Transfer Pricing in Chile
Transfer Pricing in Chile: New Perspectives
Since 1998, Chile has incorporated transfer pricing rules into its legislation.
However, it was not until 2012, when Law 20,630 reformed the rules on this matter, incorporating in Article 41-E of the Income Tax Law (the Law) measures according to the guidelines of the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development (OECD).
Being a member country of the aforementioned organization, it has continued to introduce changes to its transfer pricing regime as from 2016, in accordance with Action 13 of the BEPS Plan (Base and Erosion and Profit Shifting), in order to take measures against tax evasion or avoidance.
Principle of Full Competition: Concept
Also known as the “Arm’s Length” principle, it seeks to ensure that the prices agreed for transactions with related parties are in line with market value, understood as those agreed between independent parties.
In the Chilean case, the Income Tax Law has regulated this principle in Article 41-E, which states that transactions with related parties abroad must be carried out at normal market prices, values or returns.
Likewise, those who have or would have agreed to or obtained independent parties in comparable transactions and circumstances will be understood as such.
Definition of Related Party in Chile
In accordance with paragraph 1 of Article 41-E of the Law, the parties involved in a transaction are considered to be related when one of the following events occurs:
- One of them participates directly or indirectly in the management, control, capital, profits or income of the other.
- The same person or persons, either directly or indirectly, participates in the management, control, capital or income of both parties, in such a way that all are related to each other.
- An agency, branch or any other form of permanent establishment shall be considered related to its parent company; to other permanent establishments of the same parent company; to related parties of the latter and permanent establishments of the former.
- Transactions are carried out with parties resident, domiciled, established or incorporated in a country, territory or jurisdiction indicated in Article 41-H of the Law, unless they have a tax information exchange agreement with Chile.
- Natural persons shall be understood to be related when they are spouses, civil partners, or when there is kinship by consanguinity or affinity up to the fourth degree.
- Likewise, it will be considered that there is a relationship between the intervening parties when a party carries out one or more operations with a third party that, in turn, carries out, directly or indirectly, with a related party of that party, one or more operations similar or identical to those carried out with the first party, regardless of the capacity in which said third party and the parties intervene in such operations.
Transfer Pricing Methods in Chile
The transfer pricing regime in Chile consists of six methods to analyze whether the prices agreed between related parties are in line with normal market values.
According to numeral 2, of article 41- E of the Law these will be the following:
- Comparable Non-Controlled Price Method.
- Resale Price Method.
- Cost plus margin method.
- Profit Sharing Method.
- Net Margin Transaction Method.
- Residual Methods.
As for the choice of methods, the last paragraph of the indicated numeral indicates that “the most appropriate method” will be taken, for which the characteristics and circumstances of the particular case must be considered.
Comparability Analysis in Chile
In accordance with article 3.2 of Circular No. 29 issued by the Internal Revenue Service (SII), the following criteria will be followed in order to perform the comparability analysis:
- Characteristics of the goods or services.
- Analysis of the functions, assets and risks of the transactions analyzed.
- The contractual clauses of the transaction.
- The economic circumstances of the market.
- The business strategies.
Documentation and Declarations of Transfer Pricing in Chile
The transfer pricing regime in Chile establishes, as part of its formal obligations, that taxpayers who carry out transactions with related parties must have a Technical Study, pursuant to paragraph 3 of Article 41-E of the Law.
It also states that according to paragraph 6 of the aforementioned article, they may also be required to file an information return in accordance with the forms and terms established by the SII.
It should be noted that since 2016, Chile has been adapting to Action 13 of the OECD BEPS Plan, introducing the Country by Country Report (CBC Report) as one of the three levels of documentation set forth in that action.
Later, in August 2020, it introduced the other two levels of documentation, the Local Report and the Master File.
Informative Affidavit in Chile
According to Resolution No. 126 of 2016, an “Annual Affidavit of Transfer Pricing” must be filed on Form 1907, when one of the following cases applies:
- Taxpayers that as of December 31 of the year reported belong to the Medium or Large Company segments, and that in such year have carried out operations with related parties abroad.
- Those taxpayers, which are not classified in the previous assumption, carry out operations with a country or territory of low or zero taxation, preferential regimes or non-cooperative jurisdiction.
- Taxpayers who, not being in the first case, in the corresponding reporting period have carried out transactions with related parties abroad for amounts exceeding $ 500,000,000 (five hundred million Chilean pesos).
The above mentioned declaration must be filed on the last working day of June of each year, with respect to the operations carried out in the previous commercial year.
In addition, as mentioned above, as of 2016 the three levels of documentation indicated by the OECD have been implemented, for which reason the following declarations must be filed if applicable:
According to Ex. Resolution N°101, of August 2020, the SII establishes the “Informative Annual Affidavit” called Local File, which must be filed through Form 1951 with its respective annex.
Likewise, taxpayers that meet the following requirements are obliged to file such return:
- Belong to the Large Companies segment, according to criteria established by the IRS.
- Their parent or controlling entity of the Multinational Group of Companies (GEM) must have filed the Country by Country Report with the Internal Revenue Service or other Tax Administration for the respective tax year.
- That in said year they have carried out one or more operations with related parties not domiciled in Chile, for amounts exceeding Ch$200,000,000 (two hundred million Chilean pesos).
According to the above-mentioned Resolution, taxpayers who meet any of the following conditions must file the “Informative Affidavit” called Master File by means of Form 1950 and attachment:
- The parent or controlling entity of the “GEM”, which has residence in Chile for tax purposes, to the extent that the income of the group of entities that are part of such group in Chile and abroad, as of December 31st of the year being reported, is at least seven hundred and fifty million Euros (EUR 750,000,000) at the time of the closing of the consolidated financial statements.
- The entity that integrates or belongs to the GEM, that has residence in Chile for tax purposes, and that has been designated by the parent or controlling entity of such group as the only substitute of the latter for the purpose of submitting the “Country by Country Report” Affidavit in its country of tax residence, in the name of the parent or controlling entity.
Country by Country Report
According to Resolution No. 126 of 2016, the obligation to submit the Affidavit Report Country by Country, on Form 1937, is established for the following cases:
- Parent or controlling entity of the Multinational Group of Companies, which has residence in Chile for tax purposes, to the extent that the income of all entities forming part of such Group, in the 12 months prior to the beginning of the corresponding tax period, is at least 750 million euros at the time of the closing of the consolidated financial statements.
- An entity that forms part of or belongs to the Group, that is resident in Chile for tax purposes, and that has been designated by the parent or controlling entity of said Group as the only substitute for it.
The deadline for submitting the aforementioned annual affidavits and their annexes will expire on the last working day of June of each year, with respect to the operations carried out during the immediately preceding business year.
In turn, said term may be extended once for up to three months, for which purpose it must be submitted before the expiration of the original term.
Technical Study of Transfer Pricing in Chile
Paragraph 3 of Article 41-E of the Law states that taxpayers may accompany a transfer pricing study that accounts for the determination of the prices with its related parties.
Sanctions for Noncompliance in Chile
According to Circular No. 31 of 2016 and paragraph 6 of article 41-E of the Law, the penalties for failure to file or misfiling transfer pricing information returns will amount to 10 to 50 tax units per year.
The referred penalty will depend on the number of operations or untimely dates.
It should be noted that the indicated fines may not exceed the equivalent of 15% of the taxpayer’s own capital or 5% of the effective capital, which is higher.
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