In September 2012, the Chilean Parliament enacted a new law that made important amendments to the Income Tax Law (ITL), including the addition of article 41E, which contains new transfer pricing rules applicable for Chilean taxpayers in force starting September 27 2012. One of the most important modifications is that, starting in 2013, taxpayers must file an annual transfer pricing informative return. The first informative return must be filed on June 28 2013 regarding the cross-border intercompany transactions carried out during calendar year 2012.

However, it should be noted that taxpayers could request an extension to properly fulfill this formal requirement, since this is the first time that such a return is mandatory in Chile. It is expected that the Chilean IRS would provide a 90-day extension approval.

On the other hand, since October 2012, through Resolution 115 of 2012, the Servicio de Impuestos Internos (Chilean IRS) ruled that taxpayers who celebrate derivative contracts with related parties are required to have a Technical Memo, at the disposal of the Chilean IRS, containing the necessary elements to demonstrate that such contracts have been agreed under arm's-length conditions.

Background

Old transfer pricing rules established in the ITL came into force in 1997 and provided faculties to the Chilean IRS to challenge the prices established by taxpayers with related parties resident abroad when they did not adjust to the values charged by independent parties in similar transactions. Since the law did not include any further guidance, the Chilean IRS published certain administrative guidelines that did not expressly recognise the standards set by the OECD transfer pricing guidelines but were based on its rationale.

Under previous legislation, Chilean taxpayers did not have reporting requirements regarding cross-border intercompany transactions and they were not required to prepare a transfer pricing study.

Since Chile became a member of the OECD in 2010, the Chilean IRS adopted the arm's-length principle, and tax inspectors used the OECD transfer pricing guidelines as general guidance. Though the previous legislation was limited, the Chilean tax authority conducted several transfer pricing examinations based on the revoked article 38 of the ITL.

New transfer pricing legislation

Under the new law, the transactions that are subject to transfer pricing rules are: a) transactions with related parties resident abroad; b) transactions derived from business restructurings and reorganisations that imply the shift of goods or activities able to generate taxable income and; c) transactions carried out with entities resident in countries included in a list of tax havens or preferential tax regimes, with whom Chile has not entered into an exchange of information agreement.

It should be noted that from a textual interpretation of the proposed rules, the transactions derived from business restructurings and reorganisations will only be subject to transfer pricing rules when the goods or activities are shifted to tax havens or preferential tax regimes.

The new definition of related party is broader than the one of the 2010 OECD Model Tax Convention since it refers to the participation (direct or indirect) in the management, control, capital, profits or revenues. This addition to the rule would imply that some transactions carried out by Chilean taxpayers with independent parties are subject to transfer pricing legislation such as commissions, royalties, and franchise fees, among others.

Additionally, based on the new TP regulations and based on a textual interpretation of the law, a foreign third party that is dealing, directly or indirectly, with two members of the same MNE, would be deemed as related parties of the Chilean taxpayer. For example, two local sister companies dealing with a third party foreign trader would be considered as tainted transactions based on new definitions of related companies.

The good news about the new legislation is that it recognises and briefly describes the OECD methods, even though it does not explicitly mention the adoption of the OECD transfer pricing guidelines. The proposed rules also adopt a most appropriate method rule and would allow the use of other unspecified methods when the methods described in the ITL are deemed not to be appropriate to determine the arm's-length nature of the intercompany transactions.

Taxpayers are required to keep all the information that supports the application of a transfer pricing method allowed by the ITL. Furthermore, if requested by the Chilean IRS, taxpayers will have one month to submit such supporting information.

One of the most important changes to the law is the new obligation to file an annual informative return on cross-border transactions. As mentioned before, the initial deadline for filing the TP informative return, regarding 2012 transactions, is June 28 2012 (though a 90 day extension could be requested). Among other relevant sanctions that can be triggered under certain circumstances, the failure to file this statement in time and in a manner established by the Chilean IRS will be sanctioned with a penalty of between $10,000 and $50,000.

The format of the TP Informative Return and the corresponding manual of instructions was published by the Chilean IRS on February 1 2013 in Resolution No. 14 of 2013. Said manual limits the taxpayers that must submit Form No. 1907 to the following:

• Taxpayers identified as medium or large size companies that carried out cross-border intercompany transactions during 2012.

• Taxpayers, other than those classified by the Chilean IRS as medium or large size companies, that during 2012 carried out transactions with persons domiciled or resident in countries or territories considered tax havens or preferential tax regimes.

• Taxpayers, others than medium or large size companies, that during 2012 carried out transactions with foreign related parties for amounts exceeding $1,040,000 or equivalent, according to the foreign currency.

In general, the TP Informative Return is divided into three sections; the first one requires taxpayers to disclose all the cross-border intercompany transactions carried out, the related party with whom the transactions were carried out and its type of relation (holding, affiliate, etcetera), the currency and amount of the transactions. The second section requires, for transactions above $200,000, to disclose specific information about the intercompany transaction, the transfer pricing method applied to evaluate the arm's-length nature of the transaction as well as information about the application of the TP methodology. A final section requires disclosure about the general activities of the company, its global profitability, transfer pricing adjustments and whether the company carried out a business restructuring during the year informed.

It is important to note that though there is no statutory requirement for the elaboration of a transfer pricing study in the new law, in practice, taxpayers should perform a transfer pricing study to fulfill obligations (informative return and information supporting the application of TP methods).

New transfer pricing rules provide the Chilean IRS with the faculty to enter into APAs (unilateral or multilateral). To obtain an APA, taxpayers must submit a request in written form to the Chilean IRS including a description of the transactions subject to the APA, the pricing structure proposed, and a transfer pricing study that contains the application of the methods allowed by the ITL. The Chilean IRS can reject, totally or partially, the request and such decision will not be subject to an administrative appeal procedure. If the request is accepted, the Chilean IRS will issue a ruling that will be valid for four years; the year where the request was submitted and the three subsequent years. The APA will be subject to renewal or extension.

It should be noted that the Chilean IRS has a six month period to reject or issue the ruling, starting from the date in which the taxpayer has provided all the relevant information for the authorities to make a decision. The six month time limit appears to be short in comparison with the international experience of countries with mature APA programmes, but there are some regulations in the ITL that would allow the Chilean IRS to extend the time to issue the APA ruling.

Tax authorities can nullify APAs when the request of the taxpayer is based on false statements or when there is a significant change in the circumstances under which the APA was granted. Taxpayers can also invalidate the APA when there is an important change in facts and circumstances.

The law mentions that the Chilean IRS has to issue administrative rules with the specific requirements to file the APA but these rules have not been published.

New transfer pricing rules also include the possibility of performing transfer pricing corresponding adjustments, but those have to be authorised by the Chilean IRS and will only be allowed if cases involve a country with which Chile has a double taxation treaty in force. The Chilean tax authority can consent to corresponding adjustments only when the date for administrative appeals or court procedures is not due. Moreover, the adjustment must be based on the application of one of the transfer pricing methods allowed in the Chilean ITL.

There is a new obligation for taxpayers of having a technical memo that contains the necessary elements to demonstrate that derivative contracts celebrated with related parties have been agreed under arm's-length conditions. This rule is applicable to all those derivative contracts agreed with related parties during commercial year 2012, or those which have otherwise been modified during commercial year 2012. Unlike general transfer pricing regulations that establish obligations regarding cross-border intercompany transactions, the Technical Memo must include an analysis of the arm's-length nature of the derivative contracts entered with related parties resident in Chile and abroad.

For purposes of this obligation, the definition of related parties is quite broad and refers to article 100 of the Securities Market Law, which might not coincide with the definition of related parties for the purposes of transfer pricing regulations included in the ITL.

If the information contained in the Technical Memo is found to be insufficient by the Chilean IRS, adverse tax consequences will be triggered to the local taxpayer.

Complimenting this obligation, the Chilean government established three new informative returns (DJ 1820, 1829 and 1839) regarding derivatives contracts entered with related and unrelated parties that will indeed serve as a base for information assessing derivative operations and the fulfillment of the tax law in general.

Challenges for taxpayers and tax authorities

Though new transfer pricing rules are a big progression compared with revoked legislation, some critical topics were left out. For instance, there is no reference to retroactive adjustments (year-end price adjustments) and whether these are permitted or not.

VAT and customs rules do not contain specific rules with the implications for taxpayers when correcting their intercompany prices due to a transfer pricing adjustment. This is one of the main uncertainties taxpayers have faced when evaluating for the first time the arm's-length nature of its cross-border intercompany transactions, especially when the TP adjustment is performed once the tax year is ended.

Chilean IRS has joined together a group of TP specialists with international experience to exercise all the new faculties granted by new article 41 E.

Grey areas

Since the new regulations embrace the OECD guidelines more closely, taxpayers will have more certainty when establishing prices for intercompany transactions. However, there is a lack of clarity in some elements of the new legislation and the instructive for filing the transfer pricing informative return still has some grey areas that may create confusion among those taxpayers obliged to fulfill this formal requirement.

The immediate repercussion for taxpayers from the new transfer pricing rules is the filing of the first annual informative return in Chile regarding 2012 cross-border transactions, which has an initial deadline June 28 2013. Additionally, taxpayers that celebrate derivative contracts with related parties (resident in Chile and abroad) face the obligation of having the Technical Memo available when requested by the Chilean IRS.

Biography
		Roberto Carlos Rivas Tax partner PwC Tel: +56-2 2940 0116 Email: roberto.carlos.rivas@cl.pwc.com Robert Carlos Rivas is a partner of the tax & legal services department of PwC Chile. During 2001 and 2002 he obtained a master's in law degree in international taxation at Leiden University, the Netherlands. During 2002 and 2003 he was attached on a secondment to the international taxation department of PwC, in Rotterdam, the Netherlands, taking active part in international tax planning projects concerning investments between Europe and Latin America. He joined PwC in April 1993 and was assigned to PwC Buenos Aires until May 2004. He is a transfer pricing expert. Roberto is a member of the International Fiscal Association in Chile and he has written many articles on international tax matters. He has been a lecturer in international tax seminars in Rotterdam, Amsterdam, Barcelona, Buenos Aires, Punta del Este and Santiago.

Biography
		Carolina Alexandres Transfer pricing manager PwC Tel: +56-2 2940 0120 Email: carolina.alexandres@cl.pwc.com Carolina Alexandres has a degree in public accounting and financial strategies from the Instituto Tecnológico Autónomo de México (ITAM) and a master's degree in accounting from Florida International University. She has been working in transfer pricing for more than eight years focusing on strategic planning, consulting in transfer pricing disputes, competent authorities procedures and in obtaining advance pricing agreements. She also has experience in the valuation for tax and accounting purposes of businesses, private stocks and intangible assets. Carolina has provided services to a wide range of industries over the years that include: asset management, investment banking, heavy construction, television broadcasting, retail and consumer, and health.

Biography
		Gabriel Bernal Transfer pricing manager PwC Tel: +56-2 2940 0405 Email: gabriel.bernal@cl.pwc.com Gabriel graduated in economics from Universidad de los Andes, Colombia. He has been working in transfer pricing for more than seven years. Gabriel has taken advanced transfer pricing courses with the International Bureau of Fiscal Documentation (IBFD) in the Netherlands, and also at the OECD in France. He has participated as a lecturer in several transfer pricing seminars and was the professor in this area at Universidad de los Andes in Colombia. Gabriel has provided services to a wide range of industries over the years, that include: mining, energy, pharmaceuticals, health, massive consumption, IT, telecommunications.