The catalogue of avoidance
Chile’s tax reform, within its latest and more important updates, incorporated a general anti-avoidance regulation through which it established that the tax obligations can be enforced according to the legal nature of the facts, acts, or business, without attending to their form, denomination or to the defects that could affect them.
The regulation specifies that there is avoidance of the taxable facts in case of abuse of the legal forms or simulation.
In case of abuse, the tax obligation that arises from the taxable facts established by law will be demanded. On the other hand, in case of simulation, the corresponding taxes will be applied to the real transactions made by the parties, regardless of the simulated acts or transactions.
Nevertheless, the rule recognises the right of the taxpayers to choose between the alternatives contained in the tax law, without the need to consider that simple option an abuse of the law.
The existence of avoidance must be declared by the corresponding Tax Court, previous request by the Chilean IRS.
As the start of the procedure depends on the IRS appreciation, its interpretation of the different situations and tax schemes implemented by the taxpayer becomes highly important.
Progressing in this matter and following foreign tax administrations, the Chilean IRS has recently published a “catalogue of tax schemes” that under specific circumstances might be found elusive and, as result of that, be subject to review by the mentioned authority.
This catalogue centers in an enumeration and description of twelve specific cases which hold operations that the Chilean IRS, a priori, considers a potential case of avoidance and as a result, they might be monitored and reviewed by this entity to determine if they can be classified as an aggressive planning or elusive scheme.
For these matters, the Chilean IRS established a warning of determined operations that it qualifies as “unusual”, in which some of the following characteristics can be found:
· Cases in which the tax benefits of the transaction or planning are excessive or unproportioned;
· Schemes that cannot be technically understood by the upper management nor owners of the companies, apart from the fact that they “produce a good tax effect”;
· Cases in which the signature of unusual contracts to the business is required;
· Schemes that imply a flow of funds or goods between the same companies, even though that does not have a logical explanation except producing a tax advantage.
· Using tax havens, or companies without personnel nor functions, that move important amounts of funds or assets, unproportioned to the company.
The aforementioned operations carry an adjective as “unproportioned”, “unusual” or “tax advantage”. The incorporation of these subjective standards, uncontemplated in the law, and the interpretation of which will be controlled by the Chilean IRS, generates uncertainty among the taxpayers and, therefore, an elevated amount of controversy which could lead to an increase in the amount of judicial conflicts with the tax administration.
What should the Chilean IRS do to declare an operation as elusive?
First, the Chilean IRS National Director is the only authority within the institution with the capability to start a request of abuse or simulation before the Tax Court.
Prior to the request, the Chilean IRS must summon the taxpayer, so it can defend itself in an administrative stage.
Then, within the deadline of nine months, in case that the taxpayer does not answer to this notice, or complies but in an unsatisfactory manner, the Chilean IRS could start a judicial request before the Tax Court to get a judicial declaration of the existence of an abuse or simulation through a reasoned decision.
It is interesting to underline that is the Chilean IRS who will need to prove the existence of the abuse or simulation.
The Chilean IRS and the taxpayer can file an appeal to the judgement of the Tax Court.
This article was prepared by Gonzalo Schmidt and Felipe Domínguez of PwC, International Tax Review’s exclusive correspondent firm for Chile.