Transfer pricing and intragroup transactions gain prominence in Chile

In 2024, the focus on transfer pricing and intragroup transactions has become a significant aspect of Chile's fiscal and financial regulatory landscape.

This increased emphasis is highlighted in the proposed Fiscal Pact for Growth Act (the Act) and the Tax Compliance Management Plan (PGCT) of the Chilean tax authority (SII). Additionally, the Financial Markets Commission (CMF) has introduced new regulations aimed at enhancing the visibility and transparency of related-party transactions within publicly traded companies.

Together, these measures mark a pivotal shift in Chile's approach to tax compliance and financial governance.

The government has submitted the Act to the Chilean Congress within the framework of the Pact for Economic Growth, Social Progress and Fiscal Responsibility. The main objective of this initiative is to increase tax collection by 1.5% of GDP, allowing the country's priority needs to be financed. Within the project, several key aspects related to transfer pricing are highlighted:

• BEPS actions – the Act in general has a fundamental pillar; namely, the control of compliance with tax obligations, which finds its justification in the BEPS Action Plan of the OECD and the G20 to prevent the erosion of the tax base. The aim is to combat aggressive tax planning, emphasising issues of economic substance and anti-avoidance.

• Formalisation of the use of the interquartile range – the Act makes the following explicit reference: "If the price, value or margin of the transaction analysed is outside the interquartile range, contained between the first and third quartile, the value, price or margin will be considered not to be at arm's length”.

• Advance pricing agreements (APAs) –

  • The Act includes a formal provision for pre-filing meetings, aligning with OECD guidelines and existing good practices already in place in Chile. This formalisation specifies the following required information: identification of the related persons or entities involved in the transactions, a description of the operations subject to the APA, the basic elements of the proposed valuation, and an email address for communication. The SII will review the prior consultation, potentially requesting additional clarifications and background information from taxpayers. The SII will then inform the interested parties about the viability of the APA within two months of the application submission date.

  • Inclusion of the National Customs Service in the APA, when the related transaction involves the importation of goods.

  • Inclusion of the APA rollback – there is now the possibility for the effects of an APA to reach operations up to three business years prior to the signing of the agreement.

• Relationship rules – the requirements to consider a country as a ‘preferential regime’ are modified, focusing on transparency and the exchange of tax information. This change will force a review of related foreign entities with which transactions are carried out.

• Corresponding adjustments – these adjustments enable taxpayers, with prior authorisation from the SII, to rectify the prices, values, or profitability of transactions with related parties abroad in response to transfer pricing adjustments made by other jurisdictions (with a bilateral tax treaty in force). The deadline for making these adjustments has been amended to "within one year from the time the transfer pricing adjustment is finalised in the other jurisdiction".

• Transfer pricing self-adjustments – at this point it is important to remember that a self-adjustment occurs when the taxpayer determines that its transactions with related parties do not comply with the arm's-length principle, and therefore it may adjust its prices, values, or profitability prior to any requirement of the SII. The determined adjustment must be added to the taxable base of the first-category tax and will only proceed when it implies an increase in the indicated taxable base. The bill is very clear in indicating that "adjustments may not be made to reduce the first category taxable net income and determine a lower tax or a greater tax loss".

• Transfer pricing and customs adjustments – adjustments or self-adjustments in transfer pricing (including those that are the objects of an APA) will not have an effect on the values declared in an import or export destination, nor will it be necessary to modify them.

• Proposed amendments to the Tax Code that affect transfer pricing issues –

  • The term of the tax authority to summon and settle will be 12 months from the time the SII initiates an audit process, extendable only once, and for a maximum of six additional months.

  • Appraisal – through the potential modification of this article of the Tax Code, it is explicitly stated that the market value is the value that would have been agreed upon by independent parties under similar conditions. The proposed amendment also specifies the use of various valuation methods – such as cash flow, multiples, and adjusted book value – to establish this market value. The SII leverages this article to audit local intercompany transactions and corporate restructurings.

Although the Act is still under discussion in Congress, it is expected that the proposed modifications in the General Anti-Avoidance and Transfer Pricing Rule will be approved. A particularity to highlight about this process is that it has not mentioned anything about pillar two, when most European countries and others such as Japan and Australia already have the qualified domestic minimum top-up tax, the income inclusion rule, and the under-taxed payments rule at a draft stage or in force.

The SII's PGCT for this year places considerable emphasis on transfer pricing, aligning with the new bill. The PGCT, presented annually by the SII, outlines the primary emphases, definitions, and actions to reduce tax non-compliance, close gaps, and mitigate risks. It specifies the focus areas for audits and the main axes of tax collection. This year's PGCT focuses on controlling tax avoidance, particularly aggressive tax planning, with three main areas of interest:

• Multinational enterprises;

• Transfer pricing and valuation; and

• Business groups.

The SII aims to strengthen compliance strategies to address BEPS risks, utilising new information sources and continuous monitoring of international operations to identify new schemes or specific risks. This will be achieved by:

• Promoting the exchange of information (under the Common Reporting Standard) developed by the OECD;

• Analysing compliance risks related to additional taxes with low effective rates, reinsurance remittances, the use of intangibles, and their correct taxation;

• Creating specialised groups to audit international transactions and transfer pricing; and

• Collaborating with the Central Bank of Chile regarding money flows to and from abroad.

The SII's objectives include:

• Guiding taxpayers in specific economic sectors on the risks of tax base erosion in transfer pricing and the probability of operational control;

• Reducing risks associated with transfer pricing in intangibles and undervalued sales of shares and social rights; and

• Facilitating the signing of new APAs; additionally, this year, Chile has an extra incentive to promote bilateral APAs due to the entry into force of the treaty to avoid double taxation with the US.

It is also important to highlight the strengthening of the SII's transfer pricing team, which has exceeded collection by 40% compared with the previous year through its transfer pricing audit programme.

The Chilean tax authority focuses on:

• Strengthening the compliance strategy of business groups by identifying schemes and mitigating specific risks affecting their tax contribution, while cooperating with well-behaved groups;

• Promoting the transparency of relevant information about business groups to the public, under the principle of tax social responsibility, to demonstrate their tax contribution to the country's development through indicators and the publication of relevant statistics;

• Discouraging the use of tax planning as an evasive tool to ensure an adequate tax contribution, increasing control and analysis actions in this area; and

• Implementing econometric models to detect multinational companies that present a risk of tax base erosion due to profit shifting (BEPS) abroad.

The CMF has issued General Rule No. 501 (NCG 501) directed at public companies and special companies. This rule mandates the dissemination of their standard operating policies and procedures, as well as transactions with related parties. NCG 501 introduces two major changes:

• An update of standard operating policies and procedures – these policies must include the minimum content established in NCG 501 and be approved and published by August 30 2024.

• Semi-annual disclosure – starting in January 2025, all related-party transactions from the previous half of the year must be disclosed. This rule mandates the preparation and dissemination of a semi-annual report of operations with related parties. The report is compulsory for open corporations and special corporations with securities registered in the CMF's registry.

NCG 501 specifies the required content for these reports, which must be presented in a grouped manner by type of operation and by counterparty. The report should include transactions undertaken by the company during the respective semester, regardless of whether they were conducted under the usual policy. These half-yearly reports must be published on the company's website within the month following the reported six-month period.

The conditions for transactions between related parties are:

• They must contribute to the social interest;

• They must be agreed upon under market conditions; and

• They must comply with legal approval procedures.

Implementing NCG 501 strategically and correctly offers companies a significant opportunity to establish sufficient and adequate controls to prevent incurring in related-party transaction crimes. It is crucial to note that NCG 501 does not differentiate between local and cross-border intercompany transactions. Although Chile's transfer pricing regulations focus on cross-border transactions, this regulation requires corporations to also pay special attention to transactions between related companies within Chile.

The key takeaways regarding preparation for NCG 501 are as follows:

• Conduct a survey and study of transactions between related parties (both usual and unusual) using market benchmarks;

• Update standard operating policies;

• Review controls and systems for the approval, registration, and reporting of transactions with related parties; and

• Prepare semi-annual dissemination reports.

The proposed new transfer pricing regulations and the greater demand for transparency in related transactions mark a before and after in the Chilean tax landscape. With the Pact for Economic Growth, Social Progress and Fiscal Responsibility bill, the government not only seeks to increase tax collection but also to establish a more robust and transparent framework that combats tax avoidance and erosion.

The SII's PGCT reinforces this strategy, focusing on multinationals, transfer pricing, and business groups, promoting an environment of greater oversight and compliance. This approach – together with the new CMF regulations, which require semi-annual disclosure of transactions with related parties – establishes a clear path to transparency.

In this context, being well prepared and aligned with the new regulations is not only crucial to avoid penalties in the face of audits but can also be a differentiating factor.