Transfer Pricing Regulations in El Salvador
Since December 16, 2009, Salvadoran taxpayers have been required to file the Transfer Pricing Information Return with the Tax Administration, as established by Legislative Decree No. 233. Articles 62A, 124, 147, 199-A, 199-B, 199-C, 199-D, and 244 of the Salvadoran Tax Code contain the regulations governing transfer pricing.
Likewise, Legislative Decree No. 763, dated July 31, 2014, published in the Official Gazette No. 142, Volume 404, amends Article 62-A, requiring taxpayers to use the procedures and technical methods set forth in the Tax Code and in the transfer pricing guidelines of the Organization for Economic Cooperation and Development (OECD).
Article 62-A, paragraph 1, of the Tax Code provides that: “For tax purposes, taxpayers who enter into transactions with related parties are required to determine the prices and amounts of consideration, taking into account for such transactions the market prices used in transfers of goods or the provision of services of the same kind between independent parties. Likewise, taxpayers must determine at market prices the transactions or dealings entered into with parties domiciled, incorporated, or located in countries, states, or territories with preferential tax regimes, low or no taxation, or tax havens.”
Transfer Pricing Rules in El Salvador
For the purposes of transfer pricing regulations, two parties (individuals, legal entities, and other organizations with or without legal personality) are considered related parties in El Salvador according to the criteria established in Article 199-C of the Tax Code:
- When one of them directs or controls the other, or holds, directly or indirectly, at least twenty-five percent (25%) of its capital stock or voting rights, whether in the domestic or foreign entity.
- When five (5) or fewer persons direct or control both related parties, or collectively hold, directly or indirectly, at least twenty-five percent (25%) of the share capital or voting rights of both parties.
- When the entities involved are legal entities—whether resident in El Salvador or foreign—that belong to the same business group. In particular, for these purposes, two (2) companies are considered to be part of the same business group if one of them is a partner or shareholder of the other and is in one of the following situations with respect to the other:
- It holds a majority of the voting rights.
- It has the power to appoint or remove members of the governing body or, through its legal representative, exercises decisive influence over the other entity.
- It can, by virtue of agreements entered into with other shareholders, exercise a majority of the voting rights.
- It has appointed, exclusively through its own votes, the majority of the members of the board of directors.
- The majority of the members of the governing body of the controlled legal entity are officers, managers, or members of the governing body of the controlling company or of another entity controlled by the latter.
When two (2) companies each form part of a business group with respect to a third company in accordance with the provisions of this paragraph, all such companies constitute a business group.
An individual is also considered to hold an interest in the capital stock or voting rights when ownership of the interest or shares, directly or indirectly, belongs to a spouse or a person related by blood up to the fourth degree or by marriage up to the second degree.
Furthermore, the following are also considered related parties:
- A person resident in El Salvador and an exclusive distributor or agent of that person resident abroad.
- An exclusive distributor or agent residing in El Salvador of an entity residing abroad, and said entity.
- A person resident in El Salvador and its permanent establishments abroad.
- A permanent establishment located in El Salvador and its parent company resident abroad, another permanent establishment of the same company, or a person related to it.
Formal Obligations: Informative Affidavits
Informative Affidavit
Pursuant to Article 124-A of the Tax Code, taxpayers who enter into transactions with related parties or parties domiciled, incorporated, or located in countries, states, or territories with preferential tax regimes, low or no taxation, or tax havens during a fiscal year, and where such transactions, whether individually or in the aggregate, equal or exceed five hundred seventy-one thousand four hundred twenty-nine United States dollars (USD 571,429.00), must file a report on the transactions conducted with such parties, using the forms provided by the Tax Administration in accordance with the requirements and technical specifications established by the Administration for this purpose (Form F-982).
Technical Transfer Pricing Report
The technical transfer pricing report or supporting documentation must be made available to the Tax Administration to verify compliance with the Arm’s Length Principle.
Deadline for Filing Annual Tax Returns.
Form 982, “Report on Transactions with Related Parties,” must be filed with the Tax Administration no later than the first three months following the end of the fiscal year.
Penalties for Noncompliance
Failure to file Form 982 is punishable by a fine equivalent to 0.5% of the offending company’s net worth, in accordance with the provisions of Article 241(b) of the Tax Code.
Furthermore, if the requirement of Article 62-A is not met, the Tax Administration, in accordance with the provisions of Articles 199-A, 199-B, 199-C, and 199-D of the Tax Code, will determine the value of such transactions, establishing the price or amount of consideration, taking into account for such transactions the market prices used in transfers of goods or the provision of services of the same kind between independent parties.
In the case of adjustments for underpayments, whether of income tax or value-added tax, a general penalty of 25% of the unpaid tax applies, with a minimum of USD568.
