CIAT Develops Risk Model For The Selection Of Transfer Pricing Audit Cases In Ecuador

; posted on
August 7th, 2019

The Inter-America Center of Tax Administration (CIAT) announced the publication of a document entitled: "Structuring of a transfer pricing risk model in Ecuador" on the structuring of a transfer pricing risk model in Ecuador, which was developed by Ecuador's tax administration (SRI) with the coordinated support of CIAT, the UN, the German Society of International Cooperation (GIZ), and the Mexican tax administration service (SAT).

The structure of Ecuador’s risk model

SRI, as the entity in charge of control has created a transfer pricing risk model whose implementation in Ecuador endeavors to continue strengthening its struggle against tax evasion and fraud.

In structuring the risk model, the SRI’s specialized technical working team involved in the project the executing units of the transfer pricing examination processes at the national level. Thereafter, it applied the CRISP-DM (Cross Industry Standard Process for Data Mining) methodology to determine the tax risk probability, based on the understanding and preparation of the information available at the SRI for developing the main risk variables and indicators in the application of transfer pricing.

This information was then used to model the data by means of artificial intelligence techniques (neuronal networks), analysis of the main components, Kohonen networks, K-means clusters, Two-step clusters, decision trees, optimum bands and text mining. It is worth noting that the population examined corresponds to the companies that carried out operations with related parties abroad and the information analyzed covers the 2012- 2017 fiscal periods.

The result from the model

To facilitate the analysis and selection of taxpayers to be controlled, the results obtained from the model were used to establish a risk score. That is, a value between zero and one thousand points calculated on the basis of the probabilities generated from the mathematical model, to finally assign each case a low, medium or high risk category.

Due to the applied technical specialty, the transfer pricing risk model will be a strategic tool for the objective selection of tax audit (examination) cases whose effectiveness may be maintained through time. This will be so, to the extent that the experiences resulting from its application are taken into consideration for its continuous improvement.

Source: CIAT

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