Reinforcement of IRS control and supervision powers
The 2014 Tax Reform Act and the 2016 Tax Reform Amendment Act gave the Chilean tax regulator new tools to contact taxpayers, request information, initiate examination processes and potential tax audits, and even to declare the termination of activities for certain businesses, write Roberto Carlos Rivas and Josefina Casals of PwC Chile.
Although these changes may appear to be less significant within the whole scope of the tax reform, they have practical consequences for taxpayers that are worth mentioning.
For the purpose of this article, we have divided these new regulations in the following groups:
Remote contact faculties (effective from September 30 2015)
Electronic notice or letter
Before the 2014 Tax Reform Act, taxpayers could elect determined letters or notices to be received by e-mail. Since the Act, upon a formal registration in the IRS website by the taxpayer, almost any communication delivered by the tax authority will be received by this method. Notices that shall be communicated by special means remain as such.
Taxpayers are responsible for maintaining their information is up to date, since the notification is legally valid until the e-mail registration is expressly modified or cancelled by the taxpayer.
The notification is valid on the date of delivery of the e-mail. This communication should be performed on working days, between 8am-8pm, and must include the IRS officer digital signature.
A digital copy of the notice or letter should be uploaded onto the IRS taxpayer's site.
Notice or letter through the taxpayer personal's IRS website
This applies to taxpayers which, having being summoned, do not attend to the IRS office, as well as missing taxpayers who cannot be located at their registered address.
There are certain formalities that the tax authorities should comply with before the publication of the notice on the website. The notification is valid from the date of the referred publication.
Moreover, a summary of the notification will be published through an IRS ruling and in a local newspaper.
Inspection tools (effective from September 30 2015)
The tax reform allows the head of an IRS unit conducting a tax audit of a particular taxpayer to initiate tax audit processes regarding related parties which have entered into operations with the taxpayer concerned, regardless of its domicile, provided certain requirements are met.
Any tax claim derived from this audit shall be filed before the tax courts domiciled in the same territory of the referred IRS unit.
Examination of taxpayers' data
The scope of information that the IRS can request for examination is broadened, including not only balance sheets, inventories and tax ledgers, but also any other physical document, authorised software and any other technological system used by the taxpayer for tax purposes.
Request of information out of the context of a tax audit
The IRS can request any tax or accounting information, as well as supporting documents in order to confirm the consistency of tax returns, without carrying out a formal tax audit. This requirement can be made in the quickest way possible, however, a letter or notice shall also be delivered indicating the specific topics to be examined, the due date for the provision of information, and the fact that there is no tax audit initiated against the taxpayer.
It is important to mention that the deadline to submit the information will start from the date of the formal letter or notice.
If the taxpayer does not duly provide the documents by the deadline, it will be recorded in their history for future screening processes.
Online tax audit
Our latest tax reform allows the IRS to access remotely to the taxpayers' software and technological support systems in order to examine any document held online, all aimed to validate calculations and verify the proper use of such software and systems for tax purposes.
A formal notification from the IRS is required. Upon request of the authority, the selected taxpayer must provide the access codes and other user privileges. Once examined, the IRS should issue a formal report, detailing the information analysed. Any objection or inconsistency detected should give rise to a formal summon, assessment, or notice of deficiency, as the case may be.
If there is an obstruction or delay caused by the taxpayer, the IRS can deny the use of such information in future tax claims promoted by the taxpayer as a consequence of the tax audit led by the authority. Fines are applicable as well.
New audit procedures and techniques
In order to verify the consistency between tax returns, taxable operations and supporting documents, the tax regulator can request that the taxpayer designs and conducts any audit procedures of general acceptance, provided that the taxpayer's normal course of business is not affected.
This new provision regulates two specific activities that the IRS may carry out, such as a sampling and field research.
The outcome of these activities may lead to tax audits, and also assessments in case of material differences. The taxpayer may deduct a tax claim against the methodology used by the IRS, as well as against the notice of deficiency or assessment, if applicable.
Fines apply in cases of obstruction or impediments caused by the taxpayer.
Termination of business activities declaration
One of the most relevant developments in the context of supervision and control powers bestowed upon the IRS by the tax reform is the ex-officio termination of business declaration. Such termination can affect any taxpayer, including corporations, limited liability companies, associations, joint tenants, sole proprietorships and individuals.
According to our local laws, when a taxpayer gives a formal notice of termination of business activities to the IRS it shall declare and pay income taxes, calculated upon the taxable income registered in the balance sheets up to the date of termination. The fact that the IRS can also declare such termination instead of the taxpayer empowers the regulator to automatically collect any income tax assessed within this process, when applicable.
This ex-officio termination can proceed in any of the following scenarios:
Termination of business after summoning (effective from September 30 2015)
This allows the IRS to declare the termination of business in case of summoned taxpayers that, without giving a formal termination of commercial activities as required by law, have ceased to operate at a certain date according to the information gathered by the authority.
In particular, our law provides for situations to be taken into account by the IRS to declare the termination, such as:
No submission of monthly tax forms during eighteen consecutive months (for taxes to be declared under a monthly basis),
No submission of yearly tax returns for two consecutive years;
Submission of a monthly or yearly tax return which does not include any income, either taxable, not taxable or exempted, for the same periods referred above, respectively;
Additionally, the IRS shall confirm the absence of any other evidence of performance of business activities, prior to summon the taxpayer. Therefore, if the taxpayer does not submit yearly tax returns during two consecutive years, but does fulfill monthly declarations, the tax regulator could not conclude that the taxpayer has terminated its business.
The summons shall request the taxpayer's response by a certain date, indicate the legal and factual grounds to determine that the taxpayer has ceased in his activities, and include a pro forma tax assessment, if applicable.
Before the reply due date, the taxpayer can opt to give a voluntary notice of termination of business by submitting all the information required for this purpose, and declare and pay the corresponding income tax.
Should such notice is not given by the taxpayer, and provided that there is no rebuttal of the antecedents considered by the IRS, the authority will declare the termination of business activities, and will proceed to perform an official tax assessment.
It is important to mention that this special summons extends in one year the statute of limitation for tax audits and collections (and not in three months as the general rule), for both the taxpayer and his final owners.
Termination of business by declaration (effective from August 1 2016)
The 2016 Tax Reform Amendment Act allows the IRS to, in special situations, automatically declare the termination of business without summoning, regarding taxpayers with no business operations for at least 36 tax periods and as long as there are:
No taxable profits pending taxation;
No assets pending taxation;
No net tax differences, although there are registered profits or assets, and;
No tax liabilities (apart from tax penalties).
When using this tool, the IRS does not perform a tax assessment because there are no net tax differences or tax liabilities.
This is a legal presumption that can be rebutted by the affected taxpayer, who can also file a tax claim according to the general rules.
The existence of the aforementioned IRS tools imposes an additional administrative burden, compelling taxpayers, owners and accountants to carefully review and update the contact information before the tax authorities, as well as to take the corresponding steps to ensure the continuing business operation of legal vehicles.
Roberto Carlos Rivas
Tel: +562 2940 0151
Roberto Carlos Rivas is a partner of the tax and legal services department at PwC Chile.
During 2001 and 2002 he obtained a master's degree in law, specialising in international taxation from Leiden University, the Netherlands.
During 2002 and 2003 he was attached on a secondment to the International Taxation department of PwC, Rotterdam, the Netherlands, taking active part in international tax planning projects concerning investments between Europe and Latin America.
He joined PricewaterhouseCoopers in April 1993 and he has also been assigned to PwC Buenos Aires. He is a transfer pricing expert.
Roberto is a member of the International Fiscal Association in Chile and he has written many articles on international tax matters. He has lectured on topics of international taxation at seminars taking place in Rotterdam, Amsterdam, Barcelona, Buenos Aires, Punta del Este and Santiago.
Tel: +56-2 2940 0152
Josefina Casals is supervisor at PwC Chile, with more than eight years of experience with the firm. Her tax practice includes consulting services in tax planning and reorganisations, financing structures, cross-border transactions and analysis in corporate tax, customs and VAT issues.
In the legal field, Josefina has participated in due diligence for public and private companies, contract analysis and drafting, corporate secretarial affairs, and legal compliance for local and foreign clients. In the past, Josefina also held the position of in-house legal sounsellor, providing assistance in legal and corporate affairs, global governance, and regulatory matters within the firm.
Josefina holds a master's degree in law from New York University, USA (2013), and a bachelor's degree in law from Pontificia Universidad Catolica de Chile (2006). She also undertook studies in tax planning and analysis at Pontificia Universidad Catolica de Chile (2011) and Universidad del Desarrollo, Chile (2010).