Chile, Office

Transfer pricing requirements

Pursuant to article 64 of the Tax Code the taxing authority (Servicio de Impuestos Internos (SII)) is empowered to contest prices used by parties when such prices are the tax base or one of the elements used to compute a tax and if they are below market values. In addition, article 38 of the Chilean Income Tax Law (CITL), allows the SII to conduct audits, request specific information and contest prices charged, paid, or accrued between related parties if such prices do not comply with the arm's-length principle.

There is no obligation to prepare a transfer pricing study. However, taxpayers are required to keep in their premises a set of documents that may be reviewed by SII officers in case of an audit. Such documentation must include copies of the contracts, invoices, vouchers, entries to the ledgers and accounting records of all cross-border transactions as well other supporting information regarding related-party transactions.

There is no obligation in the CITL to file the transfer pricing documentation.

Both article 64 of the Tax Code and 38 of the CITL are applicable with respect to domestic transactions.

Pursuant to transfer pricing regulations, transactions entered into with a party located in a low tax jurisdiction listed as such in Chile is deemed as related and subject to the transfer pricing review.

By March 15 of each year taxpayers must provide the SII with a complete set of information regarding cross-border payments and revenues via the internet.

There are no exceptions or waivers provided for in the law

The arm's-length principle

There are no regulations regarding the application of the arm's-length principle established in article 38 of the CITL and there are no special factors to apply comparability. Comparability is mostly based on internal information of the taxpayer that is used when the SII believes that a transfer pricing case exists.

Article 38 allows for the comparable uncontrolled price method, the cost plus method and the resale price method to be inferred from the language of article 38 of the CITL. It also refers to a "reasonable profit considering the circumstances of the operation" which the SII officers believe is language adopted from the OECD guidelines to reflect transactional methods, including the profit split and the transactional net margin method.

There is no best method rule in Chile.

Statistical ranges are applied in Chile.

There are no specific regulations in Chile regarding adjustments for comparables.

The SII has hired qualified professionals such as lawyers, accountants, and economists over the last four years. They are working towards implementing a massive application of transfer pricing issues in audits. The draft regulations, pending since 2002, would include language formally accepting the use of foreign comparables. In practice, both taxpayers and the SII have used foreign comparables. In addition, the SII has used information from Customs and extensively uses the information contained in monthly VAT returns presented by taxpayers.

While the use of secret comparables is not openly regulated or discussed by the SII, there have been cases in which secret comparables were used in practice. In most cases the SII has disclosed the comparables.

Penalties

If the documentation regarding related-party transactions is not in place at the time of an audit, the taxpayer is subject to a minor fine. The same applies for not complying with any and each of the reporting liabilities due by each March 15.

If, as a result of an audit, the SII rejects the deduction of an expense or increases the taxable revenue for income tax purposes, the adjustments will cause an extra amount of tax due (17% or 35% of the adjustment depending on the circumstances). Such difference must be restated by inflation, would accrue interest and would attract a fine which may range from 10% to 60% depending on whether the tax is to be declared or withheld by the taxpayer.

Additional regulations

There is no legislation allowing the use of advanced pricing agreements (APAs) and the SII does not have the power to issue them.

There are no specific rules authorising cost sharing arrangements. However, the SII has issued at least three rulings in this respect. In one of them, it did not accept the cost allocation made by the foreign parent, arguing that there was a service rendered by the parent and not a mere allocation of global costs. The other two rulings authorised the proposed allocation presented in each ruling but stated that such acceptance must be made on a case by case basis and may not be granted in anticipation by the SII.

There are no thin capitalisation rules affecting the deduction of interest expenses as such. However, there is a rule linked with excess of indebtedness subject to a reduced rate of withholding tax (reduced 4% rate). Excessive indebtedness is deemed to exist if intercompany debt exceeds three times the corporate capital of the debtor. As a result of this rule excessive indebtedness is no longer subject to the 4% withholding tax but to an additional 31% tax.

There are no particular transfer pricing rules regarding intangibles.

There are no specific transfer pricing regulation regarding inter-company services.

Interest

There are no specific transfer pricing regulations regarding interest. Interest payments will be subject to withholding tax at a 35% or 4% rate. The application of these rates is not related to the fact that the transaction is related or not but if the loan is granted by a foreign bank or financial institution. Excessive related indebtedness is subject to an additional 31% tax.

There are no specific transfer pricing regulations regarding the sale of shares. Capital gains arising from the alienation of shares are subject to taxation as a general rule except those shares traded on the Chilean stock market with strong market presence.

Audits

Transfer pricing audits are part of the regular audit programme designed by the SII. Transfer pricing audits are mainly focused on multinational companies and under the management of the large taxpayers department, recently formed at the SII.

During the first part of the audit process, the SII investigates, gathers information and requests documentation from the taxpayer being audited or from other pertinent authorities. As a result of the audit, the SII could notify a formal Citación, under which the SII disclose to the taxpayer the particular objections. The taxpayer has 30 days – extendable for up to another 30 days at the most – to accept, clarify or contest the objections made by the SII. If after the taxpayer's response, the objections are not solved, the SII will notify tax assessments, which can by claimed by the taxpayer within a 60 days' term.

Current audits are being focused on all industries involving imports such as automobile, pharmaceuticals and electronics. Audits are also focused on shipping companies.

All operations involving a buy/sell structure are currently being reviewed.

The approach adopted by the SII is taken on a case by case basis. Many times we have observed that the positions adopted with respect to the first taxpayers in an industry is more flexible than the position adopted with regards to taxpayers audited after the SII has become familiar with such industry.

Recommendations

It is recommended that taxpayers do not take advantage of the lack of regulation existing in Chile and act as if sophisticated transfer pricing scrutiny was already in place. In addition, we recommend taxpayers follow approaches that are consistent among countries and particularly in the jurisdiction of the parent. Exchange of information among tax authorities is becoming frequent.

Managing the audit process

Because transfer pricing scrutiny implies income tax or VAT differences, the applicable and relevant procedure is the procedimiento general de reclamación (general appeals procedure), which starts once a previous administrative stage in which differences are contested by the taxpayer is over. The procedure is divided into three stages: discussion, evidence and decision.

Within the procedimiento general de reclamacion, the taxpayer has the right to appeal against the decision issued by the regional director. The taxpayer may jointly present a recurso de reposición arguing that fresh evidence was not duly considered and requesting new consideration. The recurso de reposición may be included with the motion of appeal, in which case it will take precedence over the appeal.

This procedure is not considered within domestic legislation. While it is included in tax treaties, it has not been applied in practice.

Chile has signed tax treaties with the following countries:

• Brazil

• Canada

• South Korea

• Croatia

• Denmark

• Ecuador

• Spain

• France

• Mexico

• Norway

• New Zealand

• Peru

• Poland

• UK

• Sweden

Chile has a tax treaty with Argentina not following the OECD model convention but the Andean Pact model.

Chile's tax treaties generally follow article 9(2) regarding correspondent adjustments of the OECD model convention.

No arbitration is allowed in tax matters including transfer pricing. The tax treaties in force in Chile do not authorise arbitration as a dispute resolution alternative.

Relatively few transfer pricing cases have been litigated in Chile because it was only recently that the tax authorities became active in tax assessments on this matter.

Trends and perspectives

Even though the implementation of the SII has been slow, the new director of the taxing authority has publicly announced that there are important gains to be obtained from the use of transfer pricing scrutiny in audits. A group of professionals is working to issue new regulations and to design the transfer pricing strategy to be followed by the SII in the coming years.

It is expected that a final decision will be made soon whether to have APAs or not. In addition, new regulations clarifying which methods are authorised in Chile and how they will be implemented are expected. Such new regulations would also cover contemporaneous documentation requirements and transfer pricing studies.

Sergio Illanes

Baker & McKenzie in Chile Tel: +56 2 367 7000 Email: sergio.illanes@bakernet.com Sergio Illanes is a partner at Baker & McKenzie in Chile. He obtained his licensee in law (LL.B) at the University of Chile School of Law in 1971, and was admitted as a lawyer by the Chilean Supreme Court in 1984. He also has a DPA degree in administration from Fundación Adolfo Ibañez and Federico Santa María University. Illanes is a professor of tax law at the law school of Diego Portales University. He is member of the arbitrations and mediation panel of the Chamber of Mediation and Arbitration of the American Chamber of Commerce in Santiago and a member of the International Fiscal Association.

Miguel Zamora
		Baker & McKenzie in Chile Tel: +56 2 367 7000 Email: miguel.zamora@bakernet.com Miguel Zamora joined Baker & McKenzie in 2001. He got his LLB at the Catholic University of Chile in 2000. His practice areas includes tax, tax controversies, estate and personal tax planning, tax planning & advice.

Ana Paula Güitrón

Baker & McKenzie in Chile Tel: +52 55 5351 4142 Email: ana.guitron-pruneda@bakernet.com Ana Paula Güitrón joined Baker & McKenzie in 2004. Her practice includes participation in and development of diverse issues related to transfer pricing, such as compliance, consulting, and audits. She graduated with honours in 2004 as a public accountant from the Universidad Panamericana and earned an international tax degree from the same university in 2005.