International Tax Newsletter - Summer 2011 - CHILE: New Audit Process For Transfer Pricing

August 01, 2011

Article 38 of the Income Tax Law sets out the regulations on transfer pricing which have not been changed since 2002.

The regulations are intended to give the Internal Revenue Service (IRS) the power to justifiably object to transfer pricing if they have the documentation that, according to reasoning, analysis and logical consistency, allows them to assign another value to the transfer or the prices received or paid between related companies, according to the terms of the law, if one of the companies is established abroad.
For tax purposes, the IRS has pointed out that the above prices shall be called "transfer pricing" and includes concepts such as the purchase and sales of goods, the provision of services and technology transfer as well as the authorization for the temporary use of licences and trademarks. Broadly speaking, transfer pricing is the price paid or received for the transfer of goods or services between companies which are part of a multinational group.

Immediately after the last legal regulations on transfer pricing had been passed, the IRS published instructions clarifying its approach on the topic and giving examples of several cases and procedures to determine whether the operation has been carried out under the principle internationally known as "arm's length."

The Director of the IRS has recently announced that the Service has begun an audit process on these types of operations. He has explained that Article 38 of the Income Tax Law is a facility for the IRS to assess the value of an operation as if it had been made between non-related parties. To do this, the methods based on the OECD model will be applied, considering its advantages and disadvantages according to the case. Tax auditors are being trained on the subject and have recently finished a course on the new Chapter IX of the OECD Transfer Pricing Guide on entrepreneurial groups' reorganizations.

The IRS has not given specific instructions on how taxpayers can demonstrate that prices have been fixed properly from the tax point of view. However, regardless of which method has been applied, reliable documentation that provides supporting evidence under a tax audit shall be crucially important to prove that its price is not out of the line with the regular market prices between non-related parties.

International Tax Newsletter - Summer 2011