Key Changes in Chile’s New Tax Assessment Regulations

Chilean Law No. 21,713, effective November 1, 2024, amends tax assessment regulations by broadening the IRS’s authority to evaluate transfer prices, clarifying market value definitions, and simplifying requirements for tax-free reorganizations. While the changes are significant, the absence of a final IRS circular leaves certain uncertainties regarding implementation.

On October 24, 2024, Chilean Law No. 21,713 was published, introducing important amendments concerning tax compliance regulations. This law replaced Article 64 of the Chilean Tax Code, which governed the tax assessment powers of the Internal Revenue Service (IRS) and tax-free reorganizations. A draft circular letter from the IRS interpreting these changes has been issued, but the lack of a final version leaves some ambiguities regarding application.

The new tax assessment provision, effective November 1, 2024, introduces several key changes. Firstly, the assessment of transfer prices by the IRS is now permitted even in transactions where no traditional transfer occurs, such as in capital increases or spin-offs. Under the previous rule, a transfer necessitated a price assessment, but the revised law broadens the IRS’s authority.

Another significant shift is the appraisal provision, which now allows the IRS to evaluate transaction prices that deviate from market value, irrespective of whether they are above or below that value. Previously, appraisal powers were limited to situations where transaction prices were below market prices, creating a more restrictive assessment framework.

The definition of market value has also been clarified under the new provision. It is defined as the price that would have been agreed upon between unrelated parties in comparable transactions, enhancing clarity and reducing ambiguity within prior regulations.

Regarding tax-free reorganizations, previous requirements mandated that mergers and spin-offs retain the tax basis in assets and liabilities and that contributors continue to exist. The new requirements are simplified, requiring only that there be a legitimate business purpose, preservation of the tax basis by the recipient, and that no cash flows are triggered. Notably, formal accounting records are no longer a prerequisite for tax-free capital contributions, easing the administrative burden.

Moreover, the revised rules remove the requirement that contributors continue to exist, thus facilitating smoother transitions from individual enterprises to corporate entities without a tax burden. Furthermore, discrepancies between fair value and accounting or tax value are now manageable under the new provisions, as long as the tax basis is maintained.

The treatment of international reorganizations has also evolved. While earlier regulations did not specifically address international reorganizations affecting Chile, the new law stipulates that such transactions qualify for tax-free treatment if they maintain a legitimate business purpose and preserve the tax basis, among other criteria.

In summary, while the changes introduced by Chilean Law No. 21,713 are significant, there are still outstanding questions regarding their application. Further clarification is anticipated in the upcoming circular letter from the IRS, which will provide guidance on these new regulations.

In conclusion, the amendments brought by Chilean Law No. 21,713 significantly reform the tax assessment landscape in Chile. The expanded powers of the IRS, clarified definitions, and eased requirements for tax-free reorganizations promise to streamline compliance and reduce administrative challenges. However, the existing uncertainties necessitate the finalization of the IRS circular letter to clarify these provisions further.

Original Source: www.internationaltaxreview.com