How to prepare for TP audits in Argentina and Chile
The transfer pricing (TP) audit environments in Argentina and Chile show no sign of relaxing. Silvana Blanco and Vanesa Lanciotti of Deloitte set out how to enter the audit in a position of strength.
Tax authorities around the world are increasingly focusing on TP matters. International taxation issues have been a top priority on the political agenda in recent years. In light of these developments, it is worth reviewing trends in TP audits in Argentina in recent years.
There has been a shift towards the use of tailored questionnaires as opposed to general ones and broadened scope of audits. In current audits, some taxpayers have been receiving questionnaires tailored to the company’s specifics, as well as containing questions focusing on various TP topics included in its reports.
For example, consider transactions with international intermediaries. According to local regulations, the remuneration of the international intermediary should be supported and consistent with the functions performed, the assets employed, and the risks assumed, provided the following conditions of economic relations are verified:
The international intermediary should be related to a local taxpayer, or
The exporter in the source jurisdiction or the importer in the destination jurisdiction should be related to the local party.
If the remuneration of the international intermediary is higher than an arm’s-length remuneration, any excess will be treated as an increased Argentine-source income attributable to the local taxpayer.
If an international intermediary does not meet these conditions, the taxpayer should provide evidence to support such remuneration. This evidence should include public information on the intermediary resulting from the public financial statements of the economic group to which the intermediary or the taxpayer belong.
Based on this, the local tax authorities are requesting more details on the information requirement related to import and/or export of goods carried out through international intermediaries (intermediary substance test). This test is explained below.
Intermediary substance test
For fiscal years before December 2018, applicable only to export transactions performed through international intermediaries:
The taxpayer must have a real presence in the territory of residence, have a commercial establishment there where their businesses are managed, and comply with the legal requirements of constitution, registration, and presentation of financial statements. The assets, risks, and functions assumed by the international intermediary must be consistent with the volumes of traded operations;
In addition, its main activity must not consist of obtaining passive income, nor the intermediation in the commercialisation of goods from or to the Argentine Republic or with other members of the related economic group.
Finally, its international trade operations with other members of the same economic group may not exceed 30% of the total annual operations arranged by the foreign intermediary.
For fiscal years closed as of December 2018, applicable to import and/or export of goods carried out through international intermediaries:
The taxpayer must carry out a functional analysis of the intermediary and must obtain and keep the following information:
Records that prove the real presence of the international intermediary in the territory of residence according to the regulation of that jurisdiction;
Audited financial statements of the intermediary;
A certification issued by a competent professional who acts in the jurisdiction of the intermediary, certifying the detail of the direct taxes to which they are subject in the jurisdiction of residence and Tax Identification Number (NIF) in the country of fiscal residence;
A certification issued by an independent professional of (a) the reasonableness of the remuneration obtained by the intermediary and (b) the detail of the purchase and sale price and expenses associated with the transaction.
It is not easy for many companies to obtain this information from intermediaries, given its sensitiveness and confidentially.
Intragroup services have attracted the attention of the tax authorities in many countries, including Argentina. Intragroup service fees comprise fees for technical services, management services, back-office support services such as human resources support, finance and accounts, and information technology.
Due to the international environment, increasing competition and for efficiency reasons, it is quite common for multinational companies to provide different services within the group. In addition, the creation of intragroup service centres to centralise the service offering in the group has become increasingly common in recent years.
According to General Ruling No. 4717 (following Law 27,430 and Regulatory Decree N°. 1,170) published on May 14 2020, the TP study must contain an economic analysis that justifies and documents that the services are necessary, are not duplicated and generate a benefit and/or savings to the local taxpayer.
Tax authorities around the world are increasingly focusing on TP matters.
Intragroup services are therefore of great importance to local tax authorities. A major focus of the tax authorities is determining whether a service has been provided. The tax authority may frequently challenge the validity of services received; the service recipient should therefore be able to prove the economic value of services received and that they will be willing to pay an independent party for the provision of such services.
In addition, it must be demonstrated that there is no duplication of expenses for identical services. To assess whether this criterion is met, the taxpayer has to demonstrate using, for example, a functional analysis that the entity is not performing such a service for itself. It must be noted that duplicated services will not qualify as intragroup services.
This analysis is called a benefit test analysis and is aligned with the income tax expenditure deductions. A given expense should be necessary and incurred for the benefit of the recipient company that has requested the services.
In short, based on the guidance provided by GR 4717/2000, the existing jurisprudence and recent audits, a taxpayer should prepare a defence file to justify the deductibility on the intercompany services received. This file should include calculations and support documentation showing:
The need that the recipient of the services has to satisfy by obtaining the services,
The impossibility or economic unfeasibility of meeting those needs in-house or by engaging other providers,
The economic value of those activities for the recipient of the services,
The reasonableness of the pricing methodology, and
That services are not shareholder activities.
Information gathering based on master files reports
The tax authority reviews the consistency of the information contained in the master file and that in the local report.
Additionally, the local tax administration requests additional information on what the taxpayer detailed in the master file. The tax authority also asks for a translation of the information that the taxpayer submitted to the tax authorities if it is in English.
With the increasing trend towards TP audits in Argentina, multinationals need to be well prepared to be able to shift the burden of proof to inspectors in the event of an audit. Thus, taxpayers must look at their business through the eye of a tax inspector performing a risk assessment based on some red flags such as:
Transactions with international intermediaries.
Paying significant amounts for service contracts and licensing contracts in relation to sales and profits.
Losses for several consecutive years, profits fluctuation and disconnections between financial results and tax paid by the taxpayer.
Significant transactions with low tax jurisdictions.
Constant divestments, acquisitions, mergers, or change of business model, with no economic substance.
Contemporary documentation of a consistent worldwide TP structure will be crucial to manage tax risk. In addition, a TP policy that is implemented consistently and supported by the necessary TP documentation and analyses will be critical.
Intragroup services have attracted the attention of the tax authorities in many countries, including Argentina.
Taxpayers should take proactive actions to prepare themselves for these situations. This includes undertaking reviews to identify and address any collateral risks in advance, taking precautions with TP documentation, and ensuring that legal arrangements are up to date and fit for purpose. Working on these actions now can pay dividends later.
Multinational corporations based in Argentina must stay on top of these matters to ensure they are not attracting unwanted attention from the local tax authority.
Chile joined the OECD in 2010. It was the first South American member of the organisation but also one of the last Latin American states to join the TP world.
TP legislation, and therefore the formal acknowledgement of the OECD Transfer Pricing Guidelines, was incorporated into the Chilean Income Tax Law (CITL) only in 2012. Despite this, Chile is one of the countries that has evolved the fastest in this area, giving TP and related transactions a preponderance, sophistication, and importance. TP is now a predominant topic of conversation in the current tax environment.
This is clear in the inclusion of a significant number of TP cases in the “catalogue of tax schemes” that could be considered elusive under the Chilean general anti-avoidance rules; in the new regulations on deductible expenses; in the importance of TP within of the Tax Compliance Management Plan (TCMP) recently published by the Chilean Tax Authority; in the Servicio de Impuestos Internos (SII); and in the growth of audits and specialisation of professionals in this matter within the SII.
The SII has issued a recent general ruling regarding the deductibility of expenses and the application of a tax on disallowed expenses (Article 21 of the CITL). This provides that, with respect to disbursements in operations with related parties, it is necessary to analyse especially that the amount of the expense is reasonable, taking into account the particular circumstances of the case and the interest of the company that incurs the disbursement.
For purposes of considering the reasonableness, the following will be taken into account, among other elements: values or market prices, liquidity or debt capital ratio, existence of a strategy or business plan or the execution of a new project, and the characteristics of previous operations (if any). In this regard, it is important to note that there is no differentiation between cross-border and domestic expenditures.
As mentioned above, the SII has published the TCMP, in which the main matters, industries, or groups of taxpayers and types of operations that will be subject to audit actions during the year 2022 are determined. Although there are segments of interest such as small taxpayers or informality, most of the focuses are associated with TP, as shown in Table 1.
Table 1: TCMP segments of interest
2) Transfer pricing and valuation
3) Economic groups
4) Advance pricing agreement (APA)
5) High net worth
6) Small taxpayers
Focus on multinationals
The document issued by the Chilean Tax Authority points out that “the problems with cross-border operations that erode the tax base affect both developed and developing countries in the same way: according to data from the OECD, the presence of base erosion and profit shifting (BEPS) costs between 4% and 10% of global corporate tax revenues”.
The control actions within multinational groups proposed by the SII, with special emphasis on the relevant transactional risks related to the use of tax planning and TP, include:
Remittances not taxed with withholding tax;
Loans granted to related companies abroad;
Correct use of the withholding tax on back-to-back loans;
Correct use of the benefits established in tax treaties;
Information exchange; and
Monitoring investments abroad.
TP and valuation
Regarding intra-group operations, in Chile around 4,000 taxpayers have submitted their TP sworn statements. The SII seeks to mitigate the risks associated with cross-border transactions between related parties that are not applying the arm’s-length principle, by strengthening the examination processes and promoting collaborative work with other external organisations.
To achieve this, it has developed new capabilities, such as:
Team formation: standardisation of procedures that allow optimising of support interactions between the different dependencies of the SII on control issues;
Updating and improving the jurisprudence and instructions related to valuation and TP; and
Development of econometric models for the TP policy of multinational groups that allows the detection and quantification of possible transfers of benefits between tax jurisdictions, based on the information contained in the country-by-country report.
In practice, these measures are already being implemented, given that there is evidence of an increase in TP audits, as well as a deepening of them. In these audits, a significant volume of documentary and accounting information is requested, as well as evidence such as deliverables, e-mails, and interviews with different areas of the taxpayer.
The existing economic groups in Chile have a great impact on the national economy and an important role in society. They have various types of businesses, which range from retail to construction, and of course investment companies. The SII has developed a collaboration and monitoring scheme for business groups that includes:
Design and implementation of the tax contribution report of economic groups;
Implementation of the concept of tax social responsibility;
Creation of cells/groups specialised in monitoring and review of groups; and
Participation in the OECD for the implementation and training related to the rules for allocation of benefits and minimum tax payment proposal: OECD’s pillar one and pillar two.
Advance pricing agreement
Although TP regulations in Chile have made it possible to submit advanced pricing agreement (APA) requests since 2013, only in recent years have these agreements begun to be signed between taxpayers and the SII.
According to official data, there are four APAs signed in Chile, six under review and one rejected. These agreements cover more than $400 million of collection.
These numbers may seem modest next to the official figures of the United States or the European Union. However, in Latin America it is the only tax authority that is making significant progress in signing these agreements with taxpayers (with the exception of Mexico, which has negotiated and issued APAs for more than 20 years).
Additionally, and in order to encourage these agreements, the SII has formed an area dedicated exclusively to reviewing APAs and mutual agreement procedures. This includes tax, economic, and legal specialists.
In addition to carrying out other actions such as the creation of an exclusive web page for this purpose, or making statistics and information from the OECD or CIAT available to the taxpayer, the SII aims to show multinational groups that the APAs are tools that generate certainty and transparency.
The level of tax collection in this fiscal year will depend on many factors (including a new president with a new tax reform proposal, a possible new constitution, global uncertainty, low growth of around 2% in 2022 versus 12% in 2021, and inflation).
However, the truth is that the tax authority has its inspection programme for this year and the main topics of interest are predominantly those related to TP.