Transfer Pricing Country Summary Chile

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Erika Richards
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1 Page 1 of 7 Transfer Pricing Country Summary Chile 5 April 2017

2 Page 2 of 7 Legislation Existence of Transfer Pricing Laws/Guidelines Article 41-E of the Chilean Income Tax Law (CITL) introduced by the Law 20,630 published on 27 September 2012 and lastly amended in January 2015 contains the basic transfer pricing statutes. This article allows the Chilean tax authority, Servicio de Impuestos Internos ( SII ), to conduct audits, request specific information and challenge the prices charged, paid or accrued between related parties if such prices do not comply with the arm s length principle. Article 41 E follows, in general, the OECD guidelines. Chile is a member of the OECD. Its transfer pricing rules are consistent with the OECD Transfer Pricing Guidelines, which are generally followed by the SII. Definition of Related Party Article 41-E CITL establishes a broad concept of the notion related parties, which includes the following situations: a company incorporated abroad that participates, directly or indirectly, in the management, control or capital of a company established in Chile or vice versa; a person that participates, directly or indirectly, in the management, control or capital of both a Chilean enterprise and a foreign enterprise; a branch and its head office or another branch or a related company of the head office; transactions with fictitious resellers in foreign countries (covert relationships); operations among relatives; a transaction with an enterprise established in a low tax jurisdiction included in a list enumerated in Article 41 D, No 2 of the CITL, unless a covenant for exchange of fiscal information between those states is in force. The amendment which came in force in January 2015 clearly specifies that transfer pricing legislation is applied to transactions and business activities between a foreign entity and a local one, eliminating all the previous speculations that transfer pricing regulation is valid only for activities with tax havens. Transfer Pricing Scrutiny A highly qualified Transfer Pricing Unit has been established by the SII and has been carrying out intensive tax audits. With the last reform, and based on the new Article 41-E, the SII requires from the taxpayers (medium and large) all the information about their operations in excess of 200 million Chilean pesos with related parties. Other taxpayers must file information about their operations in excess of 500 million Chilean pesos. The SII is entitled, based on Article 41-E CITL and Article 64 of the Tax Code, to investigate and assess domestic transactions as well.

3 Page 3 of 7 Current audits are being focused on all industries involving imports, such as automotive, pharmaceuticals and electronics. Audits are also focused on shipping, mining and some agricultural enterprises. Transfer Pricing Penalties If the relevant documentation is not available at the time of a tax audit, a minor fine is due. The same fine applies when failing to comply with any and each of the reporting liabilities with regard to cross border payments and revenues. Penalties due to a transfer pricing adjustment are: A tax of 40% of the increase of the tax base (depending on the circumstances); and a fine of 5% of the difference; the amount of the increase must be restated for inflation reasons; late payment interest on the extra tax payable is due; a fine, ranging from 10 to 50 Monthly Tax Unit (Unidad Tributaria Mensual ( UTM ), (index reflecting inflation amounting to USD85) per year, for failure to file the statement, to file an incomplete one or in case of misstatement; Maliciously false statements are punishable with imprisonment and 50% to 300% of taxes evaded. Circular No. 31, Instructs on the sanctions applicable pursuant to the provisions of Article 41 (6) and the Income Tax Law (CITL), for failure to file the Affidavit referred to in said rule, or Its erroneous, incomplete, extemporaneous, or maliciously false filing. The affidavit not submitted will be sanctioned with the fines indicated in the following table. Fines will be applied depending on the number of transactions that should have been reported and the timing of the filing, thus fluctuating among the segments indicated: Date From 07/01 From 08/16 From 10/01 Nº of Operations To 08/15 To 09/30 onward. 1 to UTA 1 20 UTA 40 UTA 26 to UTA 24 UTA 45 UTA 100 and more 15 UTA 30 UTA 50 UTA The affidavit submitted after the legal deadline will be sanctioned with the fines indicated in the following table. 1 The Annual Tax Unit (Unidad Tributaria Anual ( UTA )) corresponds to 12 UTM, where the UTM is a unit of account used in Chile for tax and fines purposes, updated according to inflation. It was created on December 31, 1974 through article 8 of Decree Law Initially, it was a tax measure (fines, scale of payments, etc.) used by the Internal Revenue Service (SII). Subsequently, it has been extended to payments of fines, debts, tariffs, among others, by the State of Chile, Municipalities and other organizations. Unlike the unit of development (UF), it is not used as a financial instrument. It is readjusted monthly according to the CPI informed by INE.

4 Page 4 of 7 The fines will be applied depending on the number of operations that should have been reported in total at the end of the respective fiscal year, thus fluctuating among the segments indicated: Date From 07/01 From 08/16 From 10/01 Nº of Operations To 08/15 To 09/30 onward. 1 to 25 5 UTA 15 UTA 30 UTA 26 to UTA 20 UTA 35 UTA 100 and more 12 UTA 25 UTA 40 UTA The incomplete or erroneous presentation of the affidavit will be sanctioned taking into account the circumstance of whether or not the corresponding rectification statement has been filed within the original term or the extended, as appropriate. In the case of having filed such rectification, the penalty will be applied according to the timing of the correction by the taxpayer, according to the following table: Date of presentation of the Up to 45 days from From the 46th From 91 days rectificatory / original declaration Type of Penalty the filing of the declaration day of affidavit presentation and up to 90 days. onwards since the filing of the affidavit. Penalty for missing or erroneous 0.15 UTA 0.25 UTA 0.50 UTA transaction Penalty Limit 10 UTA 20 UTA 40 UTA Advance Pricing Agreement (APA) The new Chilean statutes and regulations allow taxpayers to conclude an APA with the tax authorities, based on article 41-E CITL. Bilateral and multilateral agreements are available. APAs apply from the date of its signing and will last for the following three commercial years. A renewal may be requested. Documentation And Disclosure Requirements Tax Return Disclosures Form 1907 shall be submitted on a yearly basis, in the month of June. This transfer pricing return form need to be filled by medium and large taxpayers, entities with intercompany transaction exceeding 500 million Chilean Pesos and by entities that made transactions with entities established in low tax jurisdictions. Affidavit No entitled "Annual Affidavit of Global Tax Characterization". Its purpose is to obtain qualitative information on processes or operations that are of interest for the characterization of large taxpayers. It must be submitted by the classified taxpayers, as of December

5 Page 5 of 7 31 of the year prior to that reported, in the segment of "Large Companies" and also by those who are on the List of Large Taxpayers. This Affidavit must be sent prior to the filing of Form No. 22 of Annual Income Tax Return by electronic transmission of data via the Internet. The omission or delay in the delivery of the information required by the Service in the Annual Affidavit will be sanctioned in accordance with the provisions of No. 1 of article 97 of the Tax Code. For its part, the violation provided in article 109 of the legal body in comment, will be incurred in case the delivery of the required information is incomplete or erroneous. Affidavit No entitled "Annual Affidavit on the Country-by-Country Report. Attachment of Affidavit 1907" In accordance with the legal powers granted to the Internal Revenue Service (SII) and its Director and in compliance with the standard established in action 13 of the BEPS project, it has been agreed that certain countries, including Chile, implement the obligation to report annually to the Tax Administrations, based on a standardized model, the level of income, profits (losses) before taxes and the amount of income tax that affect large multinational companies that meet certain conditions, including that the income of the group of entities that form part of the "Multinational Enterprises Group", in the 12 months before the start of the corresponding tax period, is at least 750 million Euros, or equivalent at the time of the closing of the consolidated financial statements of the group of multinational companies, according to the exchange rate observed at December 31 of the indicated tax period, published by Central Bank of Chile. In turn, they are required to include information such as: number of employees, declared capital, accumulated profits, tangible assets with which they have in each tax jurisdiction, identifying in turn each entity belonging to the Multinational Group of Companies, specifying the specific type of economic activity developed by each entity. For all purposes, the information referred to is called Country-by- Country Report. The information presented in this Affidavit may be subject to automatic exchange of information. They must submit, through Form No. 1937, an annual affidavit containing the so-called Country-by- Country Report, the parent or controlling entities of the Multinational Enterprises Groups that, as of January 1, 2016, are resident in Chile for the tributary purposes. Form 1937 shall be understood as forming part of the affidavit contained in Form No

6 Page 6 of 7 Level of Documentation There is no statutory obligation for transfer pricing documentation. However, taxpayers are required to keep at their offices, apart from the books duly kept, contracts, invoices and vouchers to attest to their operations with related entities, for a possible supervision by the SII. Still, 41-E allows the use of a transfer pricing study and it has been understood that the law recommends it as the best proof of the taxpayer s transfer pricing policy. Record Keeping There are no specific statutory provisions, regulations or rules dealing with record keeping for transfer pricing purposes. The general record keeping rules apply. Language for Documentation Documentation should be in Spanish. The business description of foreign comparables may be in English, but should be translated into Spanish upon request of the SII. Small and Medium Sized Enterprises (SMEs) There are no specific statutory provisions, regulations or rules with regard to small and medium sized enterprises. Deadline to Prepare Documentation The SII has established the month of June for the transfer pricing statement to be prepared, which is a taxpayer s affidavit. Deadline to Submit Documentation Transfer pricing documentation must be submitted upon request. Statute Of Limitations The SII may conduct audits, make assessments and charge taxes and fines within 3 years from the end of the term in which the taxes are due. The term is 6 years for taxes assessed by means of returns when the return is not filed or is willfully false.

7 Page 7 of 7 Transfer Pricing Methods The CITL includes specific references to the CUP method, the resale price method and the cost plus method. The tax reform includes the traditional methods of transactional net margin method, profit split and residual profit split, adopting the OECD Transfer Pricing Guidelines. Exceptionally if none of the referred methods can be applied due to special circumstances and this is duly justified, other reasonable methods will be allowed. To determine which method is to be applied in each particular case, the taxpayer must apply the most appropriate method to reflect an arm s length value considering the circumstances of the case. Comparables Domestic and international comparables are acceptable. There are a number of cases where the SII has used secret comparables. In most of these cases, the SII has disclosed these comparables. This document was updated in cooperation with Claudio Salcedo Gabrielli, SALCEDO & CIA., Abogados + Auditores Tributarios.

Transfer Pricing Country Summary Chile

Page 1 of 7 Transfer Pricing Country Summary Chile 28 June 2018 Page 2 of 7 Legislation Existence of Transfer Pricing Laws/Guidelines Article 41-E of the Chilean Income Tax Law (CITL) introduced by the