Transfer Pricing
Country Summary
Ecuador

Overview:

Transfer Pricing Regulations in Ecuador

Transfer pricing regulations in Ecuador are defined by Executive Decree No. 2430, effective from 2005. While Ecuador is not an OECD member, its tax authority, the Servicio de Rentas Internas (SRI), uses the OECD Transfer Pricing Guidelines as a reference. Resolution No. NAC-DGERCGC15-00000455 outlines content requirements for transfer pricing documentation.

Definition of Related Party

Related parties are defined based on the OECD Model’s article 9(1). This includes parent-subsidiary, head office-branch, permanent establishment, and more. If transactions do not follow the arm’s length principle, the SRI may deem them related. Transactions with entities in tax havens are considered related parties. The burden of proof lies with taxpayers.

Nature of Transfer Pricing Documentation

Ecuador hasn’t adopted BEPS Action 13, so there are no Master Files, Local Files, or CbC reports. Transfer pricing must be reported in Form 101 for annual income tax returns, accompanied by a tax compliance report signed by an independent CPA. For significant transactions exceeding $3 million, taxpayers must submit an Annex of Operations with Related Parties (AOPR). The taxpayer must provide this information within two months of the income tax return becoming enforceable.

Tax Havens & Blacklists

SRI issues resolutions that define tax havens and lower-tax jurisdictions. Transactions with entities in these regions are treated as related parties for tax purposes.

Advance Pricing Agreement (APA)

Taxpayers can request the SRI to value activities with related parties based on the arm’s length principle. This inquiry applies to activities in the current and following fiscal years.

Audit Practice

SRI has a dedicated transfer pricing team responsible for compliance. Transfer pricing issues are audited during tax audits, starting with desk reviews and followed by on-site inspections. The burden of proof typically lies with taxpayers.

Transfer Pricing Documentation

The level of documentation depends on transaction amounts. Aggregate transactions above $15 million require a transfer pricing report. Transactions between $3 million and $15 million need an informative return (Annex). The documents should include identification of the taxpayer, information on foreign-related parties, transaction details, the transfer pricing method, comparables, and adjustments made. Ecuador relies on foreign comparables due to insufficient local financial data.

Industry Analysis

Value drivers for specific industries are considered to determine common profitability levels.

Company Analysis

The management structure, organization chart, business description, and restructuring or intangibles transfers are assessed.

Functional Analysis

The assessment includes activities, assets, risks, and is consistent with OECD Guidelines.

Choice of Transfer Pricing Method

Ecuador accepts multiple transfer pricing methods but favors the CUP method. The method should best fit the specific business and circumstances.

Economic Analysis – Benchmark Study

Ecuadorian companies use foreign comparables, and the tax authorities have published methods to determine comparable prices, especially for banana transactions.

Inter-company (IC) Legal Agreement

IC legal agreements are less important since the focus is on the parties’ conduct.

Financial Statements

Financial statements include balance sheets, profit and loss statements, and other relevant disclosures.

Production Process for TP Relevant Returns, Documents, Forms, and Financials

The submission process is determined by the ninth digit of the taxpayer’s identification number. There is a two-month deadline for transfer pricing documents, and the statute of limitations is three years.

Mandatory Language

Documentation should be in Spanish, although the use of English in some sections is unclear.

Notification Requirement

There’s no specific notification requirement for CbC reporting.

Record Keeping

There are no specific rules for record-keeping. Tax legislation and other disciplines must be followed.

Penalties and Interest Charges

Ecuador imposes penalties of up to $15,000 for failing to submit transfer pricing reports or for errors and discrepancies. Late filing can result in penalties up to $333, based on the severity of the error.