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Introduction to transfer pricing in Uruguay
Transfer pricing rules
- Transfer Pricing regulations were introduced in Uruguay in 2007 and continues to be an area of focus for the Uruguayan General Tax Bureau (DGI, as per its Spanish acronym), with audits increasing both in quantity as in sophistication.
- Such regulations include Chapter VII of Title 4 of T.O. 1996 (in Law 18.083), Decrees 56/009 and 353/018, and the pronouncements of the DGI on this regard. Local regulations adhere to the arm’s length principle.
- The TP rules apply to Uruguay Corporate Income Tax taxpayers, including local branches of overseas companies and there is a self-assessment regime, i.e., the onus is on the taxpayer to confirm its transfer pricing meets the standard or to adjust its tax return accordingly.
- The regime is a 'one-way street', i.e., upwards-only adjustments are permitted, and offsets between years and entities is not accepted.
- Only transactions with related parties resident abroad are subject to the regime, with the exception of local customs havens that benefit from a special regime of low or nil taxation. This includes transactions with permanent establishments in Uruguay of foreign-related parties, and with Uruguayan companies permanent establishments abroad.
- Uruguayan TP legislation states a wide definition of the relationship between parties, including the concept of a functional relationship. Moreover, taxpayers undertaking operations with entities structured, domiciled, located, residing or otherwise placed abroad in countries with low or nil taxation or benefiting from a special regime of low or nil taxation will also be subject to TP regulations for those transactions. This includes local and foreign customs havens.
- Taxpayers subject to this regime will be enforced to file annual documentation to the Tax Office if they are explicitly requested or if they have performed operations with related parties for over 50.000.000 Indexed Units (approximately USD 7.500.000 at the current exchange rate). However, even in cases in which subjected taxpayers do not reach the aforementioned amount, they are still enforced to perform a TP analysis and keep all corresponding and probative documentation in case of a fiscal audit.
- For larger multinational groups (over €750M of consolidated income) Uruguay has implemented CbCR (Country by Country Reporting) requirements. Master File obligation is included by Law, but it is not yet regulated and currently not in force.
- Uruguay’s transfer pricing rules do not explicitly refer to OECD Guidelines. However, in general terms and conceptually, current regulations follow them, with exception of commodities transactions.
- Although not mandatory, OECD Guidelines are usually considered an appropriate reference and approach by DGI.
Transfer pricing methods
- The most appropriate pricing method should be selected on a transaction per transaction basis, providing the most reliable measure of an arm’s length result in each case. The current 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. Other methods can also be used if justifiable and appropriate.
- There is no set hierarchy but in practice, however, a ‘natural hierarchy’ may be said to favor the comparable uncontrolled price method.
- As an exception to the above, there is a mandatory 6th method for commodities import and export operations. The requirements of this method are not aligned with OECD recommendations for these transactions, since local regulations are more restrictive.
- Uruguay has mostly a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to.
- Total amount of transactions subject to the regime must be disclosed in the Corporate Income Tax Return. This can lead to requirements from the DGI to companies which due to their intercompany transactions were obliged to file annual documentation and failed to do so. In case of a TP adjustment, it must also be included in the CIT Return.
- Obliged to file annual documentation or not, the lack of a TP Report at the start of a fiscal audit is not well seen by the DGI, and taxpayers are usually given a 10-day period to provide TP Reports for all fiscal years being audited.
- This self-assessment regime does not provide penalty protection regarding potential questionings from DGI during a Tax Audit.
Transfer pricing documentation
Preparation of transfer pricing documentation
- TP documentation minimum content is established in current regulations and although it was stated in 2009, it is reasonably aligned with BEPS Local File content.
- Companies that are enforced to file annual documentation are also required to file a special transfer pricing return.
- For taxpayers obliged to file annual documentation, the due date for the filing is during the ninth month after the fiscal year-end. However, substantial conclusions must be available for the fourth month, in which the Corporate Income Tax Return is due. In case of not considering a TP adjustment in the CIT Return and determining it afterwards, the corresponding tax will have to be paid plus fines and surcharges.
- Uruguay has also introduced CbCR (Country by Country Reporting) regulations which are effective for fiscal years starting on or after 1 January 2017 for multinational groups with revenues over €750m. Groups that have filed the CbCR as parent company or surrogate in countries with which Uruguay exchanges information, are exempted from filing the CbCR locally. There is a CbCR notification that applies in all cases regardless of where the Group files the CbCR.
- In case of having to file the CbCR, the due date is 12 months after the group’s fiscal year-end.
- Master File obligation has been introduced by Law, but regulation is pending and currently not being applied.
- Any documentation should be prepared in Spanish.
- Transfer pricing documentation must be preserved for the term of tax prescription, which is of five years in normal conditions, but can be extended to ten years given certain circumstances.
Some risk factors for challenge
- Royalties paid abroad are frequently questioned, requiring substantial information from the taxpayer to prove the benefits it obtains from the licensed intangible.
- Services received from related parties abroad are usually challenged, requesting information to prove the actual rendering of the service, its necessity and the benefits it provides to party that receives them. Indirect expenses or overheads assigned via pro-rata criteria are not likely to be accepted.
- Persistent losses in a 'low risk' entity.
- Licensing payments to low tax jurisdictions.
- Business restructurings, or changes in TP model, can also trigger a challenge but businesses can evolve, and if the previous TP method no longer appears as the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
- In principle, according to the law, the burden of proving that the terms and conditions of a transaction are not in conformity with market values falls on the DGI, except in the case of transactions performed by the IRAE taxpayer with companies in low-tax or nil-tax jurisdictions, or regimes that are absolutely presumed not to be arm’s length. However, the documentation requirements imposed by the DGI have, in fact, transferred such burden to the taxpayer.
- CIT taxpayers who do not comply with the formal duties foreseen in the transfer pricing regime shall be penalized -in a graduated way- depending on the gravity of the violation (eg reiteration, the relevance of the fiscal damage, etc.). The maximum amount of the penalty established is, at the current exchange rate, of approximately USD 290.000. However, this has never been regulated as to how it would be applied and graduated, and hasn’t been applied.
- In case of a challenge from the tax authority or late determination by the taxpayer, a fine of 20% (in most cases) and surcharges on underpaid tax.
- In certain cases, including non-compliance with CbCR obligations, the DGI can suspend the company’s certificate, which prevents the taxpayer from both importing and exporting, among other consequences.
- Examples of more severe sanctions include tax fraud both as an infringement (punished with a fine of between one and fifteen times the amount of the fraudulent tax omission or attempted omission) and as a criminal act (subject to an imprisonment penalty of between six months and six years). In both cases, the behavior subject to punishment is configured by deceit or deceitful concealment with the purpose of creating an undue fiscal benefit.
Economic analysis and how to demonstrate an arm’s length result
- DGI will expect to see that a search for potential internal comparables has taken place before defaulting to an external database search for comparables.
- Local comparable companies are preferred. However, given the usual lack of them, reasonable international comparables are usually accepted.
- In case of two or more comparable observations, whether they are profit margins of companies or uncontrolled prices, an interquartile range must be determined as the market range.
- 'Secret comparables' can be an issue, as they are explicitly allowed by law. Experience in dealing with this subject with DGI has been ambiguous, varying the outcome in each case.
- Even though the Law entitles the Executive Power to establish special regimes of presumed income for the taxpayers to use (commonly known as 'safe harbors'), the current regulations do not include any issue on that regard.
- Local regulations explicitly accept that either the local or the foreign related party can be selected as tested party, as long as the choice is reasonable and in accordance with the transaction under analysis.
- In accordance with Decree 56/009, the comparability factors include, among others: characteristics of the transactions, functions or activities including assets engaged and risks assumed in the transactions of each of the parties involved, contractual terms, and economic circumstances. The regulatory decree does not mention ‘business strategies’ as one of the factors determining comparability. However, the elements and circumstances referred to in the decree are not stated in a restricted sense. In this case, an in-depth analysis is recommended.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advanced Pricing Agreements (APAs) are written agreements between a business and DGI to govern the appropriate transfer pricing method for a forward-looking period, which has a maximum of three years.
- Bi and Multilateral APAs including foreign jurisdictions tax authorities are also within the scope of the regulations.
- Uruguay currently has only two APAs signed, only one currently in force, and some failed attempts due to different reasons.
- While DGI is in principle willing to sign APAs with taxpayers, its interest actually depends on the taxpayer’s industry and main activity.
- Uruguay has no experience this far in Mutual Agreement Procedure (MAP) regarding transfer pricing disputes.
- Uruguay has ratified the OECD Multilateral Instrument (MLI) and hence where the other country (treaty partner) has also agreed, arbitration should be available to eliminate double taxation. This must be checked on a country-by-country basis.
- There are usually no 'secondary adjustments' or recharacterization sought where a TP adjustment is made
- Companies operating from Uruguay’s Free Trade Zones are exempted from filing the TP Report and special return regardless of the amount of their intercompany transactions.
- Other than that, there is no exemption nor minimum materiality of transactions to be included within the regime.
- Given the economic fallout of COVID-19, companies business and operations will be affected and the usual practice of considering financial information of comparable companies of last three years should be reviewed when necessary.
- Financial operations such as loans are likely to increase and conditions agreed in them could be very different from what the exact same companies could have agreed prior to the pandemic.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.