The transfer pricing laws in Ecuador are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines). However, in case inconsistencies arise, the Ecuadorian law and bilateral agreements take precedence over the OECD Guidelines. TP rules are governed by the Internal Tax Regime Law (ITRL) and the respective Regulation.
Arm’s Length Principle
The arm’s length principle requires adjustments to be done if related parties enter into a business deal on terms that are not defined by what a party unrelated to the transaction would agree, and in doing so local tax law has a lower profit than would have otherwise occurred. The local taxing authority may adjust that profit to an appropriate level and tax the difference.
Related Party Definition
In Ecuador, related parties are defined as entities when they have a direct or indirect ownership of 25% or more of capital or a voting right, or where one party engages in 50% or more of total sales or purchases with another. Also, entities that are located in tax havens in the jurisdiction of Ecuador are directly considered related parties for transfer pricing purposes. The law does not distinguish between domestic and cross-border transactions thus transfer pricing rules will apply equally regardless of the tax residency.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Ecuador are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
As per Ecuadorian law, the CUP method cannot be used for import and export transactions with public and well-known international prices. However, it can be used for exports of crude oil, silver, copper, and bananas, if the related party receiving the export is in a lower-tax jurisdiction.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Ecuador follows the OECD Guidelines and applies the comparability analysis outlined in Chapter III. The profitability indicators should be calculated based on financial information for the fiscal year we are analyzing, if the prior year’s information has the same economic conditions. Comparables should not show losses company that can be justified by certain characteristics of the business or market conditions. Companies in tax havens are excluded from being considered viable comparables.
In addition, for segmented financial statements, a consistent allocation method must be applied. The quality or reliability of a comparable is dependent on the database from which you obtain information; however, it will depend mostly on the comparable functional analysis. The tax authority may rely on secretly obtained comparables and information from the taxpayer, as well as information provided to them from external sources.
Documentation Requirements
In Ecuador, companies that have related party transactions over USD 3 million in a year must submit an electronic annex with their annual income tax return, listing details of those transactions. If the total exceeds USD 10 million, they must also file a detailed transfer pricing report. This report needs to include a full analysis explaining which comparable companies or transactions were used or rejected, the financial data relied on, any adjustments made, and a summary of all related party operations. The information must reflect only the specific tax year—using averages from multiple years is not allowed. The report cannot be prepared by anyone who also gives the company tax advice, prepares its financial statements, or represents it in court. Not meeting these rules can lead to fines of up to USD 15,000.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
In Ecuador, taxpayers can request an advance pricing agreement (APA) with the tax authority. The process starts with an initial consultation, which is not binding. After that, the taxpayer may submit a formal proposal to agree on a transfer pricing method that follows the arm’s length principle. If the tax authority approves the proposal, the agreement is valid for the tax year of approval and the three following tax years, unless there is a major change in economic conditions. The agreement is only valid if the request is made before the tax return deadline for the approval year.
Approach to Transfer Pricing Audits
In Ecuador, taxpayers must submit transfer pricing documentation within 60 days of a request from the tax authority. If the tax authority proposes an adjustment, the taxpayer can challenge it in fiscal court. Penalties may apply for failure to submit, incomplete, or incorrect documentation.
Penalties
There are no explicit penalty rates for improper transfer pricing. Instead, the general penalty regime applies.
Taxation at a Glance
Key taxes in Ecuador include corporate income tax, personal income tax, VAT, remittance tax, and special consumption tax. Corporate and personal income taxes are national, while property and asset taxes are municipal. The tax system is governed by the Tax Code, Internal Tax Regime Law, its regulations, and SRI guidance.
Its official currency is US dollars (USD), and the official name of the tax authority is called Internal Revenue Service.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 22/25/28% |
VAT | 15% |
Withholding tax on dividends to non-residents | 10% |
Withholding tax on interest to non-residents | 0/25% |
Withholding tax on royalties to non-residents | 0/25/37% |
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