We are launching the “International Taxation” blog, a new space dedicated to in-depth analysis of international tax law topics, coordinated by Tax partner Victor Polizelli and international tax specialist Javier Bonilla, a consultant at LLP Consultoria, which is a partner of KLA Advogados.
Here, we will address technical issues, regulatory interpretations, and global trends that impact the operations of companies across different jurisdictions.
It’s compensating adjustment season…
As the year comes to an end, tax departments around the world begin carrying out transfer pricing adjustments. However, the problem may arise even before implementation. It is important to consider that transfer pricing adjustments result from prior management of the prices agreed upon in transactions between related parties, using as a reference the prices or margins that would be agreed upon by independent parties in a specific economic sector.
In Spanish-American countries, such as Chile, we are seeing the most recent update to the transfer pricing rules (Article 41 E of the Chilean Income Tax Law). This regulation introduced the concept of a “self-adjustment” (compensating adjustment), which allows a company to make adjustments understood as those in which the taxpayer itself may determine an arm’s-length price or profitability for the related-party transaction, even if such price or profitability differs from the value initially agreed upon between the related parties.
For a self-adjustment to be carried out, Chilean legislation requires that it be made before any tax request by the tax administration (Internal Revenue Service – SII), and it is generally implemented before the closing of the financial statements.
The new regulation encourages taxpayers to build a defense file that preserves all supporting documentation demonstrating that the self-adjustment was made considering market-standard prices, values, or profit margins.
A self-adjustment may be carried out by determining a price or profitability that will serve as a reference to verify whether the related-party transaction meets arm’s-length conditions. If two or more prices or profitability indicators exist, the company must establish an interquartile range, and may adjust to any point within that range as the reference.
However, the law also imposes limits on taxpayers, prohibiting adjustments that result in lower tax payable or higher tax losses to be carried forward.
In summary, the management of tax compliance and the execution of compensating adjustments can be conducted through proper segmentation of financial statements, reviewing the validity and adherence of the transfer pricing policy, analyzing the tax feasibility of applying the policy in each country, assessing the possibility of revising and adjusting benchmarks to local economic realities, and verifying applicable accounting criteria that may generate impacts under local and international rules.
