Taxpayers should consider these changes for transfer pricing reports from 2016 onwards.

Ecuador's president has issued Executive Decree 973, which makes the following changes to the Tax Law Regulation, including the transfer pricing rules:

Eliminating the Comparable Uncontrolled Price (CUP) application for commodities using intermediaries, also known as the Argentinian 6th method or commodities rule

Eliminating the compulsory application of hierarchy of methods

Allowing the Tax Administration (IRS) to establish anti-avoidance rules

Requiring the OECD's Transfer Pricing Guidelines to be used as the transfer pricing technical reference for items not covered by Ecuadorian IRS resolutions, laws or treaties

Methods to apply the arm's-length standard

Executive Decree 973 amends the Ecuadorian Tax Law regulation and changes the transfer pricing rules. Specifically, Executive Decree 973 eliminates the application of the CUP method for import and export transactions with public and well-known international prices and the CUP Method for import and export transactions through an international intermediary (also known as the Argentinean 6th method or commodities rule).

Under the modifications, the five transfer pricing methods (i.e., CUP, Resale Price (RP), Cost Plus (C+), Profit Split (PS) and Transactional Net Margin Method (TNMM)) recognized in the OECD Transfer Pricing Guidelines (profit split and residual profit split are recognized as one method) must be used. Executive Decree 973 eliminates the compulsory hierarchy application between direct and indirect methods. The Executive Decree also allows the Ecuadorian IRS to issue technical guidance resolutions that taxpayers must follow.

For everything not covered by Ecuadorian IRS resolutions, Ecuadorian laws or international treaties signed by Ecuador, the most recent version of the OECD's Transfer Pricing Guidelines on January 1st of the transaction's fiscal year must be used as a technical reference.

Transfer pricing anti-avoidance rules

The Ecuadorian IRS, through resolution, may establish the technical standards and methodology to prevent transfer pricing abuse, including:

— Method to apply the arm's-length standard

— Existence of reference prices

— Identification of data sources for prices or margins

— Availability of information regarding the listing periods

— Acceptance or prohibition of intermediaries

Additionally, the Ecuadorian IRS may issue resolutions to define conditions and requirements as to when the anti-abuse rules do not apply.

Implications

Before this reform, it was compulsory to demonstrate that a TNMM was a last resort method by proving that the CUP, RP, C+ and PS methods were impossible to apply. Under the previous rule, the Ecuadorian IRS was able to deem a defective CUP preferable to a reasonable TNMM.

The Ecuadorian IRS could possibly include the anti-abuse rules eliminated by the Executive Decree in future resolutions because the Ecuadorian IRS will have more flexibility in defining how the anti-abuse rules apply.

In addition, requests for advanced pricing rulings for commodities seem more feasible, because the Argentinian 6th method is no longer compulsory.

Aligning the transfer pricing rules to the most recent version of the OECD guidelines enables the use of methodologies that are more in accordance with international standards.

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