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Chile’s focus on TP will only grow

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Chile is set to amend its Tax Code as it ramps up the scrutiny on domestic inter-company TP policies. Alejandro Paredes, transfer pricing lead for Deloitte Chile, looks at the developments.

Proving compliance with the arm's-length principle in transfer pricing has long been based on economic and financial logic. That is, proving that prices, values or profitability are in line with the market. However, in the past few years, the focus has been on fiscal and tax matters. Thus, tax authorities have an interest in corroborating that intercompany transactions are done at arm's length, and multinational enterprises modify their prices in order to allocate profits in certain jurisdictions. This has been the genesis of transfer pricing; a tax analysis on which the most time has been spent and which is focused on cross-border transactions.

The use of transfer pricing to resolve conflicts between minority shareholders has been a regular topic of discussion. For instance, where two unrelated companies that do not have an interest in modifying their transfer pricing policies to allocate profits with tax purposes but that do have a common minority shareholder, the minority shareholder can hire transfer pricing advisors to verify that transactions are at arm's length and are not harming the minority shareholder's interests. Both majority and minority shareholders can take this action. In such cases, the shareholders can be cross-border or local.

IRS to strengthen review powers

In relation to local shareholders, there has been a recent move in Chile to more heavily regulate inter-company transactions between domestic related parties. The most recent tax reform project includes the modification of Article 64 of the Chilean Tax Code. The old Article 64 gives the local tax authority the power to review and adjust prices between local companies, but the wording is very ambiguous. It states that when prices or values of an object or service for sale serve as the basis, or are one of the elements that determine tax rates, the Chilean Internal Revenue Service (IRS) may appraise the price or value. The IRS can do this in cases where the prices are "notoriously lower than market prices". No details are given on how the prices are determined to be lower or how the prices or values are calculated.

The new proposed Article 64 of the Chilean Tax Code is much more detailed and provides specific case examples for appraising and adjusting prices in transactions. If approved, it would establish the following rules:

  • Grounds for appraisal;

  • Asset valuation rules;

  • Evidence rules and legal presumptions favouring the taxpayer depending on the type of operation or asset transferred (for example, a sale price is deemed arm's-length if made to an unrelated party); and

  • Special rules on domestic and international corporate reorganisations.

Appraisal powers would not apply to mergers, spin-offs and capital increases (in certain cases). The proposed provision would also repeal the legitimate business reason for capital contributions.

The reform specifically mentions transactions within an enterprise group in Chile. It states the following.

Without prejudice to the provisions of letter A.-, in transactions of any nature between entities of the same business group in Chile, according to this is defined in letters a) and b) of Article 96 of Law No. 18,045, on Securities Market, which include transfer of goods, payments for the provision of services, royalties, interest, constitution of guarantees, holding of current accounts or management accounts, among others, the determination of prices or values can only be controlled by the service according to Article 59, considering as a substantive element the tax results obtained by the entities of the business group, therefore, it is necessary to consider the tax effects between the parties of the same operation or contract and that said tax effects are determined and, where appropriate, are contested by the service in a comprehensive and consistent manner, considering, among other factors, the tax consequences that the operation has for both parties and the application of the taxes that correspond in the operation. It will be presumed, unless the service proves otherwise by reasoned resolution, that the price or value assigned in the provision of services or functions between entities that are part of a business group corresponds to the normal market that would have been agreed by unrelated parties, in the cases that said prices or values correspond to the cost associated with the provision of said services or functions plus a profit that corresponds to the normal market that had or would have been agreed by unrelated parties considering the circumstances in which the operation is performed, except that the service in a rational and well-founded manner certifies that they do not consist of market values or that the entities of the business group have unduly allocated expenses and rents among them. If the same service or function benefits more than one entity that is part of the business group, each entity must support the respective pro rata based on the benefit received.

Based on the transfer pricing discussions taking place in multinational companies at the time of writing and the changes discussed above (as well as the reform to bolster reviews of local transfer pricing), we believe the focus on transfer pricing will continue to increase. It is no wonder that transfer pricing specialists are not only interacting with tax authorities but also with other local authorities, such as the Chilean Commission for Financial Markets (CMF, or the equivalent to the US Securities and Exchange Commission). There have also been instances of transfer pricing specialists called upon to testify before the public prosecutor in cases of abuse of minority shareholders.

The Chilean transfer pricing landscape has been broadening in recent years, not only with regards to cross-border transactions but also for domestic transactions within enterprise groups and the protection of interests of the various shareholders of these groups. Transfer pricing practitioners should be well positioned to take advantage of these developments and help companies navigate the new landscape to reach safe port for their transactions and taxation in general.

Alejandro Paredes


Transfer pricing partner


Tel: +56 2 2729 8216

Alejandro Paredes is a partner and leader of Deloitte's transfer pricing practice in Chile. He has broad experience advising multinational companies.

Alejandro has more than 14 years of experience delivering a broad range of transfer pricing services such as implementing practical and tax-efficient transfer pricing structures, representing clients in audits from the local tax authorities and advising on transfer pricing disputes.

Mining, energy and resources, technology, pharmaceuticals, aviation, consumer products, manufacturing and financial services are some of the industries in which Alejandro has strong experience.

Based in Chile since 2011, Alejandro has also been part of Deloitte's transfer pricing practice in Venezuela and the US. He graduated in economics from Universidad Católica Andrés Bello, Caracas, Venezuela and obtained post-graduate degrees in marketing from the Universidad Central de Venezuela and in international tax from the Universidad de Chile.

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