Transfer Pricing Regulations in Ecuador
The current regulations on transfer pricing in Ecuador are set forth in Article 4 of the Internal Tax Regime Law (LRTI) and Articles 84, 85, 86, 87, 88, 89, 90, and 91 of the Regulations for the Application of the Internal Tax Regime Law (RLRTI).
For audit purposes, taxpayers must submit to the SRI, by the dates and in the manner established by the SRI, the schedules and reports regarding such transactions. To this end, it has established the methods for valuing such transactions, which are based on the applicable OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations.
The Internal Revenue Service (SRI) requires proof that the prices in transactions with related parties are at market values, through the submission of the “Annex on Transactions with Related Parties” and the “Comprehensive Transfer Pricing Report.” This requirement is based on Article 66-1 of the Regulations for the Application of the Internal Tax Regime Law. This provision stipulates that a taxpayer must determine its revenues, costs, and deductible expenses by considering, for such transactions, the prices and values of consideration that would have been used with or between independent parties in comparable transactions.
Related-Party Rules in Ecuador
As established in the Organic Law on the Internal Tax Regime (LORTI), “related parties” are defined as individuals or corporations, whether or not domiciled in Ecuador, where one of them is directly or indirectly involved in the management, administration, control, or capital of the other, or where a third party participates directly or indirectly in such transactions. In this regard, the LORTI considers the following, among others, to be related parties:
- The parent company and its affiliates, subsidiaries, or permanent establishments.
- Affiliates, subsidiaries, or permanent establishments, among themselves.
- Parties in which the same individual or company participates directly or indirectly in the management, administration, control, or capital of such parties.
- Parties in which decisions are made by governing bodies composed primarily of the same members.
- Parties in which the same group of members, partners, or shareholders participates directly or indirectly in the management, administration, control, or capital of such parties.
- Members of the company’s governing bodies with respect to the company itself, provided that relationships not inherent to their positions are established among them.
- The company’s directors and auditors with respect to the company itself, provided that relationships are established among them that are not inherent to their positions.
- A company with respect to the spouses, relatives up to the fourth degree of consanguinity or second degree of affinity of the company’s executives, directors, or auditors.
- An individual or company and any trusts in which it holds rights.
Additionally, Article 4 of the RLRTI defines the criteria for establishing a relationship between related parties, whether based on percentage of capital or the proportion of transactions; among these, it mentions the following cases:
- When a natural person or corporation directly or indirectly holds 25% or more of the share capital or equity in another corporation.
- Companies in which the same partners, shareholders, or their spouses, or their relatives up to the fourth degree of consanguinity or second degree of affinity, directly or indirectly hold at least 25% of the share capital or equity, or engage in commercial transactions, provide services, or are in an employment relationship.
- When an individual or corporation directly or indirectly holds 25% or more of the capital stock or equity in two or more corporations.
- When an individual or corporation, whether or not domiciled in Ecuador, conducts 50% or more of its sales or purchases of goods, services, or other types of transactions with an individual or corporation, whether or not domiciled in the country.
Taxpayers who meet the requirements set forth in the regulation will be subject to the transfer pricing regime and must file the schedules, reports, and other documentation related to transfer pricing, in the manner established in the Regulations, without the need for notification by the Tax Administration.
To determine whether parties are related when transactions between them do not conform to the arm’s-length principle, the Tax Administration will apply the methods described in the regulations.
Formal Obligations: Informative Tax Returns
The income tax taxpayers required to file transfer pricing documentation are as follows:
Informative Affidavit: Taxpayers who have conducted transactions with certain related parties—whether domestic or domiciled abroad—during the same tax period, with a cumulative amount exceeding USD 3,000,000.00, must file the Related-Party Transactions Schedule.
The Related-Party Transactions Schedule must be filed and submitted through the Internal Revenue Service’s website using the DIMM System.
Technical Transfer Pricing Study: If the total amount of transactions with related parties exceeds USD 15,000,000.00, the taxpayer must file, along with the Related-Party Transactions Schedule, the Comprehensive Transfer Pricing Report in accordance with the provisions of the Technical Guidelines for the Standardization of Transfer Pricing Analysis, which is published on the website www.sri.gob.ec.
Deadline for Filing Annual Tax Returns.
Taxpayers subject to the transfer pricing regime must file the Transfer Pricing Report and its Annexes with the SRI within two months of the due date for the income tax return.
Penalties for Noncompliance
Ecuador has a specific penalty regime for transfer pricing. Fines of up to USD15,000 may be imposed if taxpayers fail to file the Transfer Pricing Report or the Related-Party Transactions Annex, or if inaccuracies, errors, discrepancies, missing information, or false data are detected.
Notwithstanding the above, the Tax Administration issued Guidelines for the Imposition of Monetary Penalties, which are used to determine the amount of the fine based on the severity of the violation or minor offense (late filing or submission of incomplete or erroneous information by local taxpayers). According to these guidelines, late filing could result in a fine of up to USD 333.
