Latin America: Anti-avoidance rules present challenges and opportunities
Baker McKenzie’s practitioners provide an update on the general anti-avoidance rules in Mexico, Peru, Colombia, Chile and Venezuela with an insight on the challenges and opportunities faced by tax authorities and taxpayers.
Following a global trend, some Latin American jurisdictions such as Mexico have recently enacted the general anti-avoidance rules (GAAR). However, the GAAR has been in place for six years in Chile and for more than 20 years in Venezuela. In Colombia, the rules were sanctioned in 2012, but further developed in 2020. In Peru the rules were enacted in 2012 but they only became applicable in 2019.
In other jurisdictions such as Argentina and Brazil there is no GAAR in force, however tax authorities and courts have relied for years on the ‘substance over form’ principle to re-characterise artificial transactions.
Following the recommendations of Actions 2 and 6 of the BEPS Report, the Mexican government introduced a GAAR for the first time in Mexico as of January 2020.
Article 5-A of the Mexican Federal Fiscal Code includes a GAAR through a mechanism where Mexican tax authorities are entitled during a formal audit to re-characterise legal transactions lacking business reasons and generating direct or indirect tax benefits to the taxpayer will have the same tax effects as those corresponding to the transactions that otherwise would have been carried out to obtain the economic benefit reasonably expected by the taxpayer.
The tax authority would be entitled to presume that there is no business reason, when the reasonably expected economic benefit is lower that the tax benefit. Also, the tax authority would be entitled to presume that a series of transactions lack business reasons when the reasonably expected economic benefit could have been obtained through the performance of fewer transactions and the tax effect of those acts would have resulted in a higher burden.
A reasonably expected economic benefit exists, among other cases, where the transactions of the taxpayer pursue the generation of income, reduction of costs, increase in the value of its goods, its property or an improvement on its market position.
In order to quantify the reasonably expected economic benefit all contemporaneous available information related to the transaction under analysis should be analysed, including the projected economic benefit, to whatever extent the information is supported and reasonable. For purposes of this rule, the tax benefit shall not be considered as part of the economic benefit reasonably expected.
The rule mentions that a tax benefit exists in cases where taxation is reduced, eliminated or temporarily deferred, through deductions, exemptions, adjustments, offsetting of taxes, change of a tax regime, or a re-characterisation of a payment/activity, among others.
The application of the GAAR must be authorised within the tax audit by a special committee comprised of the Ministry of Treasury (Hacienda) and the Mexican tax authorities (SAT), and the re-characterisation must be informed to the taxpayer before the closing of such audit in order to allow the rebuttal of such assessment/presumptions regarding lack of business reasons.
If the committee does not authorise within the following two months, the response should be considered as being negative, that is, that no avoidance or elusion was detected.
The business reason concept is not new when it comes to a tax audit. In recent years, it became common for tax authorities to question the business reasons of a given transaction because said concept could be linked to the requirement of any deduction being strictly necessary or could lead to the conclusion of a transaction lacking economic substance. In addition, certain Mexican federal courts have ruled that in fact the business reason has to be proven in order for a deduction to be strictly necessary.
With the inclusion of a definition of ‘business reason’ in the tax law, in the past months the tax authorities are threatening taxpayers with the re-characterisation of a given transaction and the application of criminal effects, in order to pursue settlements that implies the payment of significant amounts.
Therefore, analysing any relevant transaction carried on by companies in the past five years or any relevant transaction that will be performed, aiming to prepare a defensive file with all the economic analysis and supporting documentation that will prove that the transaction has a business reason is recommended.
The Peruvian GAAR has been in force since 2019, however, it could apply to any transactions carried out as from July 19 2012, if their effects continue until a fiscal year in which the statute of limitations period has not been reached.
With the GAAR, the Peruvian Tax Administration (SUNAT) is entitled to re-characterise those transactions and structures deemed as improper or artificial where the sole or main purpose is to reduce the tax burden of the taxpayers or apply for tax benefits.
It should be noted that since 2012, the year in which the GAAR rule was introduced to the Peruvian Tax Code, there has been significant discussions around the conflict between the legal security of the taxpayers vs the duty to contribute into the funding of public expenditures.
“Following a global trend, some Latin American jurisdictions such as Mexico have recently enacted the general anti-avoidance rules”.
In this context, the Peruvian Legislator has made efforts to provide a certain level of certainty to the taxpayers. It has established that the GAAR may only be applied within a definitive tax audit procedure and once the tax auditor has obtained a positive opinion from the Revision Committee (the specialised tax administration body, in charge of defining the application of the GAAR).
The Peruvian Legislator has also published a list of facts and circumstances, which could indicate that a tax avoidance scheme has been implemented, e.g. substance over form parameters, and thus, that the GAAR could apply. In the same line, the SUNAT has published a list of transactions and schemes that could suggest that a tax avoidance plan has taken place, which is not an exhaustive list.
However, all the efforts of the Peruvian Legislator have not been enough to guarantee the predictability of the SUNAT actions in this matter. The lack of tax decisions on the application of the GAAR makes even harder to assess the risks of its application. Hence, until there is significant case law regarding the application of the GAAR, the taxpayers and tax advisors have a significant challenge when assessing the risks of any tax planning that could be over a grey area.
The challenge is not only reduced to the application of the GAAR on the domestic tax legislation, but also on the tax treaties executed by Peru.
Colombia introduced its GAAR in 2012. However, it was substantially modified in 2016. Current regulations, particularly Article 869 of the Colombian Tax Code, provides that the tax authorities may re-characterise or reconfigure any operation or series of operations that constitute abuse for tax purposes and, consequently, disregard its effects.
To accomplish this, it may issue the corresponding administrative acts in which it proposes and assesses the taxes, interests and penalties. According to this rule, an operation or series of operations will be tax abusive if it involves the use or implementation of one or several artificial acts, without apparent economic and/or commercial purpose to obtain tax benefits. The conditions set forth by this rule are as follows:
Condition 1.Artificiality: An artificial act or transaction is that which lacks commercial and/or economic purpose. The circumstances that may give rise to an artificial act or transaction including the following:
The transaction is not reasonable from a commercial and economic perspective;
The transaction gives rise to a high tax benefit that is inconsistent with the risks undertaken by the taxpayer; and
The execution of a structurally correct legal act or business is apparent, but its content hides the true will of the parties.
Condition 2.Tax benefit: A tax benefit is understood as the alteration, defacement or modification of the tax effects that would otherwise be generated by one or more taxpayers or beneficial owners such as the elimination, reduction or deferral of the tax, the increase in the balance in favour of tax losses and the extension of tax benefits or exemptions.
In the case of a re-characterisation of the transaction, the tax office may impose the appropriate penalties (an inaccuracy penalty of 100% of the higher tax liability could be imposed), and demand payment of default interests.
In 2020 the interpretation and procedure for the Colombian GAAR were further developed by Resolution No .00004 of 2020. This regulation clarified the following:
The terms ‘tax evasion’ and ‘tax avoidance’ are defined as follows:
“Tax evasion is the action or omission by means of which the taxpayer hides the existing tax obligation from the tax administration.”
“Tax avoidance is the conduct by which the taxpayer, through different techniques or procedures, avoids the occurrence of an event that would give rise to a tax liability.”
Note that tax avoidance is not under the GAAR.
The burden of proof is on the tax office to demonstrate that a transaction is artificial, has not economic or commercial purpose and is aimed at obtaining a tax benefit.
The resolution allows the tax office to disregard entities that have been used or have participated, by decision of its partners, shareholders, directors, or administrators, within the abusive behaviours.
Since the corresponding regulation has been issued recently in Colombia, the implementation of the GAAR is rather new in Colombia.
Chile’s GAAR was introduced in the 2014 Tax Reform Act, and it took effect on September 30 2015 – one year after the law was published in Chile’s Official Gazette. It adds on to several specific anti-avoidance rules (SAAR) throughout the Chilean tax legislation.
Chile´s GAAR is based on the economic reality principle, also known as ‘substance over form’ and allows the tax courts – under certain circumstances and after a specific request from the SII (Servicio de Impuestos Internos) – to disregard the ‘form’ of a transaction and have it re-characterised thereby assessing the tax effects arising from its ‘true nature (substance)’.
For Chile’s GAAR to operate, the SII must claim either ‘abuse’ or ‘simulation’ in a given transaction or series of transactions (a disjunctive test). Both ‘abuse’ and ‘simulation’ are legally defined concepts.
Only the SII’s National Director may file a GAAR claim alleging that there is either ‘abuse’ or ‘simulation’ in a given transaction or series of transactions. This claim must be filed before the Tax Court, which has the exclusive ability to hear and decide cases of alleged ‘abuse’ or ‘simulation’ for GAAR purposes. This is a tax dispute resolution process, where the taxpayer has an opportunity to oppose the SII allegations and deliver evidence. The initial burden of proof lies with the SII (claimer of the ‘abuse’ or ‘simulation’).
Before the SII files the GAAR claim with the Tax Court, the SII must issue a tax notice (Citación) addressed to the taxpayer. The taxpayer has a one-month term to answer, renewable for one additional month. Once this pre-judicial, administrative review stage is finished, the SII may file the GAAR claim with the Tax Court within nine months from the date of the taxpayer’s answer to the notice (or the answer period expiring).
When a Tax Court decides that there is abuse or simulation in a given case, it must establish:
The specific transaction being abused or simulated;
Assess the tax deficiencies owing on the true facts;
Apply legal recharges – inflation adjustment, penalty interest and fines; and
Direct the SII to issue the tax assessment or tax collection order against the taxpayer.
The Tax Court decision may be appealed before the Court of Appeals (second round) and thereafter before the Supreme Court (third, and final round).
When a legal entity or individual has allegedly participated in the design or planning of transactions, contracts or dealings qualified as ‘abusive’ or ‘simulation’, the SII may request to the Tax Court (and the Tax Court may decide) that such a taxpayer (including its tax advisors) is subject to a (discretionary) penalty of up to 100% of all taxes avoided, with a cap of 100 annual tax units ($90,000 approximately).
If the infringement was made by a legal person, the fine shall apply to board members or legal representatives of the entity if they have neglected their duties of direction and supervision.
Chile’s GAAR explicitly acknowledges general and specific limitations of the SII´s tax audit activity. General limitations include the ‘good faith’ presumption, the ‘free will’ and ‘freedom of contract’ principles. Specific limitations include a rule whereby if a transaction is subject to a SAAR, this SAAR overrides the GAAR.
The Venezuelan GAAR has been in force since 1999. The Venezuelan Tax Administration (SENIAT) is authorised to examine the economic substance of transactions based upon the general anti-abuse provision of the Tax Code. Such provision permits the SENIAT to disallow the incorporation of companies, the entering into agreements and, in general, the adoption of legal forms and procedures, when these are evidently inappropriate for the economic reality pursued by the taxpayer and this results in a decrease in tax liabilities.
The Political-Administrative Chamber of the Supreme Court has ruled, however, that the abuse of the forms theory may not be enforced based on presumptions. Rather, the SENIAT must provide proof that irrefutably evidences that the fundamental purpose of the taxpayer was to avoid the tax rule and adopt a specific legal form evidently unsuitable in view of the underlying economic reality (Decision No. 1.539 of October 18 2009, Agencia Operadora La Ceiba, S.A. v. Treasury; Decision No. 957 of July 16 2002, Organización Sarela, C.A. v. Treasury; Decision No. 1,486 of August 14 2007, Publitotal 994 Servicios de Publicidad, S.A. v. Treasury; Decision No. 919 of August 6 2008, Policlínica La Arboleda, C.A. v. Treasury; and Decision No. 1,071 of July 15 2009, Proagro, C.A. v. Treasury).
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Baker McKenzie, Mexico
T: + 52 55 5279 2928
Roberto Cardona-Zapata is a tax partner and the leader in the public/administrative law practice in Mexico. His practice focusses on tax planning, tax litigation, administrative law, contracting with government, administrative procedures and constitutional matters.
Roberto has published several articles on tax and administrative opportunities for Baker McKenzie and specialised magazines. He has also been an exhibitor at seminars and conferences sponsored by the Firm.
Roberto has a master’s degree in tax law from the Universidad Panamericana and an International Tax Law Degree from Georgetown University.
Rolando Gastón Ramirez
Baker McKenzie, Peru
T: +51 1 618 854
Rolando Gastón Ramirez is a partner at Baker McKenzie, Peru. He advises corporate and institutional clients on tax solutions for their business and financial transactions and on tax matters of major company mergers and takeover processes.
Rolando advises on wealth planning matters, tax procedures with the National Tax Administration, the Municipal Tax Administration and the judiciary. He acts as a consultant on tax matters related to capital markets transactions, and to the mining, oil and gas, retail and construction industries.
Rolando hold a LLM from New York University.
Baker McKenzie, Colombia
T: +57 1 634 1557
Ciro Meza is a partner at Baker McKenzie, Colombia. He has advised companies from the oil and gas, pharmaceutical, IT, consumer business, and mining sectors in Colombia.
Ciro’s areas of practice include tax planning, tax advisory and tax litigation. He has also been involved in the restructuring of several companies and in various mergers and acquisitions which have involved local and international jurisdictions.
Ciro obtained a LLM in international and comparative law from Tulane University in New Orleans.
Baker McKenzie, Chile
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Alberto Maturana is a partner at Baker McKenzie, Chile. He advises corporations and individuals from a broad spectrum of industries on tax and corporate law matters.
Alberto is proficient in business structuring, foreign inbound/outbound investment, offshore intercompany transactions, as well as tax and estate planning. In addition, he counsels on mergers and acquisitions and matters involving contracts.
Alberto has a MBA from the Pontificia University Catolica de Chile.
Baker McKenzie, Venezuela
T: +58 212 276 5093
Ronald Evans is a partner at Baker McKenzie, Venezuela and head of the tax department. He advises on the taxation of cross-border transactions and investments, including direct foreign investment, joint ventures, mergers and acquisitions, restructurings, TP, permanent establishments, tax treaties, wealth management and dispute resolution.
Ronald has extensive litigation experience in Venezuelan tax courts and the Venezuelan Supreme Court, and he has dealt with some of the largest assessments made by the Venezuelan tax administration.
Ronald has a LLM in tax from Harvard University as well as a graduate of Harvard’s International Tax Programme.