ECUADOR Law and Practice Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Guillermo García-Mendoza and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
The main concern is related to export prices as well as royalties, technical service fees and interest paid to related parties. Regarding these issues, local law allows Ecuadorian entities to file a consultation (request for an advance pricing agreement) with the tax authority to determine the parameters under which the transfer pricing valuation will be performed. Corporations that make frequent transactions with related parties (whenever certain requirements are met) must file a yearly transfer pricing report with the Ecuadorian Tax Administration. In this report, the cor - poration must demonstrate that the transactions con - cluded with its related parties comply with the arm’s length principle. For tax purposes, and particularly for determining transfer pricing, transactions with entities domiciled in tax havens are regarded as if they were concluded with related parties. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements Local tax authorities have not challenged the use of related-party limited risk distribution arrangements for the sale or provision of goods or services locally. Nonetheless, Ecuadorian tax law states that transac - tions between related parties should follow the arm’s length principle. 4.6 Local Transfer Pricing Rules and OECD Standards Ecuador is not a member of the OECD. Nevertheless, Ecuadorian transfer pricing principles and the appli - cable methodologies generally follow OECD guide - lines. Accordingly, local transfer pricing rules and/or enforcement in theory do not vary from OECD stand - ards. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures In the past few years, the Ecuadorian tax authority has been focusing its audits on the transfer pricing regime applied by multinational corporations. Regarding the possibility of re-opening earlier years to analyse the fulfilment of the transfer pricing regime, the general rules on tax audits apply (see 8.1 Regular Routine Audit Cycle ).
Commonly, transfer pricing disputes are resolved before local tax authorities and/or courts. The authors are not aware of any international transfer pricing disputes being resolved through double taxation treaties. Local law does not provide for a specific procedure to handle mutual agreement procedures (MAPs) to resolve transfer pricing issues between tax authorities and private entities. Local tax authorities have not publicly entered into a MAP with foreign tax authorities. Nevertheless, tax disputes may be solved through mediation. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments Transfer pricing issues and claims have been resolved through administrative claims and judicial actions filed by private entities against the Ecuadorian tax author - ity. The authors are not aware of any specific MAP and/or pass-through company (PTC) processes that Ecuador has been a part of. 5.2 Local Branches and Local Subsidiaries Local branches of non-local corporations and local subsidiaries of non-local corporations are taxed equal - ly. The Ecuadorian Constitution and law expressly pro - hibit any discrimination in the treatment applicable to local and foreign individuals and entities. Neverthe - less, payments made by local branches or subsidiar - ies to their parent corporation may be subject to lower taxation pursuant to tax treaties (see 4.1 Application of Withholding Taxes ). 5.3 Capital Gains of Non-Residents Capital gains of non-residents on the sale of shares in local corporations are taxed in Ecuador. Indeed, the tax applies when the gains relate to shares of a non- local holding company that owns the shares of a local corporation, both directly and indirectly. The main principle under Ecuadorian tax law is to tax capital gains on the sale of shares issued by local corporations whenever the indirect transfer of equity within the chain of ownership (including one abroad) affects the ownership of an Ecuadorian entity and cer - tain requirements are met. Nevertheless, capital gains
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