SII issues instructions on amendments to Article 64 of the Tax Code

The circular regulates how to verify if a transaction was made at market value and details the procedure to determine it when the taxpayer does not credit it.

The Internal Revenue Service (SII) issued Circular No. 23 which provides instructions on the amendments to Article 64 of the Tax Code by the Tax Compliance Law.

This provision supersedes Circular No. 45 of 2001 and paragraphs 19) and 20) of section IV of Circular No. 23 of 1975.

The key points of this new rule are:

• Appraisal Power: Article 64 defines “market value” as that which would have been agreed upon by unrelated parties, in comparable operations and circumstances, considering, among others, the characteristics of the industry, sector or segment, the functions, assets or risks assumed by the parties, the specific characteristics, components and determining elements of the goods, services, contracts, or any other operation being analyzed and, in general, any other relevant circumstance.

In order to establish whether the price or value assigned by the taxpayer is normal market value, the following parameters or elements must be considered:

1. The characteristics of the industry, sector or segment.
2. The functions, assets or risks assumed by the parties.
3. The specific characteristics, components and determining elements of the goods, services, contracts, or any other operation being analyzed.
4. In general, any other relevant circumstance.

This rule seeks to align the market value with the economic reality of the transactions:

• Contribution to natural persons: it will no longer be taxable the conversion of the individual entrepreneur and the contributions of assets made, both by natural persons and legal persons, including the individual entrepreneur, to the extent that it complies with the requirements established by the rule in question.

The above, as long as the following requirements are met:

1. Are carried out by natural or legal persons.
2. The goods are assigned within the national territory.
3. They obey a legitimate business reason.
4. The tax cost of the assets of the company receiving the contribution of one or more assets is maintained.
5. No effective cash flows are originated for the contributor.

• Exceptions to the Appraisal Power: It will not be applicable in cases of mergers and business divisions (national and international) if the tax cost of the assets in the absorbing or nascent entity is maintained.
• New Rules for International Reorganizations: The business reorganization will not be taxable if it complies with requirements such as maintaining the tax cost.
• Taxation Process: The taxpayer may submit optional valuation studies to credit the market value.

In those cases in which the SII determines that there is a difference between the price or value assigned by the taxpayer and the one determined by the service, it will be affected in the corresponding fiscal year with a single tax rate of 40%.

In relation to the above, the regulation contemplates differences between the price or value assigned or agreed by the taxpayer:

• The one proposed by him in response to the summons, accepted by the SII.
• The one proposed by him by means of rectifying declarations.

We emphasize that it is essential that taxpayers review business transactions, especially in cases of reorganization, to ensure compliance with the new provisions and we recommend to properly document the market value analysis, considering technical studies to support the operations carried out.

For more information, please contact our Tax Team:

Rodrigo Albagli | Partner | ralbagli@az.cl

Álvaro Rosenblut | Partner | arosenblut@az.cl

Andrea Bobadilla | Director Tax Group | abobadilla@az.cl

Valentina Herrera | Associate | vherrera@az.cl

Javiera Melo | Associate | jmelo@az.cl

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