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US repatriation of profits and its impact on Chile

25 September 2017

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American multinationals are significant investors in the Chilean market. Roberto Carlos Rivas and Gregorio Martínez of PwC look at how prepared Chile and its tax laws are for a return of corporate profits to the US under President Trump’s tax reform.

President Trump has since the beginning of his campaign intended to cut the corporate tax rate from 35% to 15%. The president has said that with lowering corporate taxes, the country could increase workers' wages and bring back trillions of dollars in cash which is currently parked overseas. A one-time repatriation of corporate profits at a reduced rate has also been proposed. It is estimated that US companies currently hold around $2.5 trillion overseas. There has been no recent confirmation regarding the rate, although 10% was mentioned during the campaign.

Said incentives to return funds to the US, if materialised, may bring an important flow of funds from countries where US companies have important investments.

From a Chilean perspective, a recent tax reform modified the total tax burden applicable on distributed corporate earnings under the partially integrated system from 35% to 44.45%. Said increase was accompanied by a permanent rule that establishes that the tax burden increase does not apply to dividends paid to countries with which Chile has a tax treaty in force. Chile does not have a tax treaty in force with the US.

A temporal rule establishes that the increased tax burden does not apply to dividends paid to a country with which Chile has a signed (but not yet approved) tax treaty until December 2019. Such is the case of dividends paid to the US, so at the moment the total tax burden is 35% for US investors in Chile.

A tax bill in discussion at the Chilean parliament increases the later term until December 2021, postponing a tax burden increment that would apply to dividends paid from Chile to the US.

Having said the above, it would be fair to argue that there seems to be attractive tax savings incentives in the future for US multinationals for bringing foreign profits back to their home country, either via making US activities more profitable than before or via a direct repatriation to the US of dividend income already earned or accrued abroad by the multinational. Knowing that US multinationals are significant foreign investors into the Chilean market, and in the context of this prospective future flow of funds from Chile to the US, Chilean tax authorities will likely put their audit and control efforts into this area going forward. This would also apply to other jurisdictions in similar positions.

Making a basic summary of the main Chilean tax rules applicable to cross-border transactions, it can be said that our standard 35% final tax burden should apply to dividends remittances from Chile to abroad (taking into account the above-mentioned clarifications). Additionally, there are several other rates available, applicable depending on the type of income paid to abroad. For example, royalties for the use of trademarks is 30%, interest income could be 4%, technical assistances 15%, industrial designs 15%, software 15%, and standard software 0%. There are no withholding taxes applicable on the importation of physical assets, as long as the arm's-length principle is duly fulfilled.

Transfer pricing

Chile is an OECD member country and, as such, it has transfer pricing rules following, in general terms, the OECD TP Guidelines. These rules have been strictly applied over cross-border operations, where it has been carefully reviewed that the profitability of Chilean entities is not transferred to abroad under a different title. Moreover, together with the local transfer pricing rules which have been in force since 2012, Chile has been very active in adapting its legislation to conform to the OECD's BEPS project.

In this context, in December 2016 the transfer pricing annual affidavit and the country-by-country report were updated through Resolution number 126 published by the Chilean Internal Revenue Service.

There is also a tax bill which will update the rules regarding information exchange. This will ease the exchange of information with foreign tax authorities, updating Chile's information exchange tools to the context of the Convention on Mutual Administrative Assistance in Tax Matters.

Should the proposed US legislation comes into force, we expect Chilean tax authorities to increase tax audit processes of US multinationals with business in Chile. This would be in order to control that cross-border intercompany transactions eroding the taxable basis of the local taxpayer are duly documented and in line with the arm's-length principle under local TP rules.

Although there are no particular foreseen modifications to the Chilean tax and TP rules, current tax legislation provides reasonable control measures to Chilean tax authorities for, in the context of future audit processes, applying tax adjustments over intercompany transactions that are mainly driven to increase movements of profits from Chile to abroad.

Roberto Carlos Rivas

Tax partner
PwC Chile

Tel: + 56 – 2 – 29400116
roberto.carlos.rivas@cl.pwc.com

Roberto is a partner at the tax and legal services department of PwC Chile.

During 2001 and 2002 he obtained a master's degree in law in international taxation at Leiden University in the Netherlands.

During 2002 and 2003 he went on secondment to the international taxation department of PwC in Rotterdam, the Netherlands, taking an active part in international tax planning projects concerning investments between Europe and Latin America.

He joined PwC in April 1993 and he has also been assigned to PwC Buenos Aires. He is a transfer pricing expert.

Roberto is a member of the IFA in Chile and he has written many articles on international tax matters. He has been a lecturer in international tax seminars taking place in Rotterdam, Amsterdam, Barcelona, Buenos Aires, Punta del Este and Santiago.

 

Gregorio Martínez G.

Tax supervisor
PwC Chile

Tel: +56-2 29400633
gregorio.martinez@cl.pwc.com

Gregorio is a supervisor of PwC's tax and legal department, where he is involved in several tax and legal projects focusing on multinational corporations and foreign investors.

Gregorio also collaborates with the firm's transfer pricing team, working on major APAs, MAPs and corresponding adjustment processes and dealings with the local tax authority.

He also advises local clients directly in new business organisations, incorporation of companies, and drafting of legal documents and agreements.

Gregorio holds a master's degree in tax law from Universidad de Chile and currently he is an assistant professor in the Tax LLM Degree of Universidad Católica de Chile.







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