Chile Leads Region to Test Companies’ International Tax Links

Chile is leading a regional push across Latin America to clamp down on tax avoidance and profit-shifting by multinational and local firms, with the country’s tax authority making companies with interests and assets one of its priorities for inspections this year.

Outlining its tax enforcement plan for 2017 on March 28, Servicios de Impuesto Internos (SII) said international inspections will be one of its priorities this year, highlighting the issues of transfer pricing and passive incomes received from companies outside Chile, including controlled foreign corporations.

This year will be the first year the authority fully adopts a risk-based tax compliance model, focusing on those taxpayers most likely to pay less than what they should. Other priorities will include taxpayers that don’t make monthly tax statements, high net-worth individuals, companies that don’t declare distributed profits and companies with anomalous results within their respective sectors.

“Analyzing more than one hundred of objective variables will allow control actions to be focused on those taxpayers which, by their own characteristics, are more susceptible to fall in to non-compliant behavior, while facilitating compliance for those who show appropriate tax behavior,” the SII said.

The service will also be revising undistributed profits declared by companies over the past three decades, which become subject to tax beginning this year. Under the 2015 tax reform, companies can pay tax on these profits at a lower rate of 32 percent for profits earned up to the end of 2016. The mechanism has so far raised more than 550 billion pesos ($830 million) and is expected to raise significantly more before the window closes April 30.

Detailing Business Interests

But it is in international tax that most change is being seen. New and revised sworn statements issued over the last two years require groups with interests outside Chile to provide unprecedented levels of details about their international businesses, including the number of companies in the group, the number of employees in each country and what percentage of revenues and costs come from outside Chile.

These form part of SII’s implementation of the Base Erosion and Profits Shifting Action Plan being coordinated by the Organization for Economic Cooperation and Development and the Group of 20 major economies, in particular Actions 10 and 13.

“Chile is really at the vanguard among Spanish-speaking countries, along with Mexico and Spain, in this type of inspection,” said Claudio Salcedo of Salcedo y Cía.

With much more information now available, provided by companies themselves or through exchanges with counterparts in dozens of countries around the world, the SII is able to crosscheck reports to identify possible breaches and focus its efforts.

“Thanks to technology and information, the inspections are increasingly regional, so the large holding groups are going to be in the spotlight,” Salcedo said.

The SII’s additional powers—new anti-avoidance rules introduced through the 2014 tax reform allow them to challenge companies and advisors over “aggressive” tax measures—are forcing companies to change their attitude toward tax management, especially with regard to business outside Chile, Rodrigo Benitez, a partner at BDO Chile, told Bloomberg BNA March 29.

“They are becoming more conservative on transactions, moving operations away from tax havens to serious countries and investing more in compliance than tax planning,” he said.

Digital Economy

The rapidly-growing digital economy is another area of international focus for SII this year, which highlighted app stores and online advertising in its plan. Software sales in Chile are subject to a special tax of 15 percent, but this is difficult to implement when it is not clear exactly in which jurisdiction the transaction takes places.

“They are checking whether these payments out of Chile should be subject to some kind of withholding tax or, indeed, value-added tax,” noted Benitez.

Chile’s rapid implementation of BEPS has some worried that mistakes could be made by SII personnel who remain relatively inexperienced in international tax law.

“In one year, the tax officials cannot gain adequate understanding of all the regulations, so the problem could be ill-founded inspections due to the lack of training,” Cristobal Riffo, senior tax partner at Alessandri, told Bloomberg BNA March 29.