The Peruvian government has recently enacted Legislative Decree No. 1663, introducing alternative valuation methods for transactions between related parties. These methods are to be applied when the primary rules of Peruvian transfer pricing do not align with the nature or complexity of certain transactions.
Why the Change?
Typically, Peruvian tax law relies on established transfer pricing methods to ensure that related-party transactions are valued at arm’s length. However, certain transactions may lack comparable independent data or involve unique circumstances that make the traditional methods impractical. In such cases, taxpayers may need to turn to the newly introduced alternative methods to properly value the transactions and remain compliant with tax regulations.
Key Changes Under Legislative Decree 1663
The new rules lay out several scenarios where alternative valuation methods may be used:
- Use of Alternative Methods When Traditional Methods Fail
When traditional transfer pricing methods are not feasible due to the nature of the transaction or a lack of comparable independent transactions, taxpayers can resort to “other methods” for valuation. These methods, however, must be supported by a detailed technical report, which must be presented to the Peruvian Tax Authority if requested.
- Valuation of Unlisted Shares
For the valuation of shares not listed on a centralized stock exchange, the following methods can be employed:
- Discounted Cash Flow Method (DCF):
This method calculates the present value of expected future cash flows. Though its application is limited, it cannot be used if:
- The seller owns less than 5% of the company whose shares are being transferred, or
- The company’s net income in the previous year was below 1,700 Tax Units (approximately USD 2.3 million).
- Multiples Method:
This approach values the shares by comparing the entity to others with similar financial and operational metrics.
- Equity Method:
This method bases valuation on the entity’s book value and financial health.
- Appraisal:
An external appraisal can be conducted to estimate the fair market value of the shares.
- Valuation Methods for Other Transactions
For other types of related-party transactions, the decree allows the use of the Multiperiod Excess Earnings Method (MPEEM). This method is commonly used for valuing intangible assets. It involves calculating the excess earnings generated by the asset over multiple periods and discounting them to present value.
Implementation and Reporting Requirements
To apply these alternative methods, taxpayers must ensure their approach is technically sound. They are required to provide a detailed report substantiating the chosen method’s appropriateness, which must be submitted to the Peruvian Tax Authority if requested.
These changes are set to come into effect on January 1, 2025, giving taxpayers time to adjust their valuation processes accordingly.
Conclusion
The introduction of alternative valuation methods by Peru’s government provides flexibility for taxpayers engaged in related-party transactions that do not neatly fit within traditional pricing frameworks. Tax professionals and businesses dealing with unlisted shares or complex transactions should take note of these changes and ensure they have the necessary documentation in place to support their valuations.
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