Chile: Tax modernisation bill introduces changes on transfer pricing compliance
Roberto Carlos Rivas and Carolina Céspedes Lacombe of PwC Chile explain how Chile's transfer pricing laws are converging towards the global model.
In February 2020, the law that is set to modernise Chilean tax law was published in the Chilean Official Gazette. Among other changes, the updated laws will introduce certain modifications to the Chilean transfer pricing (TP) regulations as of January 1 2020.
Although most changes are relatively minor, the modifications introduced to Article 41E of the Income Tax Law will potentially increase pressure on companies. The change gives the tax authority the possibility of requiring the filing of transfer pricing affidavits to taxpayers domiciled or resident in Chile, who carry out transactions with foreign related parties.
Taking into account that Chile is a member of the OECD, it is not a surprise that the scope and content of the obligations are in line with the commitments agreed in Action 13 of the BEPS Action Plan. It requires taxpayers to annually submit information associated with the so-called local file or the master file, as many of the signatory countries do.
The information required could be similar to the types requested in countries such as Australia, Netherlands or Peru, where taxpayers have to:
Prepare the local file and/or master file;
Submit information to the tax authorities about the economic group to which the taxpayer belongs;
Assess the business value chain;
Prepare financial information of the relevant inter-company transactions;
Create a functional analysis of the Chilean taxpayer; and
Prepare a comparability analysis or an economic analysis of the inter-company transactions containing the selection and application of the most appropriate TP method to support compliance with the arm's-length principle required by law.
Although it would seem like a large amount of information, these requirements would align Chile with the global trend of being more transparent when doing business within a multinational group.
In Latin America, for instance, the local file required in Peru must contain the following information:
The taxpayer, containing among other materials, a description of their organisational structure, a detailed description of the business lines, activities and business strategies of the taxpayer, identification of main competitors;
Transactions carried out by the taxpayer with related parties, including, for example, a description of the transactions, information related to the benefit test, the amount of the transactions carried out in their source currency, identification of the counterparts involved in the transactions, functional analysis, a comparability analysis of the taxpayer and their counterparties, for each of the transactions, identification of the most appropriate TP method to analyse each transaction, a copy of the advanced pricing agreements covering the transactions under analysis; and
Financial information of the taxpayer, which involves submitting annual financial reports and work-papers showing how the financial data was used to apply the TP methods, are related to their annual financial reports.
When the modifications to the tax regulations are fully in force, it is reasonable to expect that the Chilean Internal Revenue Service (IRS) to request one or more sworn statements from 2021, regarding inter-company transactions carried out during 2020. Likewise, it can also be expected that the fines for not complying with the requirements of the authority, would be the same as those already in force. Thus, taxpayers may be charged up to $36,000.
Therefore, what would the implementation of this regulatory change imply for multinationals that have a subsidiary in Chile and for national economic groups that have subsidiaries abroad? The answer will only be known when the Chilean IRS issues its instructions through a resolution. However, the power granted to the authority, to request more information from taxpayers through affidavits, makes it clear that there must be a greater concern regarding the way of doing business in companies belonging to an economic group. The changes allow authorities to make assessments with increased documentation requirements regarding TP in the short term.
The regulatory change will expectedly align Chile with the global compliance trend in TP matters. However, this compliance will involve an additional effort that companies will have to assume.
Roberto Carlos Rivas
T: +56 22 9400116
Carolina Céspedes Lacombe
T: +56 22 9400741