BVI Company’s Subsidiary Wins Chilean Case on Segmentation

Capitaria SA, previously named Forex Chile SA, is a subsidiary of Grupo Capitaria SpA. The taxpayer facilitates the trading in currency derivatives through access to a transactional platform and owns portfolio investments. In 2014 it also provided financial advisory and operation processing services in derivatives to KT Financial Group BVI Ltd., a related party tasked with promoting online trading among the main countries in Latin America. The taxpayer segmented its business into third-party and controlled transactions. For the related-party business, it applied the transactional net margin method and calculated a 69.24 percent profit margin with a median of 15.77 percent.

A tax audit that began in 2016 concluded that some expense accounts were incorrectly disregarded for the segmentation. The tax authorities therefore claimed that the taxpayer’s business operations were so interrelated that a separation between them was not feasible. To comply with the country’s arm’s-length principle in article 41 E of the Chilean Income Tax Act (Ley 824), the Revenue Service accepted the taxpayer’s methodology. However, by adopting the calculated median and disregarding any segmentation, it determined an upward adjustment of CLP 655 million in July 2017. Skipping the optional administrative objection procedure, Capitaria SA appealed to the Santiago tax court in December 2017.

It alleged that the tax authorities took an arbitrary approach by adopting the transactional net margin method, the database, the comparables, etc., but using the median. They also ignored the OECD transfer pricing guidelines requiring a segmentation of business lines, the taxpayer asserted. The decision highlights a litany of documents — e.g., bank statements, agreements, and account excerpts — the taxpayer provided in addition to the transfer pricing study.

In its April 23 judgment (RUC 17-9-00015606- 2), the Santiago tax court highlighted that each party has to prove its claims. It quoted at length the paragraphs of the 2010 OECD transfer pricing guidelines dealing with segmentation and its exceptions. The court then concluded that a segmentation was feasible and, according to the OECD guidelines, also useful in the taxpayer’s case, as supported by the transfer pricing documentation, other documents provided, and witness testimony. The tax authorities’ different claims were not based on a list of comparable companies that do not separate their different independent and related-party business nor any other evidence that it would be common practice to not distinguish between the business lines in a case like the taxpayer’s, the court said, dismissing the tax authorities’ appeal.

At the appeals court, the Revenue Service complained that the tax court did not look at the actual values used in the proposed segmentation and did not thoroughly verify the relevant supporting documentation for the taxpayer’s assumptions.

The appeals court said the tax court had sufficiently scrutinized the profuse documentation supplied by the taxpayer. Further, it had provided ample legal, logical, and technical reasoning why it agreed with the taxpayer’s methodology, the appeals court ruled, dismissing the tax authorities’ appeal.

“Since the appeals court does not conduct a de novo review, it is not uncommon to see a short analysis at the appellate level when the main issue concerns the weighing of evidence regarding factual matters,” San Juan said. He added that he expects the tax authorities to appeal to the Chilean Supreme Court.

“The appeal is granted by right, so the highest court will rule on the substantive merits of case, likely in the first half of 2025,” San Juan explained.