Tax avoidance refers to company practices aimed at reducing tax payments through the use of legal mechanisms and strategies. In other words, tax-avoidance is a way for companies to take advantage of loopholes in the law that result in them paying lower taxes. Nevertheless, even though these practices are pursuant to the law, they do not promote equity and justice; hence, they imply lower government tax revenues and undermine compliant taxpayers. It is important to not confuse tax avoidance with tax evasion. The latter is the use of illegal means to reduce the payment of taxes and is considered a crime. The recent Tax Reform in Chile (Law 20.780) introduced the first general anti-tax avoidance provision in this country’s legislation.
This provision’s objective is to ensure the correct enforcement of Chile’s tributary laws and promote their equitable distribution. To this end, Chilean legislation considers tax avoidance as operations carried out by companies that qualify as abuse of legal forms or simulation. The abuse of legal forms is understood as the total or partial avoidance of a taxable event, the reduction of the taxable base or tax obligation, or delaying or differing the event or transaction that gives rise to tax liability. On the other hand, simulation is concealing a taxable event or the nature of the elements that determine the event or transaction that gives rise to the tax obligation.
This rule entered into force on September 30, 2015, which means that it is applicable to all of the taxable events, groups and/or series, that take place as of said date. This also means that it is not applicable to any taxable event that occurred and ended prior to said date, provided it was not modified after that date. Therefore, it is applicable if:
- the taxable event is modified after the date stated above
- the modification significantly affects the tax effects, such as transforming the parties subject to the tax, the taxable event, rates, among others
- the modification in itself or its effects are considered as abuse or simulation.
If there is sufficient proof of tax-avoidance behavior, the director of the Internal Tax Service (SII, for its Spanish acronym) will request the Tax and Customs Courts to declare the existence of abuse of legal forms or simulation. These courts are the entities responsible for determining whether the anti-tax avoidance rules are applicable. The competent court will be chosen taking into account the taxpayer’s domicile. The new legislation establishes the following procedure:
- Once the SII makes the request, the Court will notify the taxpayer of the request
- Subsequently, evidence is presented of the abuse or simulation. In this stage, the SII has the burden of proof
- Lastly, the Tax Judge rules on the request
Chile’s anti-tax avoidance regulation does not establish penalties nor can it create new taxes, its only aim is to get taxpayers to pay the taxes they are supposed to pay. Notwithstanding, an abuse or simulation declaration may imply a fine equivalent to 100% of the taxes that were supposed to have been collected. This fine cannot exceed 100 Annual Tributary Units (UTA, for its Spanish acronym). According to the SSI, one UTA is equivalent to 539,460 Chilean Pesos.
It is very important for businesses to be up-to-date with their tributary and compliance obligations. On the one hand, tax avoidance is a very more common practice among companies in Chile; therefore, changes in the rules-of-the-game as a result of the Tax Reform implies companies need to review their behavior to make sure they are compliant. On the other hand, companies need to understand that consumers are demanding more transparency and accountability from businesses; hence, the appearance of or proven tax avoidance behavior may affect their sales negatively.
Finally, we take compliance very seriously and understands company’s needs. If your company is looking for guidance in tributary management and compliance, Chile Business Services expertise can help you to understand the tributary benefits offered by the Chilean government and make sure your complying with accounting and tributary legislation. We have the experience in Chilean back office processes will provide you with options, solutions, and strategies. Contact us at email@example.com