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CHILE: Increase in trials for transfer pricing issues.

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September 7th, 2015.      WWW.PULSO.CL


The Internal Revenue Service (SII) has increased its powers and its oversight role over the years, and this will continue growing with the Tax Reform. But there is a change that was implemented with the previous tax reform prepared by Sebastian Piñera on transfer pricing.

This term, known to many large companies, but unknown to the vast majority is bringing headaches today to Cementos Polpaico because IBS fined them with $10 billion for owing taxes by this. And the expectation is that it will happen to many more companies.

In 2012 the administration of former President Piñera stated that it was necessary to adapt the system of price regulation in Chile to match OECD standards in order to prevent the country to "lose money", reminds the expert lawyer and tax expert matter, Claudio Salcedo, Salcedo & Cia.

Before, he says, little or nothing was done in the field, and while in 1998 attempted to regulate the matter, ended in a dead letter until the reform of 2012.

Since then, there have been various trials in Customs Tax Courts (TTA) for this area, where one of the biggest was US $ 50 million from fines and taxes, says Salcedo. "What comes now is the increase in trials for transfer pricing issues," warns lawyer.

But what is the transfer price? As Salcedo defined, they are "transactions in goods, services and intangibles between related parties", companies with subsidiaries outside Chile. In simple words, it is intended to prevent a company to buy its related article at $ 3,000 and sell it to $ 2,000 for leaving profits of the product outside the country and not pay the "real" tax in Chile, because the margin represents profit net that will affect tax.

The SII uses a matrix to monitor these cases and checks whether the operating margin of the company is negative or below or above the minimum and maximum established as margins for that particular industry. This is because if the margin is negative, the company would not pay losses and taxes. And if you are over or under the margins, it is out of the market price.

The expert notes that "the IRS looks with special attention to companies with losses in the negative operating margins."

However, at this point there are things to consider stresses as the sector as a whole is declaring losses cycles in the economy. "The SII understand what happens," admits Salcedo.

Another common case of losses, where IBS does not put the magnifying glass strongly, is when a company is just starting in Chile, as companies have losses in the first stages.

To whom and how it is applied

Transfer prices are regulated by filing the 1907 sworn declaration, the 30th of June each year, with an option for extension until September 30.

It must be filed by medium and large enterprises with transactions over $200 million; and small businesses, provided they make sporadic operations $500 million.

Salcedo explains that when the IRS applies the industry average, it can harm small businesses that do not reach that operating margin. "For a statistical issue IBS said operating margin ranges of cost and sale ranging from 5% to 8%, then if the company falls in that range, you risk that the IRS applies the median, and taxes, penalties and interest for it. And for some companies moving from an operating margin of 2% to 5% or 6% could liquidate them" he explains.

As the SII has a term of three years to monitor, it is from this year when they can start increasing the summonses sent to taxpayers by presented in 2012.

This is precisely what happened with Cementos Polpaico company that is accused of having taxes owed by $ 10,106 million, equivalent to US $ 14.6 million, which the company informed in the Superintendency of Securities and Insurance (SVS).

The expert noted that trials for this issue will increase, since the SII is overseeing further considering it has a goal of raising US $ 400 million annually for transfer pricing.

The main problem has been observed among its clients is ignorance on the part of businesses in completing the sworn declaration. Even says that there are about 3,500 taxpayers who do not know they had to do it.

"In Chile it is estimated that you can have some 6,000 companies that should file the sworn declaration, and there has been half or less. And the worst is that these statements are not being supported by a transfer pricing study, as recommended by the OECD, "says Salcedo.

Circumvention adds

In this control, the anti-circumvention rules adopted in the current tax reform will be added. Salcedo said that the standard is "ambiguous" because it could be the case that if the IRS challenges a declaration of transfer pricing could also consider it as avoidance and apply these new rules.

This, because the practice of presenting losses seek to pay less taxes in the country, leaving out utilities. This point emphasizes the lawyer, is not complicated mainly for the company, but to the representatives, advisors, lawyers and accountants, "as the reform changes also make us responsible for the circumvention practices that a company can do".

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