Revision of formal obligations: what to expect

The last time Chilean Transfer Pricing (“TP”) regime was updated was in September 2019. In said opportunity, the modifications were aimed at aligning formal obligations such as the F1907 (transactions with related parties) and F1937 (CbCR). Later in February 2020, just before the COVID-19 outbreak worldwide, a modernised Income Tax Law and Tax Code (its art. 64 provides specific case examples for appraising and adjusting prices in transactions within an enterprise group in Chile) was finally published. Although minor changes in TP issues were introduced, they added pressure to taxpayers and to the Internal Revenue Service itself. But are these the implementations that we expect and need?

With the F1907, Chilean taxpayers are complying to disclose their related parties and operations performed during the previous fiscal year; and with the F1937, economic group information exchange standards are being met successfully.

We certainly expect practical modifications in accordance with the current and future post-COVID-19 scenario, for example:

• Benchmarking and TP analysis; we expect more details about discerning the effects of an economic crisis between companies, industries, or markets; the reduced probability of finding appropriate comparables that have experienced financial distress (e.g. bankruptcy or operating losses). Hence, in the F1907 it would be good to include the interquartile range of comparable companies and the suggested adjustments.
• Pricing financial transactions (cash pooling, related parties’ loans, credit rating, guarantees); the economic downturn will lead Multinational Enterprises (“MNEs”) to reassess their existing intercompany (“IC”) financing agreements. We would expect from the Internal Revenue Service explicit guidelines to search the unit of criteria regarding adjustments in the agreed conditions: SBIF/CMF¹ information would be useful for TP purposes? Only a credit rating approach would lead to the best outcome when determining the arm’s length interest rate?
• Allocation of legitimate losses and business restructurings (shutting down or scaling back their operations due to the pandemic); we would expect a solid guidance on the termination or substantial renegotiation of IC agreements (mainly intangibles and services).
• Submission of the TP study (local file (“LF”)) following the regional trend. We would expect that serves to standardise criteria for documentation and audits.
• Standardisation of complementary analysis such as Benefit Test in the LF and/or F1907.

Clearly, the Chilean TP landscape has been broadening in recent years. It is worth mentioning that this has happened not only regarding cross-border transactions, but also for domestic transactions within the economic group. We hope that the present circumstances serve to include these elements and can provide greater certainty for the Internal Revenue Service and elements of defence for taxpayers with regard to audits.

1 The banking regulator (SBIF) joined the Commission for the Financial Market (CMF) in 2019, as provided in the amendment to the Banking Law. The CMF is the government agency that oversees the entities and activities involved in the securities markets and insurance in Chile.