On July 24, 2020, CIAT held a webinar on Transfer Pricing Perspectives in the Oil and Gas Industry. The panel was composed of Gonzalo Arias and Alejandro Juarez of CIAT; likewise José Luis Galindez, Carlos E. Gonzalez Gamero and Susana Bokobo. More than 600 participants joined the webinar and several questions were left unanswered. CIAT is jointly publishing the answers:

Thank you for the opportunity to participate. What are the experiences of adjustments or rounding in this economic activity? How contentious have these cases been? In some countries where we import oil and gas, they are much discussed in the courts, from the database to obtain prices, the pricing process, the premiums involving these imports.

With regard to cooperation between tax administrations, do you consider that the exchange of information on tax matters between jurisdictions strengthens the control of transfer prices?

Without a doubt, tax authorities must use all available tools to be able to exercise their powers and verify the correct compliance with the tax obligations, especially when it comes to matters involving international taxation such as transactions with related parties residing abroad.

The information obtained through information exchange mechanisms can be very useful for the tax authorities to obtain the necessary elements to perform properly their verification duties, including those that they have not been able to obtain from the local taxpayer and that is available to the foreign tax authority; so as to be able to perform properly the duties of tax risk analysis, necessary to take the decision to start an audit process to a taxpayer.

In a country where you do not see the payment of royalties for the use of an X mark of Gas; but if you give a payment for premiums added to international prices; do you consider that this premium would become the payment of royalties?

Thank you very much for the question. In the abstract, and as the question is presented, it is difficult to consider that such a payment can be considered a royalty. In any event, it would be necessary to determine both the nature of that international price, in particular the cause of the payment of that price, and the nature of the premium added to it.

Thank you for sharing your experiences in this interesting topic and sector that usually presents high levels of complexity, my doubt arises about the treatment of some financial activities between related parties. Given that it is part of the operation of such companies, what is the appropriate treatment for the financial derivatives between related parties, is it reasonable to admit them since the risks that we aim to mitigate are within the same group and can therefore be used to defer income. With the existing level of uncertainty, what is the extent of deductibility of costs and expenses for this type of particular transactions between related parties? The counterparty covering the risk of the underlying is usually placed in a preferential regime.

Very interesting question. No doubt, it could lead to a whole webinar. It is true that the level of uncertainty we experience is unprecedented. As it is known, the use of financial derivatives has a very specific function in this industry: the mitigation or transfer of the risk of uncertainty related to adverse fluctuations in order to limit or compensate for the likelihood of loss. Within these fluctuations we have that of commodity prices and interest rates, for example, which are beyond the control of the entities as they are governed by market forces. But it is also true that it is necessary, from my point of view, to distinguish those transactions that have a certain underlying, from those that are purely speculative. Focusing on the specific question, some formulas could be analysed, such as that the losses of certain instruments cannot exceed a certain market price, however, they might not be consistent with the arm’s length principle.

How do the tax administrations of your countries detect and monitor possible transfer pricing situations? Is there a specific group that monitors with the help of artificial intelligence, based on tax returns? Or are situations only detected on the basis of regular/normal inspections?

Usually, Tax Administrations have specific areas dedicated to the identification of fiscal risks, including those relating to the possible manipulation of prices in transactions between related parties, for which we commonly develop models and risk profiles based on documentation provided by the taxpayers annually to the tax administrations, such as statements, reports, financial statements, as well as tools that are available for some countries, such as the Local File, the Master File or the Country-by-country Report,  which seeks congruence between the degree of economic presence and taxable income in a jurisdiction, as well as other factors that may pose a risk, such as complex operations for significant amounts that take place in only one occasion, the level of profitability compared to the industrial sector to which the taxpayer belongs, the recurrent losses, the royalty payments to entities located in jurisdictions of low or no taxation, the transfer or use of intangibles to related parties, among many others.

In relation to the sale of carbon bonds (with the aim of reducing greenhouse emissions) should they be considered a commodity? the purchase and sale of such bonds when they generate profit could be taxed, it would be important that there be international rules governing such transactions since they can be carried out between different countries.

Interesting question. In my view, carbon bonds themselves, in principle, should not be considered as commodities unless specific legislation so provides. I fully agree that it would be important to have international rules governing these transactions.

Hello, do you have the document or paper describing the evaluation to make public the CBCR?

It is a demand or request from NGOs, essentially. An example of this request is found in the Oxfam report available at https://www.elboletin.com/adjuntos/176586/informe_Oxfam.pdf

In this pandemic and in the Latin American context, in what percentage or quantification would help simplify tax procedures in a country to attract investment from international companies?

I could not speak of a specific percentage or quantification, but what we are sure of is that the simplification of formalities in one country definitely encourages investors to consider one country versus another if they are in the same investment conditions.

Without a doubt, any measures that involve less administrative burden and that enable taxpayers and tax authorities to be sure that tax obligations are properly met are useful, provided that there is an appropriate balance between compliance and control, especially in an environment of economic recovery where there is pressure on tax administrations to raise resources that will enable states to face the challenges of such recovery.

It is difficult to establish a degree or percentage, but as noted above, a very important factor in determining the type of compliance simplification measures should be the appropriate balance between compliance and control.

Since the prices of petroleum derivatives are very susceptible to a country’s economy, how do you think this volatility should be mitigated in order to establish a price that can be comparable in industry?

Oil price volatility depends on so many variables beyond the reach of a single stakeholder that it is very difficult to mitigate that volatility. In my view, there should be an international consensus to make it possible.

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