income tax law only allows unilateral APAs.
- They will not allow 'DIY MAP' or downwards profit adjustments by taxpayers on their tax returns.
- The law there is no contain exemptions to used TP rules regarding amount of transaction or entity (ie: SMEs).
Digital services tax
- In Guatemala the income tax regulation establishes a withholding tax on digital services of 5%. This is only applied by corporations, but there is no obligation to perform this on services contracted by individuals.
Tax authorities and taxpayer behaviour
- The tax office has recently placed a great focus on improving the standards of transfer pricing documentation and economic analyses via reviews of taxpayer and agent 'behaviour'. It will expect local reviews of functions, assets and risks, accurate characterisation, and high-quality TP documentation, otherwise penalties may be sought.
- The tax office is working to adopt measures about the Covid-19 (year 2020).