Tax changes, introduced by Law 19,506, which generally applies as from the tax year 1997, are summarised below.

Deduction of foreign expenses

A new rule regulates the substantiation of expenses incurred in a foreign country and provides that supporting documents issued in that country (which must eventually be translated into Spanish) are valid for this purpose. In the absence of supporting documents, the tax authorities may allow the deduction if they find that the expenses are reasonable and necessary for the taxpayer's business.

Transfer pricing rules

The tax authorities may object to the prices of supplies of goods and services between related parties if the prices do not conform to arm's length standards.

When the supplies are made by a Chilean enterprise to a foreign related enterprise, the tax authorities may assess the price of the transaction on the basis of either a "reasonable profitability" or the production cost plus a reasonable profit margin (cost-plus method).

When the supplies are made by a foreign enterprise to a related Chilean enterprise, the tax authorities may assess the price of the transaction by reference to the resale price to unrelated parties less a profit margin (resale less profit method). In the absence of comparable transactions with unrelated parties, the tax authorities may base their objection taking into account the relevant international market prices. In contrast to the OECD approach, the arm's length standard, which is normally the first preferred method, seems to be the method of last resort under the Chilean provisions.

Parties are deemed to be "related parties" if one enterprise participates (directly or indirectly) in the management, control or capital of another enterprise or if a third enterprise participates (directly or indirectly) in the management, control or capital of the other two enterprises.

The transfer pricing rules also apply to transfers and supplies between a Chilean-based branch and its foreign head office and vice versa and to transfers between a Chilean-based branch and a related party of the foreign head office and vice versa.

Interest on loans granted to branches and related parties

The tax authorities may disallow as a deduction the excessive interest, commission fees or other payments in connection with loans granted by, or financial transactions concluded with, the head office (or other agency thereof) or a financial institution in which the head office has a holding of 10% or more.

The same applies to interest, commission fees and other payments in connection with loans granted by, or financial transactions concluded with, nonresident related parties.

Foreign tax credit

An indirect foreign tax credit is granted to Chilean resident companies receiving foreign-source dividends, provided the dividends are not subject to withholding tax in the source country or are subject to withholding tax at an effective rate which is lower than the Chilean corporate income tax rate (i.e. 15%). The underlying foreign tax credit may be granted up to the second-tier level, provided both the first and second-tier companies are domiciled in the same country and the Chilean resident parent owns indirectly at least 10% of the second-tier subsidiary.

Other measures

Effective 1 January 1998, the total tax credit granted under a double taxation treaty is limited to the lower of (a) the foreign tax actually paid or (b) 30% of the taxable income, grossed up with the credit. This credit may be offset against the corporate income tax, the tax on employment income, the individual income tax and/or the tax on nonresidents.

The reduction of the additional tax on outgoing royalties (from 35% to 30% is effective from 1 August 1997. Effective from 1 January 1998, the deduction of outgoing royalty payments is limited to 4% of the payer's annual turnover.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Anthony Cook, Deloitte & Touche, Santiago, Chile on Tel: +56 2 638 4186, Fax: +56 2 639 1522.