Last July1, the Chilean government submitted to the Congress a proposed tax reform bill that aims to increase tax collections by 4.3% of GDP when fully implemented. This package includes “substantial and structural” changes to the corporate income tax regime that would affect businesses operating in the country, such as a reduction in the corporate rate, abolition of the partially integrated tax system and replacement with the separate taxation of companies and shareholders, changes to the Transfer Pricing rules and the introduction of a new royalty regime on the mining industry.
With regard to the Transfer Pricing rules, changes proposed are aimed to update the effective regulations and level these up with regional and OECD applications. These changes will improve the Chilean Revenue Service position and include:
a) Business restructuring: the Chilean Revenue Service powers would be enhanced with respect to challenges to Transfer Prices and values or establishing prices/values if they are not arm’s length with regard to intercompany transactions and business restructurings. The reform bill would extend the Chilean Revenue Service powers in cases where agreements, contracts, etc. are terminated or substantially modified (substance over the form). Reorganizations that comply with the arm's length principle would not be subject to Article 41E of the Chilean Income Tax Law (Transfer Pricing principles) or Article 64 of the Chilean Tax Code (local restructuring and valuation rules).
b) Transfer Pricing adjustments: under the existing rules, the point of the interquartile range used to calculate a Transfer Pricing adjustment is not specifically set, although, in practice, the Chilean Revenue Service uses the second quartile (median value). Under the tax reform bill:
This would be the most important change in the Chilean Transfer Pricing regulation, as it is in line with its regional counterparts, who strongly emphasize median adjustments resulting in significant collections for penalties.
c) Self-initiated adjustments: taxpayers would have the ability to initiate an adjustment of their Transfer Prices transactions that do not comply with the arm’s length principle, but only if the adjustment increases the tax base, i.e., a self-initiated adjustment would not be possible if the adjustment reduced taxable income or the tax base. The bill clarifies that the adjustment could be made in the income tax return and the taxpayer would be able to avoid the 40% penalty.
It is worth mentioning that these penalty reductions do not consider those referring to incomplete, untimely or maliciously false declarations, or in which the Chilean Revenue Service identified a material difference regarding intercompany transactions (Circular 29 Chilean Revenue Service of June 24, 2022).
d) Advance pricing agreements (APAs)2: taxpayers would be allowed to submit a preliminary request to the Chilean Revenue Service to ascertain the viability of concluding (or not) an APA. Furthermore, the term of an APA would be extended from three to four years and possibly to transactions during the three previous tax years. In all cases, taxpayers would be required to submit an annual report on compliance with the APA when signed.
As we can see, these updates will serve the Chilean Revenue Service to improve their transfer pricing audits and minimize the low success rate in intercompany adjustments that could not materialize due to legal loopholes in current regulations. These changes would be in force from January 2023.
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