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12.4.1. Main Rules

Ecuador requires that transactions between related parties be conducted in accordance with the arm’s length principle. For transactions deemed non-compliant, the taxable base can be adjusted by the tax authorities to reflect an arm's length transaction.

Definition of Related Parties

Related parties are those that participate directly or indirectly in the management, administration, control or capital of the other. In general, a participation of 25% or more  results in parties being considered related.

Additional related party treatment includes when a party carries out 50% or more of their total transactions with the other, and entities resident in a tax haven or low-tax jurisdictions (see Sec. 12.5.)  can be considered a related party for transfer pricing purposes.

Transfer Pricing Methods

The transfer pricing methods allowed by the Ecuadorian tax authorities in order of priority include the following:

  • Comparable uncontrolled price (CUP) method;
  • Resale price method;
  • Cost-plus method;
  • Profit split method;
  • Residual profit split method; or
  • Transactional net margin method.

Use and Availability of Comparables

Local comparables are preferred, although limited. When local comparables are not sufficient, relevant foreign comparables can be used.