What is Tax Avoidance?
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 not to 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. Employing the services of a professional accounting company can ensure you comply with all Chilean tax laws.
What does the Chilean Tax Reform Involve?
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 tax requirements and obligations.
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 etc.
- The modification in itself or its effects are considered as abuse or simulation.
What are the Penalties for Tax Evasion in Chile?
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.
The Importance of Understanding Chilean Tax Laws
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 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.
Chile is on of the most attractive comercial hubs in Latin America. Once you are established in Chile, Biz Latin Hub can provide professional and tailored accounting services to assist you in tributary management and compliance or general taxation advice. Reach out to Karl at [email protected] and see how we add value to your Chilean investment.