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Changes to Transfer Pricing Regulations Will Affect Foreign Investment
Article 38 of the Chilean Income Tax Law regulates the prices charged between related companies located in Chile and companies located in other jurisdictions.
The rules contained in the Income Tax Law on transfer pricing matters apply to both operations between a branch and its head office, and operations between a foreign company and a Chilean company in which the former participates (directly or indirectly) in the conduction, control or capital.
These rules allow the Chilean IRS to challenge the prices paid by the Chilean company branch to its head office or to a foreign related company, when the prices agreed are not adjusted to those applicable in operations between unrelated parties (arm's length principle).
Taxand Chile looks at the anticipated changes that will be included in the transfer pricing bill, and what impact this will have on foreign investment.
The Head of the Chilean Tax Administration announced in the 2010 public report that a bill on transfer pricing is being drafted by the Ministry of Finance to be presented to the Chilean Congress. The purpose of the bill is to adjust Chilean transfer pricing rules to international standards (OECD transfer pricing methods).
Also, the Head of the Chilean Tax Administration announced that in year 2011 an Assessment Department was to be created in order to establish companies' value, assets and sale prices; and in general transfer pricing in all intra Group dealings.
It should be noted that an Assessment Department has been created during the present year.
However, the transfer pricing bill has not yet been filed before Congress.
Nevertheless, we have been informed that such a bill will include the following amendments to the current transfer pricing rules established in the Chilean Income Tax Law:
(i) clarification of the Transfer Pricing methods, which will be set in accordance with the OECD Transfer Pricing Guidelines
(ii) obligation to file before the IRS annual sworn statements and eventually Transfer Pricing studies, in order to support prices charged between related parties
(iii) possibility to agree upon Advance Pricing Arrangements (APAs), supported on Transfer pricing studies.
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We expect that an amendment to transfer pricing regulations will have an impact on the tax on foreign investors. Such amendments should clarify issues that were not clearly provided in the current tax legislation. Taxand Chile will continue to actively monitor the developments in this area and the impact of any proposals.