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Astrid Schudeck |
Jonatan Israel |
The interpretation of the General Anti-Avoidance Rule (GAAR) by the Chilean tax authority, concerning the entry into force of the provision, has been subject to strong criticism and confusion. This is because of conflicting interpretations of the rules and because the GAAR could apply to transactions performed before the entry into force date of September 30 2015 if the effects of the said transactions are generated afterwards.
The GAAR was enacted by Tax Reform Law No. 20.780 of September 2014. Transitory article No. 15, stated that GAAR provisions would enter into force as of September 30 2015. The GAAR would only apply to facts, acts or a series of them, which are performed or concluded from the effective date.
However, the criticism of the tax authority's interpretation of the rule led to the government introducing some adjustments to the provision. These were published in the Official Gazette as Law No. 20.899, under the name of "Simplification of the Income Tax System and Perfection of other Tax Laws" (Simplification Law).
Intentions
For the purpose of the analysis it is relevant to mention that the set of rules that incorporate the GAAR in the Chilean tax system are intended to restrain aggressive tax planning practices, as well as tax avoidance. It does this by establishing two legal types of tax avoidance scenarios: the abuse of the legal forms and simulation.
In this regard, the Chilean tax authority is allowed to assess, not only the individual legal actions or taxable events of a given scenario, but also a group or series of actions, which, when considered together, may in fact cause abuse of the legal forms or simulation scenarios. This applies even if each of the legal transactions do not cause tax avoidance when examined individually.
In a manner, it could be said that the step transaction doctrine was legally introduced into Chilean Law. The step transaction analysis we refer to – the fact that many taxable events are developed through a period of time, and thus their effects are not necessarily immediate, and the necessity of giving taxpayers a degree of certainty regarding their past transactions to be consolidated in time – meant the Chilean Legislator had to introduce a rule to determine which acts and series of acts would be subject to the new GAAR analysis and which of them would remain outside its scope.
Interpretation
In Circular Letter No. 55 – 2015, the Chilean tax authority issued an administrative interpretation of the complex GAAR provision. The authority's interpretation was very broad, stating that "even though the law restricted the possibility of applying the GAAR provisions to a period of time, a systematic interpretation of the rules that limit its retroactivity, cannot put in risk the objective set forth by the legislator when envisaging them (the GAAR), and thus creating opportunities of tax elusion, that the referred rules seek to restrain".
The concept under the analysis of the Chilean tax authority were the words "realised" and "concluded". The tax authority stated that facts, actions or businesses or a series of them, even though performed before the entry into force date, can be analysed under the provisions of the GAAR when their legal or taxable effects are still pending and are produced once the GAAR is in force.
This broad interpretation led to the legislator issuing transitory article No. 8 of the Simplification Law to explain the rules and provide taxpayers with the legal certainty they were seeking. The transitory article stated that facts, actions or businesses are understood to be "realised" and "concluded" if the elements or characteristics that determine their legal consequences are stipulated before the entry into force date, whether or not their effects are produced afterwards. However, in case the referred elements or characteristics are modified after the referred entry into force, the GAAR may indeed be applied to such related effects.
Some caution
The Chilean Internal Revenue Service has issued a draft for a ruling to address the new entry into force rule, stating among other aspects, which modifications of the facts, actions or businesses would entail the possibility for them to assess such transactions under the scope of the Chilean GAAR. The public consultation period on the draft ruling has ended and it is now at the redaction stage. We are still in early stages of the administrative developing of the GAAR, and there is little applicability at this time, hence there is still road to run. Nevertheless, it is extremely important to take into account that any interpretation of the entry into force rule should consider that the main objective of the legal modification, which was to give taxpayers legal certainty regarding the applicability of the GAAR.
The market is taking the GAAR with caution, which is why we are following its outcomes.
Astrid Schudeck (astrid.schudeck@cl.pwc.com) and Jonatan Israel (jonatan.israel@cl.pwc.com)
PwC Chile
Tel: +56 2 2940 000
Website: www.pwc.cl
