Economic integration and productive specialisation have been key to the evolution of Central America in recent years. Regulations have also accompanied this growth and it is important for middle market companies to understand the transfer pricing regulatory framework that must be complied with in these countries.

Trade between Central American countries has seen a constant growth in recent years, driven by economic integration and productive specialisation in the region. According to Carlos Felipe Jaramillo, World Bank Vice-President for Latin America and the Caribbean, “Central American economies have made substantial progress in trade facilitation and have signed an average of 10 trade agreements, almost twice as many as the Latin American and Caribbean region.” This trade dynamism has led to a significant increase in transactions between related parties, generating the need for a careful analysis of transfer pricing.

The economic diversification of Central American countries has led to a robust commercial exchange landscape. Among the main products at the centre of this trade boom, goods such as textiles, processed foods, and chemical products, as well as services such as logistics, manufacturing, and technology, stand out as the key areas of trade between the countries in the region.

Furthermore, given that one of Central America's main competitive advantages is its geographical position, the region has the potential to increase nearshoring processes that drive even greater economic and social growth. This means that businesses need to have robust, regionally-focused  logistics strategies in order to reach their growth objectives.

A decade after the implementation of transfer pricing in Central America, middle-market companies operating in the region must be vigilant to properly comply with their obligations. El Salvador and Panama were the first countries to establish a regulatory framework on transfer pricing and Costa Rica, Guatemala, Honduras and Nicaragua did the same sometime later. Thus, the issue of transfer pricing has been gaining greater importance for local tax administrations, urging taxpayers to correctly document transactions between related parties.

Due to the nature of business activities, the region has three main transactions that generate an obligation of a transfer pricing study:

Transfer of tangible goods: Companies that exchange physical goods, such as raw materials or finished products, must carefully evaluate the prices at which these transactions are carried out to ensure that they reflect market conditions.

Intangible services: Intangible services transactions, such as intellectual property, brands, and technology, require detailed transfer pricing analysis to avoid base erosion and ensure a fair allocation of revenue between related entities.

Intercompany financing: Loans and other forms of financing between related parties must conform to market conditions to avoid the imposition of undue interest and guarantee an equitable financial structure.

This is not all. The main challenge that the region faces in terms of transfer pricing is adapting to the changing dynamics of intraregional trade. The application of appropriate methodologies, adequate documentation and close collaboration with tax authorities is essential to ensure regulatory compliance and avoid tax risks.

The growth of intraregional trade in Central America has generated an increase in transactional complexity, highlighting the importance of carrying out transfer pricing studies that are correctly supported and with business sense. At RSM, we can help businesses to properly manage these analyses to ensure regulatory compliance and contribute to trade stability and sustainability in the region.

If you want to learn more or get in touch, please visit our Latin America page.