Chilean Law No. 21,713, effective November 1, 2024, updates tax assessment rules by enhancing IRS powers, redefining market value, and relaxing requirements for tax-free reorganizations. Key changes include amendments in how transfer prices are assessed and alterations in international organizational treatment. Although significant, uncertainties remain pending the final IRS circular letter.
On October 24, 2024, Chilean Law No. 21,713, which addresses tax compliance regulations, was officially published. This law replaced Article 64 of the Chilean Tax Code, specifically focusing on the powers of the Internal Revenue Service (IRS) regarding tax assessments and tax-free reorganizations. A draft circular letter has been issued by the IRS interpreting these changes, but uncertainties remain as the final version is yet to be released.
Among notable changes effective from November 1, 2024, is an assessment provision for transfer transactions. Previously, a transfer necessitated an assessment of transaction price, but the new law empowers the IRS to evaluate a transaction’s price, regardless of whether a transfer has occurred, such as in capital increases or spin-offs.
The new regulation also modifies the appraisal provisions concerning transfer prices. Whereas prior rules only allowed for assessment if the transaction price fell below the market value, the updated regulation grants the IRS authority to assess prices that are either above or below the market value.
Additionally, the definition of market value has been clarified. Under the new provision, market value is now described as that price which would have been agreed upon by unrelated parties in comparable transactions and circumstances, enhancing clarity in assessments.
The tax-free reorganization provisions have also been amended. Previously, mergers and spin-offs were regarded as tax neutral provided certain criteria were met. The new requirements specify that a legitimate business purpose must exist, the tax basis must be preserved by the recipient, and no cash flows may be triggered, simplifying the process by removing the need for formal accounting.
The previous rule mandated the contributor’s continued existence for tax-free reorganizations, but now allows conversion of individual enterprises into companies without triggering tax implications. Furthermore, contributions can be made at different values, provided the recipient preserves the tax basis, addressing potential corporate conflicts arising from value discrepancies.
International reorganizations that affect Chile were not addressed in old regulations. The updated provisions specify that international reorganizations can be covered under the safe harbor if they meet criteria, including the existence of a legitimate business purpose, preservation of tax basis, retention of Chilean taxation power, and adherence to accounting record requirements depending on the recipient’s domicile.
Despite the significance of these changes, ambiguities regarding their application remain. Many of these questions are anticipated to be clarified in the forthcoming circular letter from the IRS, which will provide further guidance.
In summary, Chile’s Law No. 21,713 introduces significant changes to tax assessment provisions, which include alterations to appraisal standards, definitions of market value, and tax-free reorganization criteria. Notably, the law simplifies processes for tax-free capital contributions and international reorganizations. However, uncertainties persist until the IRS releases its final circular letter, which is expected to provide clarification on these matters.
Original Source: www.internationaltaxreview.com
