The Profit Test is a requirement incorporated into Peruvian regulations through Legislative Decree No. 1312, published on December 31, 2016, and effective from January 1, 2017, establishing that, as a necessary condition for the deduction of the cost or expense generated in related company transactions, certain criteria forming part of the so-called "Profit Test" must be complied with. 

The regulation aims that only services evidencing real needs for a company are deductible as a cost or expense, i.e., if the services are not provided by the related company, a third party must be mandatorily hired due to the need for a company to maintain or improve its profit-generating activities.

The following information is required to support that a received service complies with the profit test:

  • The effective rendering of the service. This will require invoices, technical documentation of the service to be performed, service progress documentation, and service delivery documentation, among others.
  • The nature of the service. It should be identified if the received service is of high or low value and the detail of the service provided (the maximum margin for low value-added services will be 5%).
  • The real need for the service. The results provided by the service for improvement, increase, or maintenance of business conditions and/or characteristics shall be demonstrated.
  • The costs and expenses incurred by the renderer of the service, as well as the reasonable criteria for their allocation. It is necessary to know how to allocate the costs of the service, whether labor or direct costs of materials, among others, which, added to a margin, will result in the total value of the service.

If the profit test is not complied with, SUNAT may disregard the costs and expenses for income tax purposes and may also charge penalties and late payment interest.

As a general recommendation, the information supporting the profit test should be prepared and/or requested before the end of each fiscal year to avoid the tax authority catching the companies by surprise, and these may not provide the information required as part of an auditing process on time.

In order to have the proper advice on compliance with the requirements that companies receiving services from their related parties must consider so that their costs or expenses are considered deductible, do not hesitate to contact a firm specialized in Transfer Pricing, such as TPC Group.

Carlos Vargas Alencastre
Founder & CEO TPC Group.