Chile: Chilean IRS’s Anti-avoidance Bureau and the Administrative Consultation Procedure
The entry into force of the Chilean general anti-avoidance rules (GAAR) envisaged by Law No 20.780 effective as of September 30 2015, has made the Chilean Internal Revenue Service (IRS) take specific actions regarding the organisation of its personnel, to address the challenges set forth by the Chilean GAAR regarding tax assessment.
In that context, the Chilean IRS has issued the Administrative Resolution No. 86/2015 to create the Anti-Avoidance Bureau, a special task force within the assessment department. This Anti-Avoidance Bureau will be under the supervision of the subdirector of assessments, and will have as one of its core activities the coordination and supervision, at a national level, of the administrative procedure created to qualify certain acts or series of acts as constituting abuse of the legal forms or simulation.
As we observe the new set of rules enacted to restrain aggressive tax planning and the development and implementation of these measures by the Chilean tax authorities, we consider it to be of vital importance to address specifically the new possibility given to taxpayers to approach the Chilean IRS, with the purpose of analysing a given transaction beforehand, in order to get a binding answer.
To understand the full extent of the Chilean GAAR, it is important to note that the Chilean anti-avoidance regime is composed of four pillars:
First, substantive rules containing the definition of abuse of the legal form and simulation;
Secondly, administrative procedures to qualify an act or series of acts within the definitions contained in the substantive rules;
Third, judicial procedure rules to regulate the tax trial before the Chilean Courts;
Finally, Chilean GAAR imposes fines for the tax advisers, and/or taxpayers who partake in transactions that result in abuse of the legal forms or simulation.
Within this system, and pertinent to the administrative portion of the GAAR, article 26 BIS of the Chilean Tax Code contemplates the possibility for a given taxpayer to issue a formal consultation before the Chilean IRS in order to analyse the applicability of the substantive rules to their legal acts, contracts, businesses and economic activities. This procedure was duly described by the Chilean IRS in Circular Letter No 65/2006.
In order to be able to perform such consultation, the law requires that the taxpayer has direct and personal interest in the matter. To this extent, the Chilean IRS has circumscribed this interest solely to an economic one, understood as that which could affect the taxpayer's equity. This limitation is intended to differentiate this procedure from any consultation that could be requested to the Chilean tax authorities to obtain the administrative interpretation of a tax rule.
This consultation shall be performed in writing and, as such, it must include a detailed and comprehensive description of all the acts and negotiations the taxpayer intends to perform. Accordingly, it presents all antecedents necessary for the tax authorities to fully understand the transaction. In this context, the possibility of analysing a series of acts as a sole transaction is fundamental since each of the single transactions included in the query can be observed as a whole.
A distinctive characteristic of this consultation procedure, which makes it substantially different from the process of obtaining an administrative interpretation of the tax law, is that the law itself limits the time of response of the tax authorities to a maximum of 90 working days, beginning from the moment in which the tax authority confirms that all necessary antecedents have been received. This term can be augmented for another 30 work days through a documented response. If there is no response within this term, the query itself is considered rejected, nevertheless Chilean IRS has stated that this rejection refers solely to the query and does not carry any answer whatsoever regarding the content of the consultation.
The benefits of performing these kind of direct consultations lays in the binding effect given by law to the answer. It therefore helps to provide a degree of certainty to taxpayers. Even though these rulings only bind the tax authority to a given taxpayer, it will be most interesting to see how the Chilean IRS faces the challenges of implementing these provisions and begins to shape the substantive rules and limit more clearly the concepts of abuse of the legal forms and simulation.
Finally, discussions about possible changes to Law No 20.780, which would likely end up in a new Bill, could affect GAAR provisions. Therefore, this is a matter under development, which we are closely monitoring.