Chile: Practical Lessons learned from Transfer Pricing Audits in Chile

In the period 2020-2021, the Chilean Internal Revenue Service launched a new wave of tax audits with a focus on TP compliance and the substance of declared transactions. Most of these audits belong to FY 2018/2019 and are not yet closed. Based on observations regarding how the audits are being conducted, it is possible to describe some practical lessons learned that are relevant for taxpayers facing a TP audit in Chile. Last year, 3994 taxpayers submitted their Transfer Pricing tax returns, with operations close to 25% of Chilean GDP.

Some of these lessons may seem to be basic to other jurisdictions, especially regionally, where TP audits are a recurring practice. A tax-transfer pricing audit starts with an extensive list of information that the taxpayer must submit to allow the Chilean Internal Revenue Service to conduct an extensive investigation of the taxpayer’s tax position. This part of the process assesses the taxpayer’s ability to respond to such a request.

The pace at which the taxpayer can gather and submit the information and the completeness and quality of the data submitted, especially with regard to the records of the company; contractual and documentary support, provide an indication of the taxpayer’s operational capabilities to run its financing or holding business under genuine business conditions.

We have witnessed a special interest from the Chilean Internal Revenue Service to request information regarding intercompany loans, corporate services and IP royalties. In the first case, a further area of focus of the tax administration is the completeness of the documentation with respect to the related party transactions under review. Lending transactions, even long-term ones, often evolve quickly and the interest’s benchmarks may change dramatically. Currently, there is a debate if initial loan conditions may be useful to the entire loan term (e.g. use the original interest rate settled in 2018 in respect to interests accrued in 2021).

For the second case, the Chilean Internal Revenue Service is taking interest in the PLI selection of corporate services received and of the transaction’s side (this aimed to prefer a C+ inverted and exhibit related parties’ cost structure as a whole). And for the latter case, providing the analysis performed by the related party at the time of determining the royalty (market studies, similar contract CUP, etc.).

Finally, it is worth mentioning three useful recommendations when facing the Chilean Internal Revenue Service Transfer Pricing audit:

  • Submitting documentation that covers only part of the transactions or that is outdated could give the impression to the Chilean Internal Revenue Service of a lack of documentation capabilities with respect to related party operations.
  • Refer as much as possible to the OECD Guidelines, especially issues related to the choice of PLI based on the transaction profile type (income or expenses); and not according to the type of activities conducted by the taxpayer. Since Chile is a full member of the OECD this is mandatory in order to gain terrain in subsequent allegations.
  • The authorities generally seek direct contact with the taxpayer’s representative. The presence of external tax & TP specialists should not be viewed as a lack of internal capabilities but rather as a sign that the taxpayer is willing to address any technical questions that may arise in the audit process.

Writer: Marcos Rivera (EGB Abogados)