Chile: New anti-avoidance rules: Substance over form?
On September 29 2014, through Law 20.780 published in the Official Gazette, significant amendments to the tax regime of Chile were approved by the Chilean Congress following a proposal by the Chilean government that sets out, among others things, to raise corporate taxes. One of the most important amendments is the introduction, for the first time in the history of our tax legislation, of general anti-avoidance rules (anti-elusive) through the new article 4 of the tax code (articles 4, 4 bis, 4 ter, 4 quáter and 4 quinquies of the tax code), which establishes that the tax obligations originated from taxable events will be born and due pursuant to their legal nature or facts performed, regardless of the form or denomination given by the parties to the transaction.
At this point, it is important to mention that during Chile's history there have not been any general anti-avoidance or substance over form rules in force, and traditionally, the tax courts gave preeminence to the legal form of the acts over their substance. Recently, however, the Chilean courts, in specifics cases, have adopted the "business purpose" and "economic substance" doctrine in aggressive tax planning and, thus overcoming the lack of anti-avoidance rules.
Considering this background, the incorporation of a general anti-avoidance rule (anti-elusive) in the tax code represents an innovation in our tax legislation and in such a way, it aligns our tax regulation with international trends and OECD principles but, at the same time, this might generate a certain level of uncertainty for investors in Chile regarding how this new set of rules will be applied by the Chilean IRS.
The above mentioned general anti-avoidance rule (new article 4 of the tax code) establishes a principle by which tax obligations will be born and due in accordance with the legal nature of the business or acts carried out by the taxpayers, regardless of their form, denomination or flaws.
Along with this, the new regulation established the principle of good faith from taxpayers, by virtue of which the Chilean IRS shall recognise the effects arising from the business or acts carried out by them. However, if a taxable event, as set forth by the law, is eluded by means of the business or acts executed by the taxpayer, no good faith would be deemed to exist.
For this purpose, it will be understood as "abuse of right" for tax matters when the taxable event is fully or partially avoided; or, when the tax base or tax liability is reduced; or, when the liability is deferred through acts or legal business which individually or collectively considered do not produce different results or relevant legal or economic effects for the taxpayer or third party other than purely tax.
"Abuse" would not be deemed to exist for the single circumstance that the same economic or legal result can be obtained through other legal acts which would lead to a higher tax burden; or that the legal act or acts chosen do not generate any tax effect, or generate them either in a reduced way or deferred in time or in a lower amount, provided that these effects are derived from the tax law.
Notwithstanding the above, the new article 4 recognises the taxpayers' right to choose between the different conducts and alternatives set forth by the tax legislation. The sole exercise of such option will not be considered as abuse.
On the other hand, "simulation" would be deemed, for tax purposes, when acts and legal business are used to cover or mask a taxable event, its nature, its real amount, or the date when it arises.
This new rule will allow the Chilean IRS to consider the acts, situations, and economic activities performed, established, or desired by the taxpayers in order to determine the real nature of the taxable event.
While interpreting the tax legislation, substance shall prevail over the legal form of the acts. Hence, the fact that a taxpayer's transactions are formally well implemented does not necessarily imply that they will be acceptable under this new set of tax provisions. Thus, in those cases in which there is no business purpose other than obtaining a tax benefit, the Chilean IRS could qualify such transactions as elusive and apply the corresponding tax provisions.
Likewise, the existence of abuse or simulation shall be declared by a tax court, upon request of the Chilean IRS, which will have the burden of proving that a determined transaction was structured only because of tax-motivated purposes.
Another important amendment is the introduction of article 100 of the tax code, which establishes that individuals and companies involved in the design or execution of an elusive tax planning (for example lawyers or consultants) will be subject to penalties amounting to up to 100% of the taxes eluded. If the infraction was committed by a legal entity, the penalty will be applied to its directors or legal representatives, to the extent that there was a breach of their management and supervision duties.
Finally, it is important to mention that these amendments will enter into force one year after the law was published regarding transactions executed or concluded after.
These new rules imply a twist in the way in which tax law will be applied and it will be interesting to monitor how this matter will evolve from different sides, including from the perspective of tax practitioners and the Chilean IRS, as well as the tax courts, which finally will have the role of declaring the abuse or simulation.
Gonzalo Schmidt (firstname.lastname@example.org)
Chaterin Belletich (email@example.com)
Tel: +511 2116500