Chilean tax authorities recently adopted a three-tiered approach to transfer pricing documentation. Chile is one of the few Latin American countries — along with Colombia and Mexico — to adopt such an approach, which is fully consistent with the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) Action 13 - 2015 Final Report.
The three-tiered format consists of a Country-by-Country Report (CbCR), a master file and a local file. Together, the tiers intend to promote fair taxation and transparency with regard to intra-group arrangements.
Chile's Resolution 101: The basics
Since 2016, the Chilean Internal Revenue Service, or Servicio de Impuestos Internos (SII), has required organizations to prepare and file a CbCR. On 31 August 2020, the SII issued the Exempt Resolution SII No. 101. The Resolution requires certain Chilean multinational organizations to prepare and submit a master file and local file, along with the CbCR. The following new tax affidavits have been developed to facilitate this:
- Form 1950, the master file (archivo maestro), and
- Form 1951, the local file (archivo local).
Affidavits 1950 and 1951, along with a sworn statement and contemporaneous supporting documentation, must be submitted annually on the SII website by the last business day of June following the reporting period. The Resolution applies as of the 2020 tax year, so the first Chilean master files and local files must be filed on or before 30 June 2021. A one-time extension can be requested for a period of up to three months. The SII, however, may deny an extension request, even it is made by the deadline.
Companies that must fulfil master file requirements
The following Chilean resident companies within a multinational group (MNG) must complete master file requirements:
- Holding or controlling Chile-based companies with group turnover equal to or exceeding 750 million euros. The permissible foreign exchange rate is determined by the Central Bank of Chile.
- Chilean companies within an MNG that must file a CbCR by virtue of Form 1937. Form 1937 must be filed by MNGs headquartered in Chile with consolidated revenue equal to or exceeding 750 million euros.
Companies that must fulfil local file requirements
The following companies must complete local file requirements:
- Large-segment Chilean companies. The Exempt Resolution SII No. 76 (23 August 2017) defines a company as "large" if its local revenue is at least 75,000 Unidad de Fomento (UF), which is adjusted daily for inflation. As of this writing, one UF was equal to CLP 28,680. A large company under Exempt Resolution SII No. 76, then, has a local revenue of approximately USD 2.8 million or more.
- Holding or controlling Chilean companies with CbCR reporting obligations in Chile or any other jurisdiction, and
- Chilean companies with cross-border intra-group transactions equal to or exceeding CLP 200 million (approximately USD 250,000).
Chile's mandatory filing and sworn statement requirement
Chile's new three-tiered approach is mostly aligned with the OECD's BEPS Action 13 Report, but there are differences.
First, the Chilean Resolution defines both the master file and local file as sworn statements, effectively setting a higher bar for the quality of information disclosed. A corporate officer who signs a Chilean tax return, then, assumes personal responsibility for its veracity, and may face administrative or criminal penalties for disclosing misleading or false information or for nondisclosure. Given these risks, corporate taxpayers will want to consider using transfer pricing advisers to prepare their returns before signing.
Second, Chile requires the master file, local file, supporting documents and sworn statement to be filed by a statutory due date. This requirement stands in contrast to the regulations of many European countries, which require companies to provide transfer pricing documentation only at the request of tax authorities. Chile's mandatory filing requirement may cause a number of issues. For example, submitting blank or incomplete documentation will disqualify an entire submission, which may result in non-filing penalties. Also, those taxpayers who submit files shortly before the deadline may encounter technical difficulties. Electronic filing systems in Latin American countries have been known to crash around major submission dates.
Forms 1950 and 1951, and accompanying sworn statements, must be in Spanish. Taxpayers may choose to submit supporting documentation in either English or Spanish. That said, the SII will likely eventually request Spanish translation. Given the strong possibility of this requirement, many taxpayers will want to consider translating supporting documentation into Spanish even now.
Taxpayers should also keep in mind that OECD information suggests some Latin American countries, including Brazil and Mexico, are not only highly reliant on revenue from audit assessments, they also often make audit adjustments. Chilean companies may want to consider investing in robust transfer pricing defence files in advance of a potential audit, rather than simply fulfilling minimum compliance requirements and hoping for the best.
Whatever their situation or strategies for complying with Chile's new master and local file requirements, those companies that must comply should be prepared for increased scrutiny of intra-group transactions and their terms by the SII.
Hanna Mialik, Tax Manager, International Tax Advisory, contributed to this article.
Originally published by Vistra, October 2020
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