Chile – July 2022 Tax Reform Proposal – Changes Regarding Transfer Pricing (TP) Regime

On July 7, 2022, the Chilean President, Gabriel Boric, submitted a tax reform bill to the National Congress.  The bill is comprised of fourteen articles that modify or establish distinct sections or pieces of law, in addition to the transitional provisions necessary for their correct implementation. 

In relation to transfer pricing, existing laws are strengthened and aligned more closely to the Organization for Economic Cooperation and Development (OECD) guidelines, modifying the faculties of the tax authority, and establishing improvements to the current process for advance pricing agreements (APAs).   

The following is a summary of the primary proposals that will directly or indirectly modify the transfer pricing laws in the country (Article 41 E of the income tax law, or LIR): 

• Incorporation of the concept of the “arm’s length principle,” which is defined as when transactions are priced at the market rate; that is, the prices, values, or rates are agreed upon or obtained from those that would be used by independent third parties in comparable transactions and circumstances.  By incorporating this principle, Chile would now be aligned with Chapter 1 of the transfer pricing guidelines written by the OECD, and therefore follow the international standard. 
• Inclusion of assets and risks assumed when searching for a comparable company to determine the market value  
• Broadening of the definition of “corporate restructuring” for the purposes of Article 41 E of the LIR to be: international transfer, into or out of Chile, of functions, assets, risks, goods, and/or other activity with potential for taxable profit in the country or terms for agreements, or contracts are finalized, or substantial adjustments are made to any such legal document, and it’s estimated that in respective reorganization or restructuring the arm’s length principle is not adhered to, which should be understood according to the methods referred to in this article. (Boric, 2022). 
• The fourth paragraph of numeral 1 of Article 41 E regarding natural persons is eliminated.
• Extension of taxpayer obligation to include foreign related parties’ documentation and other data from transfer pricing methods applied in the information that remains at tax authority’s (SII) disposition.  
• The obligation to use the interquartile range in those cases where two or more prices, values, or rates are considered comparable. 
• Any adjustments made for complying with the arm’s length principle do not forego the tax authority’s right to apply any additional tax laws. 
• Taxpayer incentives for self-applying TP adjustments (without SII’s intervention necessary) or for instead accepting the adjustment proposed by the SII after an audit is conducted: 

1. No penalty if taxpayer rectifies its income tax statement before the SII completes its audit; or 
2. A fine equal to 5% of the difference in adjusted taxable income if taxpayer fails to correct their statement and pay accordingly by the time the SII’s finishes their audit. 
3. If the SII is forced to finish the audit, as a result of the taxpayer not making the adjustments on its own, the adjustment price will be equal to the median of the interquartile range.  This is in addition to the 5% fine that will be applied. 
4. Possibility to assign a price that falls anywhere within the interquartile range when a taxpayer makes an adjustment itself or accepts the SII’s TP analysis during an audit, in which case the price would be agreed upon together with the SII: 
5. When determining what price to use, please keep in mind that adjustments must not be made to diminish taxable income from the first category in order to pay fewer taxes or increase a tax loss 

• The protocol and characteristics of APAs:  

1. An added option for taxpayers to submit a previous application to determine viability of their APA application.  SII must give its response within two months after submission of the viability application. 
2. An approved APA will be in place for five years as opposed to four; beginning the commercial year the application is approved 
3. Taxpayers must have an annual report to validate the fulfillment of the transaction conditions agreed upon in the APA. 
4. SII would now have 12 months as opposed to six months to respond to APA applications. 

• Modification of the timeline to submit application for corresponding adjustment applied in another jurisdiction, from five years to only one year, from the date the TP adjustment is considered definite in the other jurisdiction. 

Regarding the country’s tax code (CT), modifications included that affect TP are to Articles 59 and 64.   

In Article 59, among other changes submitted, in transfer pricing audits, the tax authority is permitted one extension of six months, in addition to the already allowed 12 months, to issue the taxpayer the completed audit report. 

Proposed changes to Article 64 add a list of transfer pricing methods that can be used, as well as the condition that the taxpayer should use the most adequate method considering the characteristics and circumstances of the specific case, disallowing the use of more than one method. 

Finally, the bill seeks the creation of a national registry for ultimate beneficiary owners (UBOs) that will contain information of natural persons that are ultimate beneficiaries for companies, investment funds, and other entities, constituted or domiciled in Chile, or with any permanent establishment in the country. 

While the bill may undergo changes in Congress or the Senate, it at least gives taxpayers and tax consultants an idea of what the current administration’s position is regarding transfer pricing.