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The International Impact of Chilean Income Tax Law Reform 2012
This article has been republished in Bloomberg BNA Tax Planning International Review, December 2012
After withdrawing the original proposal for tax reform in May 2012, the Chilean government has submitted an updated tax package for approval by Congress. This new version of the tax reform retains the proposed changes to the corporate income tax rates, but amends some of the tax benefit deductions and anti-abuse provisions which had been included in the original submission. Taxand Chile provides an overview of the key aspects of the Income Tax Law Reform 2012 and shows how this will affect multinationals.
Corporate-level income tax rate
The tax reform increased the corporate income tax rate to 20% as of 1 January 2013. However this reform will be retroactive and will apply to the 2012 income.
Chilean Source Income
Under the former law, the indirect transfer of a Chilean company's shares or interests was taxable only if the buyer or transferee was a Chilean resident. Amendments were introduced subject to tax capital gains realised upon the indirect sale or transfer of at least 10% of interest in a Chilean company. This sale would be subject to Chilean income tax, irrespective of the buyer or transferee's residence.
The August 2012 proposal imposes Chilean income tax on the transfer of shares, ownership interests, bonds, or other instruments that are convertible into shares or ownership interests, or any right that represents an interest in the capital of a foreign company only if:
- 20% or more of the fair market value of the shares or ownership transferred is derived from:
(1) shares, ownership interest, or other ownership rights in the property, control, or profits of a Chilean entity;
(2) a Chilean branch or permanent establishment of a foreign taxpayer; or
(3) any type of movable or immovable property located in Chile or the right with respect to such property owned by a non-Chilean entity.
- At the time of the transfer or within the previous 12-month period, the fair value of the underlying assets mentioned above is equal to or greater than approximately U.S. $10 million.
- The foreign entity being transferred is domiciled or incorporated in a tax haven jurisdiction, unless certain requirements are met.
A general exception to this is provided in situations when the transfers occurred within the context of a business reorganisation.
Under the former law, only Chilean source income was considered when determining a PE?s taxable income. The amendments include all the income generated from the activities carried out by the PE or from the goods assigned to or used by them as part of the PE?s taxable basis in Chile.
Therefore, the income of a branch or PE of a non-resident taxpayer subject to tax in Chile would be determined based on the income from operations conducted either inside or outside Chile, when attributable to the branch or PE.
The Chilean Congress passed tax reform legislation that includes the following transfer pricing-related provisions:
- Definition of "related party"
The definition of "related party" is expanded to include new relationships and standards. In this regard, a related entity is that which, directly or indirectly, participates in the ownership, management, direction, control, profits or income of another. A related person is that who is related to another by means of marriage or kinship.
- TP methods
The new law establishes the transfer pricing methods that taxpayers are to use in determining prices, values, or profits with respect to related-party transactions. These methods are consistent with the OECD transfer pricing methods and taxpayers are to use the most suitable, in application of the "best method rule". This amendment provides for an option to use an unlisted, but more suitable, method, so long as it permits the assessment of a market price determined on an independent basis.
The parties may file TP studies with the tax authorities to validate their prices, but if in the SII's opinion, the taxpayer is unable to demonstrate that its related-party transactions were agreed to at normal market values or returns (arm's length principle) it may reasonably determine values and returns to calculate the tax due or adjustments. Adjustments will be subject to an additional tax at a rate of 35% plus a civil penalty imposed at a rate of 5%.
- Advance Pricing Agreements (APAs)
The new rules permit the filing of APAs which are agreements between the tax authorities and taxpayers establishing the transfer pricing methods, comparables and appropriate related adjustments that will be used in order to calculate prices for a four-year period. During this time, if tax deficiencies are identified, no interest or civil penalty is to be imposed, except in situations when criminal sanctions would apply, or in situations when it is demonstrated that the information on which the APA was based was false or misleading.
Capital Gains tax rules applicable to equity interests
The bill subjects the sale, or other transfer, of an ownership interest in a Limited Liability Company to the same income tax treatment as the one that applies to the transfer of shares in a Corporation. In computing the taxable gain or loss, the outside share basis in the LLC interests would be equal to their acquisition cost. The reform eliminates the possibility of obtaining an outside basis step-up equal to undistributed tax retained earnings (FUT).
Reduction of stamp tax rates applicable to documents concerning loans and other credit transactions to 0.4%.
It is important for taxpayers to note that while the original version of the tax reforms contained amends to the thin capitalisation rules, the new tax reform legislation will not. It is also important to note that while the above tax reforms have not been agreed on by Congress, the Senate and the President, they are likely to come to fruition. Therefore multinationals, and local companies alike, should begin to consider their position in Chile and how these tax reforms will affect their business.