Every year, until the last business day of June, taxpayers must deliver the Internal Tax Service 1907 Affidavit on Transfer Pricing. We talked with Javier Monje, Country Manager of Englobally Chile, with extensive knowledge in labor, tax, and commercial areas, about the implications of this procedure.
Regarding Transfer Prices, what kind of companies must submit the 1907 Affidavit?
Transfer prices regulate transactions between two companies, which have related parties, either because they have the same owner or another circumstance, and ensures that they are governed under the rules of free competition. They must be considered as if they were independent companies, and there cannot be preferential treatment.
All medium and large companies that have these types of transactions or that perform transactions with tax havens must submit this statement.
Regarding SMEs, it is only an obligation for those that exceed transactions with a value higher than 500 million pesos, within a tax year.
How does Englobally Chile perform this economic analysis to advise taxpayers?
The first thing we do is understand the business model, what these transactions correspond to. They can be services, products, loans, among others. When we have this clarity, what we do is compare it with the competition, look at the indicators they are using for such transactions. In this way, we can analyze if they are in the market.
If they are out of the market, the situation should be analyzed. This may be against one country and in favor of another due to lower tax collection. How is this calculated? Chile or the injured country assume what that transaction would have been like if it had been in a free competitive market. So, it simulates what that margin would have meant and makes you pay taxes for the difference. We, to make this analysis, review the financial statements and use a database that also uses the Internal Revenue Service, where you can compare different segments, drafts, items, and activities with the world market. Following this analysis, we make a report so that the client can defend why he is doing the transactions at one price and not another.
Why is it essential that companies get advice on this matter with professional teams?
The first thing is to know the international regulation. It is a regulation that takes many years and has been developed, especially in Europe. It is crucial to mention that our consultants have been trained in European schools. Also, we must know very well how the market operates, what are the calculation methods that have to be applied, and how to analyze. Therefore, we must do it with specialists who have experience in these types of reports, because it is not very common. Those are transactions that usually affect international companies. Advisors who are not used to work with foreign companies are not going to have the experience to make these types of reports.