Chile

Transfer Pricing Regulations in Chile

Transfer pricing in Chile is governed by Law 20,630 through Article 41E of the Income Tax Law and its respective amendments. The law grants the tax authority the power to make adjustments to a Chilean company when it identifies transactions with its foreign related parties that were not conducted at arm’s length. To this end, the regulations establish the methods for valuing such transactions, which are based on the applicable OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations.

The Internal Revenue Service has been developing its relevant legislation, supplemented by Resolution No. 14, published on January 31, 2013, which establishes the obligation to file an annual informative affidavit;  Circular No. 31, published on May 12, 2016, regarding penalties applicable for failure to file or for the erroneous, incomplete, late, or maliciously false filing of the annual transfer pricing return; and by Exempt Resolution No. 126, published on December 28, 2016, which establishes that parent or controlling entities of Multinational Enterprise (MNE) Groups, as of January 1, 2016, that are resident in Chile for tax purposes, must file an annual affidavit using Form No. 1937 containing the so-called Country-by-Country Report (CbC Report).

Chile, a member country of the OECD, aims to define and implement measures to combat Base Erosion and Profit Shifting (BEPS); and to that end, on August 31, 2020, the Internal Revenue Service (SII) established two new obligations for taxpayers engaged in transactions with related parties: the annual informative affidavits known as the “Master File” and the “Local File.” These requirements stem from the recommendations of the OECD and the G-20 regarding transfer pricing documentation.

Related-Party Rules in Chile

According to Article 41 E, paragraph 1, parties are considered related when:

• One of them participates directly or indirectly in the management, control, capital, profits, or income of the other, or
• The same person or persons participate directly or indirectly in the management, control, capital, profits, or income of both parties, all of which are deemed to be related to one another.
• An agency, branch, or any other form of permanent establishment shall be considered a related party to its parent company; to other permanent establishments of the same parent company; to related parties of the latter; and to the permanent establishments of those parties.
• A relationship shall also be deemed to exist when transactions are carried out with parties that are resident, domiciled, established, or incorporated in a country or territory included in the list referred to in Article 41 D, paragraph 2, unless such country or territory has entered into a valid agreement with Chile that allows for the exchange of relevant information for the purposes of applying tax provisions.
• Individuals shall be deemed to be related when they are spouses or are related by blood or marriage up to and including the fourth degree.
• Likewise, a relationship between the parties shall be deemed to exist when one party carries out one or more transactions with a third party who, in turn, carries out—directly or indirectly—with a related party of that first party, one or more transactions similar to or identical to those carried out with the first party, regardless of the capacity in which said third party and the parties involved participate in such transactions.

Formal Obligations: Informative Affidavits

Taxpayers subject to the scope of application of the Transfer Pricing regulations must comply with the following obligations:

1. Annual Affidavit on Transfer Pricing (Form No. 1907): Required for taxpayers who meet the following conditions:

• Taxpayers classified as medium-sized or large enterprises that have conducted transactions with foreign related parties.
• Taxpayers who have transactions with persons resident or domiciled in tax havens.
• Taxpayers not classified under the preceding criteria who have transactions with foreign related parties totaling 500 million Chilean pesos or more during a tax year.

The deadline for filing the Annual Transfer Pricing Affidavit has been set as the last day of June of each year, covering the previous fiscal year.

1. Transfer Pricing Technical Study (ETP): The supporting documentation for Form 1907 is the transfer pricing technical study, which must contain the minimum information required by the SII to determine whether transactions with foreign related parties are being conducted in accordance with arm’s-length practices. The taxpayer expressly has the right to submit a study or report that documents the economic analysis and the method used, which fully satisfies all obligations imposed by Article No. 41 E of the Income Tax Law.
2. Annual Affidavit on the Country-by-Country Report (Form No. 1937): Effective January 1, 2016, Chilean parent companies or the controlling entities of multinational enterprise groups with revenues exceeding EUR750 million or the equivalent amount in Chilean pesos (CLP) must prepare the Country-by-Country Report (CbC) form (Affidavit No. 1937).
3. Affidavit No. 1951, regarding the Annual Affidavit on Local File: Taxpayers who, as of December 31 of the reporting year, meet all of the following conditions must file the local file:

a) They belong to the Large Enterprises segment;

b) Their parent or controlling entity within the Large Enterprises segment was required to file the Country-by-Country Report with the Internal Revenue Service or another tax authority for the respective year; and,

c) In that year, they have carried out one or more transactions with related parties that do not have domicile or residence in Chile, in accordance with the rules established in Article 41E of the Income Tax Law, for amounts exceeding $200,000,000 (two hundred million Chilean pesos) or its equivalent based on the exchange rate between the national currency and the foreign currency in which such transactions were conducted, as in effect on the last day of December of the reporting fiscal year, according to a publication issued by the Central Bank of Chile.

This Affidavit must be filed by the last business day of June of each year, with respect to transactions carried out during the immediately preceding fiscal year.

• Affidavit No. 1950, regarding the Annual Affidavit on the Master File: Taxpayers required to file this affidavit must meet at least one of the following conditions:
• A parent or controlling entity of a Multinational Enterprise Group (hereinafter also “MEG”) that is resident in Chile for tax purposes, provided that the combined revenue of all entities forming part of that group in Chile and abroad, as of December 31 of the reporting year, total at least seven hundred fifty million euros (€750,000,000.00) at the time of the consolidated financial statements’ closing.
• An entity that is part of or belongs to the GEM, that is resident in Chile for tax purposes, and that has been designated by the parent or controlling entity of said group as its sole representative for the purpose of filing the “Country-by-Country Report” in its country of tax residence, on behalf of the parent or controlling entity.

Deadline for Filing Annual Affidavits.

All individual returns must be filed by the last business day of June of each year, with respect to transactions carried out during the immediately preceding fiscal year.

The taxpayer may request, on a one-time basis, an extension of up to three months from the Regional Director or the Director of Large Taxpayers, as applicable, for the filing of one or more of the aforementioned returns. This request must be made using the Administrative Requests form, available at www.sii.cl or at the office corresponding to the taxpayer’s address.

Penalties for Noncompliance

Circular No. 29, published on June 24, 2022, establishes new regulations regarding penalties related to transfer pricing returns:

• Failure to file the “Annual Affidavit on Transfer Pricing,” contained in Form No. 1907; the “Country-by-Country Report,” contained in Form No. 1937; the “Master File,” contained in Form No. 1950; and/or the “Local File,” contained in Form No. 1951, as applicable.
• Filing one or more of the aforementioned returns late.
• Having filed one or more of the aforementioned returns incompletely or incorrectly.
• Having maliciously and falsely filed one or more of the returns
• contained in Forms No. 1907, No. 1937, No. 1950, and/or No. 1951.

Penalties are governed as follows:

1. Affidavit filed after the deadline

• Up to 45 days late: 15 UTA
  • 46 to 90 days late: 20 UTA
  • 91 days or more late: 30 UTA

• Failure to file a return: 50 UTA

This penalty applies when the SII has detected the noncompliance, by any means.

• Incomplete or erroneous return filed
• If an amended return has been filed: 10 UTA per amended return, capped at 50 UTA (regardless of the number of returns).
• If the SII detects the noncompliance (no amended return has been filed): 30 UTA per return.

In the above situation, if the taxpayer subsequently files amended returns to correct the errors or omissions for which they were already fined, they will not be fined for these amended returns. However, if those amended returns correct errors or omissions other than those already penalized, a penalty of 10 UTA will be applied per return, capped at 50 UTA.

• Limits on the Penalties in Paragraphs 1 through 3 Above

The law establishes limits on the above penalties, which the Circular recognizes, corresponding to the lesser of:

a. 15% of taxable equity.

b. 5% of effective capital (defined in Article 2, No. 5 of the Income Tax Law as “total assets, excluding those items that do not represent actual investments, such as intangible, nominal, temporary, and order-related assets”).

• Maliciously False Tax Return

If the errors or omissions were submitted in a maliciously false manner (that is, “as a result of a conscious act by the declarant, who knew or could not have failed to know that the declaration did not conform to the truth”), the general penalty under Article 97(4) of the Tax Code applies; namely, 50 to 300 percent of the amount of the tax in question and a misdemeanor sentence in the medium to maximum range.