Transfer pricing (TP) is not something new to this country. Article 22 of Law 19,506, published in the Official Gazette on July 30 1997, introduced four paragraphs that contain Chile's basic TP regulations.
However, it was not until September 27 2012 that the new Article 41 E of the Income Tax Law (LIR) entered into force, introducing significant changes to Chilean transfer pricing legislation.
Using this legislation, over recent years the local tax authority, the Chilean Internal Revenue Service (Chilean IRS), has increased the quantity of inspections and transfer pricing audits on transactions with related parties abroad and with entities located in countries considered tax havens. As the basis for its analysis, the Chilean IRS uses local TP regulations along with the OECD Guidelines, as well as certain international jurisprudence.
Nevertheless, unlike in other countries in the region, such as Peru and Mexico, Chile's TP regulations do not cover transactions carried out with local related entities. Despite this, Article 64, paragraph 3, of the Tax Code specifies:
"When the price or value assigned to the object of the alienation of a movable, corporal or incorporeal species, or to the service provided, serves as a basis or is one of the elements that determine a tax, the Chilean IRS, without the need for prior citation, may assess/adjust said price or value in cases where it is notoriously lower than current market prices or values. This means that the Chilean IRS may also assess/adjust said price or value if they are considerably lower than the prices and values that are normally charged in conventions of a similar nature considering the circumstances in which the operation is carried out."
This paragraph demonstrates that, while, as mentioned previously, TP regulations do not cover transactions with related local entities, the Tax Code does establish certain points that empower the Chilean IRS to review the market conditions in which local transactions are carried out. It is, therefore, crucial that the contents and implications of the Tax Code be analysed.
Paragraph 3 also shows that, under comparable conditions, the Chilean IRS has the power to assess or adjust prices or values that are notoriously lower than those found in the marketplace.
Local transactions under increasing pressure
Taking the above into consideration, the most important point is to determine what mechanisms or tools the Chilean IRS would use to test the market condition of transactions with local related entities. Once identified, any taxpayer should then review its planned transactions or those that have been performed locally and that do not fall within the scope of TP regulations to confirm that they are at arm's length.
In this regard, it is worth noting that in 2010, Chile became the first South American country to enter the OECD and, therefore, the OECD Guidelines for Multinational Enterprises gives a framework and basis from which to analyse the market conductions of a particular transaction.
In its inspection tasks, the Chilean IRS has adopted the principle of market value to evaluate transactions between related entities and, as previously discussed, based its analyses on the international principles laid out by the rules mentioned above. Therefore, it is our understanding that where local regulations do not present clear indications of what mechanisms to use for the analysis of such transactions, we should consider it appropriate to supplement them with the indications provided by the OECD Guidelines.
This conclusion has led many companies, from both the international and national economic groups, to review the market conditions of their local transactions following OECD Guidelines.
The Chilean IRS has turned its attention to local transactions that were not previously reviewed in such detail. At first, Chilean fiscal authorities paid most attention to financial transactions, where interest rates were not charged for loans granted locally, or for services provided between local companies.
In the latter case, this mainly occurred when, during income tax reviews, fiscal authorities observed a situation in which all personnel of a national entity were on the payroll of one of the companies and provided services that were not billed or for whom the billing did not include a proper mark-up on its total cost, as other unrelated parties would normally be charged under comparable circumstances. These revisions and new scenarios have led Chilean companies to review their local pricing policy to avoid these types of contingencies that could lead to a tax adjustment.
However, as the trend of local review spreads throughout the Chilean market, the repercussions of a lack of strong and tested policies regarding transactions carried out with local related companies have become even clearer.
In a hypothetical situation, where the Chilean IRS adjusts the prices or values agreed upon in a local transaction, there is an important distinction concerning the repercussions of making the same adjustments in operations carried out with foreign related entities (cross-border transactions). This is because there are tax treaties that aim to avoid double taxation.
Additionally, when the tax authority of any country adjusts the transfer prices in a certain company, there are established and agreed upon mechanisms between jurisdictions that allow groups to request a rebate on overpaid tax. This, for example, would be the case in the corresponding adjustments, which could be requested in order to mitigate any possible impacts of double taxation. Furthermore, with prior authorisation from the Chilean IRS, the price, value or profitability of the operations carried out with related foreign parties, which were affected by the adjustment, can be rectified.
Notwithstanding this, when adjustments are made on a local transaction, there are no clear rules on how to proceed in order to avoid double taxation, which generates a higher cost to the Chilean taxpayer. This is an essential point to understand when considering why entities have decided to proactively review their local situation and why they have begun correcting these deficiencies in the medium and short term.
A new era for internal policies
In short, after several years, during which taxpayers in Chile have become accustomed to the local TP regulations that must be taken into account when agreeing or making transactions with foreign related parties, a new challenge, with even greater risks, has weaved its way into the local decision-making processes: guaranteeing the market conditions of these transactions.
We understand that this issue is of great importance to the Chilean market in the short term. It will require not only the work of companies' international tax teams, but also of the entire entity to successfully manage the changes needed to ensure that all local transactions made with related parties are at market value.
Transfer pricing senior manager
Baltazar Marotte has a degree in economics from the Universidad Argentina de la Empresa (UADE). He also completed a master's degree in public policy from Universidad Torcuato Di Tella (UTDT).
Baltazar has been working in transfer pricing for more than 10 years, focusing on strategic planning and consulting in TP disputes. He also has experience in business, private stock and intangible asset valuation for tax and accounting purposes.
Baltazar has rendered services to a wide range of industries over the years, including: agribusiness; investment banking; heavy construction; retail and consumer; pharmaceutical; and automotive, among others.