Tax authorities in Colombia, Peru, Ecuador and Venezuela are increasingly treating transfer pricing as an inquiry into economic substance rather than a box‑ticking exercise, according to a review of audit practice by Deloitte tax partners. The shift, driven by revenue pressures and stronger fiscal control, raises the bar for multinational groups that transact across borders and may have implications for South African companies with operations or supply chains in the Andean region.
From documentation to demonstrable transactions
Historically, transfer pricing compliance focused on preparing contemporaneous documentation and demonstrating that related‑party transactions met the arm’s‑length principle. Deloitte reports that audits in the Andean countries now probe whether transactions are backed by genuine economic activity, whether services were actually performed and whether accounting, tax and business records consistently reflect the same commercial reality.
This change means tributary authorities will not only verify pricing but also assess:
- the operational delivery of intercompany services and management fees;
- the value creation and justification for payments for intangibles, royalties and know‑how;
- whether transactions are supported by adequate financial, operational and documentary evidence across the group.
As audits become more sophisticated, tax administrations are demanding higher levels of evidence to substantiate intercompany arrangements. Deloitte said this trend has expanded assessments from technical pricing comparisons to comprehensive reviews that span finance, operations and tax.
Consequences: more adjustments, disputes and litigation
The practical effect of the heightened scrutiny has been an increase in adjustments, disputes and litigation in the region, Deloitte found. Differences in how each country interprets arm’s‑length principles and evidentiary requirements have produced variable outcomes, complicating cross‑border tax certainty for multinational enterprises.
The key areas of contention highlighted in the report include:
- Intercompany services and management fees — whether services were actually performed and whether the recipient derived measurable benefit;
- Payments for intangibles — the link between remuneration and value creation, and whether royalties reflect real exploitation of intangible assets;
- Consistency of records — alignment across tax returns, accounting records and commercial contracts to demonstrate the business rationale for structures.
| Country | Audit focus |
|---|---|
| Colombia | Economic substance and operational verification |
| Peru | Documentary and accounting alignment |
| Ecuador | Value creation and transfer of intangibles |
| Venezuela | Comprehensive evidentiary support amid fiscal consolidation |
These differing approaches can produce significant challenges when a multinational group faces audits in two or more jurisdictions with divergent interpretations of what constitutes adequate substance.
Implications for South African firms and advisers
Although the review concerns the Andean region, the underlying message is global: tax authorities now expect intercompany arrangements to be substantiated by real economic activity and consistent records. South African companies operating internationally should consider whether their transfer pricing positions are supported by:
- clear operational evidence that services or intangibles were provided;
- aligned accounting, tax and commercial documentation; and
- robust contemporaneous studies that link remuneration to value creation.
Tax advisers will face increasing demand to assemble multidimensional evidence — not only pricing studies but also operational metrics and contractual performance data — ahead of filing and in anticipation of potential audits.
For multinationals, the Deloitte review illustrates a continuing global trend toward substance over form. As countries sharpen fiscal controls, groups should reassess their intercompany policies to reduce dispute risk and the prospect of costly adjustments or litigation.
