Transfer Pricing in Chile

Concept and Regulation in Chile

Chile, a member country of the OECD, has been introducing changes in its transfer pricing regulations, in such a way that it has been adapting to what the OECD has indicated related to such matter. In 1998, through Circular No. 3, Chile has incorporated regulations related to Transfer Pricing 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, according to Action 13 of the BEPS Plan (Base and Erosion and Profit Shifting), 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.

For the purposes of applying transfer pricing rules, the parties involved in the operation, reorganization, or restructuring in question must fall under one of the relationship hypotheses contemplated in section 1 of the Law, according to which such parties will be considered related in the following cases:

  1. When there is direct or indirect participation in the management of the entity, or the same person or persons participate directly or indirectly in the direction, control, capital, profits, or revenues of both parties, understanding all of them to be related to each other.
  2. When it involves a subsidiary, branch, or office regarding its headquarters, as well as with other permanent establishments of the same headquarters, with related parties of the latter, and permanent establishments of those.
  3. When transactions are carried out with territories of null or low tax imposition for the purposes of tax regulations, except for exceptions where there is an agreement for the exchange of information relevant to the application of tax provisions that is in force.
  4. In terms of natural persons, when there are links of consanguinity and/or affinity.
  5. 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 similar or identical operations to those it performs with the first, regardless of the capacity in which said third party and the parties participate 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:
  1. Comparable Non-Controlled Price Method.
  2. Resale Price Method.
  3. Cost-plus margin method.
  4. Profit-Sharing Method.
  5. Net Margin Transaction Method.
  6. Residual Methods.
The taxpayer must select the most appropriate method, taking into account the particularities of the case. This involves evaluating the advantages and disadvantages of each method, its applicability according to the type of operations and specific circumstances, as well as the availability of relevant information, the existence of comparable operations, and comparability criteria.

Comparability Analysis in Chile

According to Article 3.2 of Circular No. 29 issued by the Internal Revenue Service (SII), the following criteria will be followed 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.
The Tax Authority accepts the use of foreign comparables as long as there is information to support them.

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, under 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 the documentation outlined 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:
  1. Taxpayers that as of December 31 of the year reported belonging to the Medium or Large Company segments, and that in such year have carried out operations with related parties abroad.
  2. 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.
  3. 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, regarding 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:

Local File

As established by the Internal Revenue Service (SII), they will be required to present this declaration when they meet these conditions:

  • 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.
  • In the year in question, 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).

Master File

According to the above-mentioned Resolution, taxpayers who meet any of the following conditions must file the “Informative Affidavit” called Master File through Form 1950 and attachment:

  • The parent or controlling entity of the “GEM”, which has a 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 a 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 to submit 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

The obligation to submit the Affidavit Report Country by Country, on Form 1937, is established for the following cases:
  • Controlling or parent entity of the Multinational Group of Companies, which has a residence in Chile for tax purposes, to the extent that the income of all entities forming part of such Group, in the 12 months previous 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, concerning 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 Non-Compliance in Chile

According to Circular No. 29 of 2022 and section 6 of Article 41-E of the Law, the penalties for the lack of submission, erroneous, incomplete, late, or maliciously false submission of these sworn statements, and the informative sworn statements of transfer pricing will range from 1 to 50 Annual Tax Units (UTA). 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. Regarding Sworn Statements 1907 (Informative Sworn Statement), 1937 (Country by Country Report), 1950 (Master File), and 1951 (Local File), fines are applied as follows:
 
Presentation of Affidavit Penalty fee
Late Submission of Sworn Statement Up to 45 days delay: 15 UTA – From 46 days delay to 90 days delay: 20 UTA – 91 days delay onwards: 30 UTA
Non-submission 50 UTA
Incomplete or erroneous submission: 10 UTA
Maliciously false submission 50% to 300% of the value of the tax evaded and with imprisonment from mid to maximum degree.
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