Since Chile's Income Tax Law entered into force in January 2017, transfer pricing has grown in importance. The law formally introduced new TP rules in an effort to curb tax avoidance. Over the past year, the Chilean Internal Revenue Service (IRS) has increased its regulatory oversight of transfer pricing as a means to keep pace with the international tax landscape.
On December 27 2016, the IRS enacted Resolution No. 126, which introduced new reporting obligations in relation to Action 13 of the OECD's BEPS project. The resolution modifies existing country-by-country-reporting (CbCR) requirements by permitting the parent entity or surrogate entity in Chile to submit CbCR to the tax authorities. The act also stipulates that CbCR should include identifiable information on each entity, specifically relating to the type of economic activity performed and the tax jurisdiction that each entity operates in.
Baltazar Marotte, TP manager at PwC, stated: "The affidavit will allow the IRS to more clearly comprehend the global business and the inter-company transactions of the group, which implies that Chilean taxpayers will have to be more careful when performing this kind of transaction, in order to avoid possible risks in this area."
This, in turn, is likely to have a considerable impact on the number of audits taking place in Chile, which has steadily risen since the new income tax law was passed.
"In recent years, the concept of substance over form has acquired significant relevance in the local business world," said Marotte. In 2014, Law 20.780 introduced anti-evasion rules which were based on this principle as a means to curtail the tax avoidance mechanisms adopted by multinational enterprises.
"The IRS has made use of this concept, directly and indirectly in its TP audits. Consequently, local taxpayers in some cases modified their behaviour by using business strategies that are more sustainable in the long term," Marotte added.
Under this regime, the IRS can recharacterise the commercial tax structure of a business as abusive when it does not produce a business result or an economic effect other than lowering the tax burden of a legal entity. This approach represents a growing trend by the IRS within the Americas.
"With regard to future changes in the sector, it is important to mention that the Chilean IRS has not issued rules related to master file or local file yet, but in the short term it is likely that we will see more regulations introduced," stated Marotte.
Moreover, Chile has become a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). It is estimated that 11,100 tax treaties would be revised as a result of more than 70 jurisdictions signing in the MLI, certainly constituting to a key moment in international taxation.
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