Global Tax Alert (News and views from Transfer Pricing) | 20 June 2013

Chilean Internal Revenue Service issues circular addressing transfer pricing modifications

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Request for extension to file TP annual sworn statement due 21 June 2013; statement due 28 June 2013

On 14 June 2013, the Chilean Internal Revenue Service (IRS) published Circular No. 29 with instructions addressing the modifications to the transfer pricing rules (TP) applicable since September 2012 (Law 20.630).

According to this Circular, 21 June is the last day to file a request with the tax authority for an extension of time to file the TP annual sworn statement, Form 1907, which is due the last business day of June (28 June).

Failure to file Form 1907 (or incorrect, incomplete or late filling) is subject to a fine that ranges from Chilean pesos $4,810,200 to $24,051,000 (US$10,000 to $50,000) (up to 15% of the taxpayer's equity or 5% of its effective capital, whichever is greater).

The Circular also states that should a TP adjustment be made by the IRS, a 35% fine will be imposed. However, the fine will not affect the determination of the taxpayer's net taxable income, its FUT (Taxable Profits Registry) or owner's equity. The Circular recognizes that the adjustments may correspond to a lower cost/expense/disbursement or higher revenue/profit of the taxpayer.

It should be noted that the Circular recognizes (from an administrative perspective) the 2010 OECD TP Guidelines as a valid source of interpretation.

The main considerations with respect to this law are addressed below.

Deadline to file a request for extension of time to file the TP sworn statement

In Resolution No. 14 of January 2013, the IRS established the obligation to file an Annual Sworn Statement for TP reporting purposes. To that end, taxpayers are required to file Form No. 1907 by the last business day of June every year.

Circular No. 29/2013 confirms that taxpayers may file a request for an extension of time to file Form No. 1907 (which might be granted for up to three months). It also establishes that the request for extension of time must be filed no later than one week before the original form filling due date.

Thereby, the time period to file the request for extension of time to file Form 1907 ends 21 June 2013.

Organization for Economic Co-operation and Development Guidelines

As stated in the referred Circular, the 2010 OECD Guidelines may be used as a reference to understand and interpret the Chilean TP rules.

Determination of values, prices, margins

The IRS has explained in this Circular the procedure to determine the margins, values or prices, making the OECD parameters applicable (2010 Guidelines).

As stated in this Circular, all those transactions performed by taxpayers resident or domiciled in Chile with related parties abroad are subject to review; however, the referred Circular provides no other explanation of the term relationship beyond the explanation contained in the law.

Similarly, when a transfer of goods or activities likely to trigger taxable income in Chile occurs between an entrepreneurial organization in which a taxpayer resident or domiciled in Chile has an interest and an entity in a country deemed a tax haven (pursuant to Article 41 D of the Income Tax Law), it is also subject to review.

The Circular also states that a comparability analysis must be conducted in relation to those transactions or operations subject to review, identifying the specific characteristics of each transaction to then apply the appropriate method.

As stated in Circular 29, the IRS may accept any point within the range that is comparable/reliable enough to reflect the arm's length principle. Nevertheless, it allows, under certain assumptions, taxpayers to limit the analysis to the interquartile range or other percentages where comparability flaws are identified.

Transfer pricing methods

Circular 29 provides details for the application of those methods contained in the tax law (comparable uncontrolled price, resale price, cost plus, transactional net margin method, profit split, residual methods).

In this regard, the law has expressly stated the need to justify the application of a method over another based on:

  • Advantages or disadvantages of each method;
  • Applicability thereof in relation to the type of operation;
  • Specific circumstances;
  • Availability of relevant information; and
  • Existence of comparable transactions, as well as comparability ranges and adjustments.

It is worth noting that according to the IRS certain methods would be preferable over others for some transactions, for example:

  • Comparable uncontrolled method: It may be used in the sale of raw materials in an open market and some financial operations, such as cash loans.
  • Resale price method: It applies to distribution activities.
  • Cost plus method: It is useful for sales or services when the manufacturer or lender does not contribute or transfer intangible assets.
  • Testing line.

Transfer pricing adjustments

In cases in which transfer pricing adjustments may be necessary, the IRS states that if a certain transaction is not an arm's length transaction, the IRS may: (1) determine the adjustment amount; thus, liquidating that amount and applying a 35% fine on the amount; or (2) authorize taxpayers to adjust their net taxable income determination according to the values determined by the IRS, applying the relevant taxes.

According to the instructions contained in this Circular, the fine does not affect the taxpayer's net taxable income determination; therefore, its retained taxable earnings registry or owner's equity is not altered.

In addition, the Circular also contains instructions with respect to the application of a fine equivalent to 5% of the adjusted amount to those taxpayers failing to timely comply with the reporting requirements and documentation filling (including failure to file Form 1907 on a timely basis).

Regardless of the collection method the IRS may use, in both cases, the appropriate readjustments, interests and fines must be applied.

It is important to note that the Circular has expressly recognized that adjustments may correspond to lower costs/expenses/disbursements or higher revenue/profit of the taxpayer.

Advance Pricing Agreement (APA)

In the Circular, the IRS provided details of APA procedures and associated effects, among which consideration should be given to the following:

  • The time period for the tax authority to make a decision is six months. If no decision is made within that time frame, the request must be deemed rejected.
  • A resolution rejecting an APA may not be appealed.
  • The maximum term for APAs is three commercial years (following APA authorization, regardless of the possibility to renew the same).
  • Should the IRS confirm lack of compliance with APA parameters, the taxpayer must correct such lack of compliance within the term established on a case by case basis, which may not be less than 30 days. If the appropriate adjustments are made, the tax authority may not collect interests or apply fines.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Ltda., Santiago, Chile
  • Felipe Espina
    +56 2 676 1328
  • Osiel Gonzalez
    +56 2 676 1141

EYG no. CM3548