Chile: Impact of Transfer Pricing Adjustments on Indirect Taxes

By Marcos Rivera, Head of transfer pricing division at Englobally Latin America

Now that we are close [1] to the expiration of the transfer pricing obligations, we remember that many multinational companies during the last weeks of the year often perform an annual evaluation of their transfer pricing; being. The most recurrent query is whether the transfer pricing policy they have been applying has resulted in an arm’s length result. While we can understand and rationalize this doubt in the 2020-2022 period due to the impact of the Covid-19 pandemic on many companies, we see that some multinational groups have been performing such assessments more frequently and, as a result, face a more limited (or even no) required adjustment at the end of the year that will impact the Income (April) and Transfer Pricing (June) returns.

Transfer pricing adjustments are essential to manage, as they ensure arm’s length arrangements between related companies. However, when changing prices between related parties, it is necessary to remember the impact of indirect taxes. After all, in certain situations, a transfer pricing adjustment could trigger an increase or decrease in customs duties and/or (import) VAT and lead to some indirect tax compliance issues.

What is a transfer pricing adjustment?

It is an adjustment to the price of intercompany transactions between two (or more) companies of a group that is made during the financial year (often at the end of the year) to ensure that the transfer pricing policy applied during the year effectively concludes in an arm’s length result. Since, in practice, many transfer pricing policies are set “ex-ante” [2] based on projections (e.g., using sales volume, cost-sharing ratio, etc. as indicators), the arm’s length nature in most tax jurisdictions must be tested annually through the application of the annuity principle. As projections in most cases deviate from reality, a transfer pricing adjustment is needed to align the actual operating result with the arm’s length principle.

How are indirect taxes affected by a transfer pricing adjustment?

Customs duties are generally calculated as a percentage of the customs value. If the buyer and seller are related companies, this customs value is often based on the group’s transfer pricing policy. Therefore, a transfer pricing adjustment between the importing company and the related supplier could result in a change in the customs value and, therefore, in an increase or decrease of the customs duties.

On the other hand, it is essential to think carefully about the VAT aspects related to such adjustments. First, the taxable base for import VAT is always based on the customs value. Therefore, a change in the customs value will automatically result in a change in the import VAT. Secondly, even in the case of services (cost-shared agreements), transfer pricing adjustments, as such, may trigger problems related to withholding taxes and/or cumbersome correction obligations.

For these reasons, it is recommended that companies always consider indirect taxes when establishing their transfer pricing policy and, with special care in Chile, perform their evaluation quarterly or semi-annually to avoid unpleasant moments before the tax authorities.

[1] This June 28, 2024 the forms F1907 Transfer Pricing; F1913 Global Tax Characterization; F1951 Local File; F1950 Master File must be submitted to the SII portal.

[2] Without considering that, in some cases, Chilean companies must deal with the different tax year cuts of their related or parent companies (September or March, depending on the jurisdiction).

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