Tax Controversy 2024 Comparisons

Tax controversies in Chile usually are the consequence of tax audits, tax assessments arising from tax audits, and tax refund requests.

Corporate income tax, due to its complexity and extensive regulation, is the primary source of tax controversies and holds the greatest financial significance. Over the last decade, litigation related to property taxes and mining royalty cases has seen an increase. Although Value Added Tax (VAT) accounts for nearly half of Chile’s tax revenue, and is sometimes subject to litigation, VAT cases are only prevalent in the tax fraud area.

The risk of tax controversies can be reduced by seeking expert advice early in the audit process. Once the audit is complete, the chances of avoiding tax litigation significantly diminish.

A general anti-avoidance rule has been in force since 2015. There are also numerous specific anti-avoidance provisions, granting significant powers to tax authorities. Additionally, the Chilean tax authorities closely follow BEPS (Base Erosion and Profit Shifting) and other international efforts to curb tax avoidance, and their principles are routinely incorporated into tax assessments even in the absence of specific legislation.

In Chile, taxpayers are not required to pay disputed tax amounts as a precondition for contesting a tax assessment. The “solve et repete” rule does not apply.

The risk of a tax audit is influenced, at least in part, by the algorithms employed by the tax authority. These algorithms consider various factors, including potential discrepancies between self-reported data and information provided by third parties, as well as compliance or non-compliance with formal tax obligations. However, major taxpayers and large-scale transactions are routinely subjected to audits.

According to Article 59 of the Tax Code, tax audits should be completed within nine months from the date all requested information is provided by the taxpayer. In specific and more complex cases, an extended period of up to 12 months, or even 24 months is permissible. Generally, audits are not allowed to start more than three years after the due date of the relevant tax. However, if taxes were not filed or were deliberately misreported, the allowable period for initiating an audit extends to six years.

Currently, most tax audits are conducted remotely since documents and data are readily accessible electronically. Tax auditors either open a special audit file on the taxpayer’s personal web page within the tax authority’s domain or files are sent to the tax auditor via email.

Net operating losses incurred by corporate taxpayers consistently draw the attention of tax auditors. Similarly, transactions that may generate capital gains, corporate reorganisations, and financial expenses are also frequently audited. Requests for tax refunds almost invariably trigger a tax audit.

Although cross-border exchanges of information are increasingly common, the authors have found that tax audits are more frequently triggered by leaks of tax information.

Strategically, during a tax audit it is crucial to: (i) comprehend the specific rights and obligations associated with the audit procedure at hand; (ii) identify which pieces of information are pertinent to the audit process; (iii) provide a targeted analysis of this tax information, steering clear of submitting “bulk information”; (iv) consider your “audience” or the stakeholders involved; and (v) refrain from delving into areas not specifically requested in the audit.

When tax authorities issue a tax assessment notification, taxpayers have the option to engage in an administrative claim phase, known as RAV, conducted before a specialised tax department (DEPAT). Despite DEPAT being part of the same tax unit that issued the tax assessment, technically it must evaluate the merits of the case. The RAV must be initiated through the tax agency’s website within 30 days, excluding Saturdays, Sundays, and holidays. The process includes at least one hearing where the taxpayer can present their case, and a written report is requested from the unit that issued the assessment. It is common for taxpayers to communicate with the tax auditor via email about the contested issues during this phase. If DEPAT’s decision is considered contrary to tax laws or directives from the National Director of the tax agency, the taxpayer can file a special hierarchical petition (RJ) with the National Director.

The DEPAT has 90 days, excluding Saturdays, Sundays, and holidays, to decide on the merits of the RAV filed by the taxpayer. If no decision is reached within this period, the RAV is legally considered to be fully rejected.

Generally, judicial tax litigation begins when a taxpayer files a claim against a tax assessment, or another formal written resolution issued by the tax administration. This filing is made to the relevant territorial tax and customs court (TTA), either through paper submission or via the TTA’s website. The tax agency initiates tax litigation in two scenarios: (i) when it seeks to apply the general anti-avoidance rule, and (ii) when it aims to access information protected by bank secrecy laws.

The stages of a tax court procedure normally include the following:

• Discussion Phase – this begins with the tax claim submitted by the taxpayer and is followed by a response from the tax agency.
• Conciliation Phase – this stage involves one or more hearings before the tax judge, aimed at exploring early settlement possibilities.
• Evidentiary Phase – both the taxpayer and the tax agency submit their evidence (within 20 days), followed by commentary on the submitted evidence.
• Decision Phase – this final stage may include additional requests from the tax judge to facilitate a decision, culminating in the tax judge’s final ruling.

When accounting records are mandated by law, they, along with their supporting documentation, are considered the most crucial evidence in tax cases. Both public and private documents also hold significant weight and can supersede accounting records if they clearly demonstrate an accounting error or omission. In certain instances, witness testimony and the tax court’s personal inspection can be decisive. Additionally, the cross-examination of witnesses presented by the opposing party may play a critical role. All evidence must be submitted before the conclusion of the evidentiary period.

In tax litigation proceedings, theoretically, both parties are required to provide evidence for their respective claims due to a special provision introduced to Article 132 of the Tax Code in 2020. However, Article 21 of the Tax Code stipulates that the burden of proof rests with the taxpayer to demonstrate the accuracy and truthfulness of the information, operations, and amounts declared in their tax returns. While most legal experts advocate for giving precedence to Article 132 over Article 21 in tax court proceedings, the courts’ responses in many cases leave the burden of proof to the taxpayer.

In tax court proceedings concerning tax offenses, the burden of proof falls on the tax agency. However, it is often observed that if the taxpayer fails to present a clear defense, or does not appear at all, both the tax courts and courts of appeal tend to uphold the tax agency’s claims with minimal evidence.

When the National Director of the tax agency files criminal charges for tax fraud or tax-related crimes, these cases are adjudicated in the criminal courts. This transition results in a significant shift of the burden of proof to the prosecutor’s office, where all the protections and guarantees of criminal procedure apply.

The timing for presenting documents, evidence, and legal arguments often depends on the strategic approach being pursued. When a settlement appears likely, early production of evidence and arguments can be advantageous. Even when a settlement seems improbable, attempting to negotiate one is often beneficial. The submission of expert reports is particularly valuable in addressing complex factual issues, such as demonstrating tax calculations that depend on multiple factors or extensive documentation. Submitting expert reports on intricate legal matters can also prove advantageous. It is crucial to maintain the tax discussion within defined boundaries to prevent the case from sprawling into multiple, potentially unmanageable issues. Although technically taxpayers can pay the disputed tax and still pursue litigation (requesting a refund later), this option is seldom utilised.

Jurisprudence from both domestic and international sources, as well as doctrinal writings, are commonly presented in complex cases, particularly those involving international elements. Additionally, international guidelines such as BEPS are frequently cited, especially by the tax agency. This is particularly common in litigation concerning double tax treaties, transfer pricing, or tax avoidance. German and Spanish legal doctrines are also routinely considered by the courts in tax fraud cases.

Civil tax procedures are typically litigated before the tax courts (TTA), which consist of a single tax judge. The TTA’s final decision can be appealed to the corresponding Court of Appeals, where a panel of three judges renders a decision. Additionally, a cassation appeal based on either procedural or substantive grounds can be made to the Supreme Court. Apart from the final decision, the following TTA decisions are also appealable:

• Preliminary decisions that either terminate the procedure or prevent it from proceeding.
• The decision identifying the points of evidence.
• Decisions on granting or denying protective measures requested by the tax agency.

The tax appeal procedure primarily involves submitting the appeal and presenting oral arguments before the panel of the Court of Appeals by both the taxpayer and the tax agency. In some instances, evidence may also be submitted during the appeals process. The court has the authority to request additional measures to aid in making its decision, which can include taking testimony from a witness.

The decision at the first instance is rendered by a tax judge of the corresponding Tax Court (TTA), appointed by the President of the Republic from a shortlist of three candidates provided by the corresponding Court of Appeals. This shortlist is selected by the Court of Appeals from a list of 5 to 10 candidates proposed by the Senior Public Management Agency (“Consejo de Alta Dirección Pública”).

At the Court of Appeals level, decisions are made by a three-judge panel. This panel consists of (i) ministers of the Court of Appeals, appointed by the President of the Republic from three nominees suggested by the Supreme Court, or (ii) “acting attorneys” (“abogados integrantes”), also appointed by the President from a list provided by the Supreme Court. No panel may include more than one acting attorney.

At the Supreme Court level, decisions are made by a five-member panel comprised of (i) ministers of the Supreme Court or (ii) acting attorneys of the Supreme Court.

Supreme Court ministers are appointed by the President of the Republic from three candidates proposed by the Supreme Court, with the appointment requiring approval by two-thirds of the Senate. Acting attorneys are selected by the President from a list provided by the Supreme Court.

Informal negotiations between taxpayers and tax authorities have long been a common practice in Chile, particularly during tax audits. Typically, these negotiations are expedited and involve trade-offs, such as one party conceding three points in exchange for gaining two more valuable concessions.

Historically, such informal negotiations also occurred in the context of tax court cases. However, due to the lack of formal legal frameworks, these negotiations often took unconventional forms.

To address this, in 2017, a formal conciliation procedure was introduced into the Tax Code. This reform aimed to formalise these practices, create more opportunities for agreement, and move beyond simple bargaining exercises by ensuring solutions are founded on clear conceptual bases. Nevertheless, certain issues, like tax fraud and avoidance, are explicitly excluded from conciliation.

In 2020, further reforms were implemented, allowing taxpayers to request a settlement directly with the National Director of the tax authority to potentially conclude a court dispute.

In cases of tax fraud, although ADR mechanisms typically found in the Tax Court do not apply, standard ADR methods used in criminal proceedings – such as conditional suspension of the procedure and compensatory agreements – are available.

Tax arbitration is not allowed in Chile.

Theoretically, the conciliation process is facilitated by the tax judge, who can propose terms and express opinions on disputed issues without compromising impartiality. However, in practice, the responsibility often shifts to the taxpayer, who presents one or more potential solutions to the tax agency for the approval of the Regional Director.

Theoretically, the settlement process is designed as a “one-shot” opportunity, where the taxpayer proposes terms directly to the National Director, who must accept or reject them in their entirety. However, in practice, there is usually an informal dialogue before the formal presentation of the settlement terms.

In the context of criminal procedures, ADR officially takes place during formal court hearings. Nonetheless, these hearings are typically preceded by informal discussions between the parties.

Under the conciliation and settlement procedures outlined in the Tax Code, agreements must be grounded in clear conceptual bases and cannot merely be discounts on potential tax liabilities. The tax agency has the authority to waive interest and penalties, either partially or entirely. This mechanism frequently enables parties to reach pragmatic agreements, particularly after protracted tax disputes where interest and penalties can significantly surpass the principal tax amount in dispute.

Advance information can be obtained through several methods:

• standard ruling requests, where one or more tax standards are either confirmed or rejected by the tax authority;
• special anti-tax avoidance ruling requests, which can be binding or non-binding based on how the taxpayer presents the case; and
• advance pricing agreements (APAs), where specific transfer pricing terms are formally negotiated and agreed upon by both the taxpayer and the tax agency.

In Chile, ADR mechanisms are widely applicable across various types of taxes and regardless of the amounts involved. However, tax conciliations and settlements are specifically prohibited in the following cases:

• tax avoidance;
• tax violations or infringements; and
• tax cases where the tax agency has initiated criminal actions against the perpetrators.

Since tax arbitration is not permitted, reaching agreements depends entirely on the parties’ capability to structure their agreements within the framework of the Tax Code, ensuring that the outcome is acceptable to both sides.

Advance pricing agreements (APAs) can be utilised to prevent transfer pricing conflicts but are not applicable for resolving existing transfer pricing assessments. Once a conflict has arisen,p conciliation and settlement are the only formal ADR mechanisms available for addressing such disputes.

In theory, simple underpayment of taxes should not automatically trigger the imposition of tax penalties, which ought to arise only from willful or negligent infringements. However, the tax agency commonly levies penalties in cases of underpayment, particularly concerning indirect and withholding taxes.

Infringements not related to tax under-payments are handled through a separate legal procedure contemplated in Articles 161 and 165 of the Tax Code.

In cases involving tax fraud or other tax-related crimes, the tax agency has the option to seek penalties through tax court proceedings of Article 161 of the Tax Code, or to initiate criminal charges, thus starting a formal criminal procedure in the criminal courts.

In theory, if a tax under-payment forms the basis of a criminal tax offense, the civil tax procedure should be terminated before a final decision is made on the criminal tax offense. Failing to do so risks penalising (either financially or with imprisonment) an alleged criminal tax offence related to an underpayment, while a subsequent civil tax procedure might determine that no taxes were actually due. However, the tax agency has successfully argued that all aspects of a tax fraud or tax crime case, including the determination of tax liability, can be adjudicated by the criminal courts.

Tax authorities routinely initiate administrative procedures for minor violations. When information suggests more serious violations, a special administrative investigation procedure (“recopilación de antecedentes”) is formally launched to assess whether criminal prosecution is warranted. Consequently, an administrative infringement process may escalate into a criminal tax case, which is a common occurrence.

Should the investigation conclude that serious tax fraud or a tax crime has occurred, the National Director of the tax agency has the option (i) to seek financial and administrative penalties through the procedure outlined in Article 161 of the Tax Code (ie, before the TTA) or (ii) to pursue both financial penalties and imprisonment by filing formal criminal charges under the standard criminal procedure (ie, before the criminal courts).

The stages of an administrative infringement process before the TTA are as follows:

• Discussion Phase – begins with the tax authority notifying the taxpayer of the tax infringement, followed by the taxpayer’s response and a subsequent reply from the tax authority.
• Evidentiary Phase – both the taxpayer and the tax agency submit and then comment on their respective evidence.
• Decision Phase – this final stage may include additional inquiries from the tax judge to aid decision-making, culminating in the tax judge’s final ruling.

The stages of a tax criminal case are as follows:

• The National Director of the tax agency presents criminal charges to the criminal judge (“Juez de Garantía”), which are then forwarded to the prosecutor’s office.
• The prosecutor’s office decides whether to drop the charges or formalise one or more charges against one or more respondents.
• Upon concluding the investigation, the prosecutor must decide whether to drop the charges or formally accuse the respondent(s) of one or more tax crimes initially identified by the National Director (but no others).
• If the prosecutor’s office decides not to accuse, the National Director may request the criminal judge to formally accuse one or more respondents.
• Once one or more individuals have been formally accused, a pre-trial hearing is initiated, where the respondent can present a defense and evidence is offered.
• If the respondent accepts the charges, a summary judgment is issued, avoiding an oral trial. Appeals to the summary judgment can be made to the Court of Appeals.
• If the respondent contests the charges, after the pre-trial hearing, an oral trial takes place before a Criminal Court (TOP), composed of three judges, to determine the applicability of the charges.
• The TOP’s decision can be challenged through an annulment request, where the Court of Appeals (or in some cases the Supreme Court), decides on the validity of the trial and/or decision.

In the administrative context, the reduction of potential fines is independent of the payment of the corresponding taxes. Conversely, in criminal proceedings, paying the owed taxes and penalties can have a favourable impact on the respondent’s case.

It is feasible to negotiate an agreement with the tax authorities to prevent a criminal tax trial. Additionally, a reparatory agreement (“acuerdo reparatorio”) can be reached with the tax agency, provided that at least 50% of the due taxes are paid. Furthermore, a conditional suspension of the criminal procedure is generally available for violations where the penalty does not exceed three years of imprisonment.

Criminal tax decisions made by the TOP can be contested via an annulment request, whereby the Court of Appeals – or in certain instances, the Supreme Court – reviews the validity of the trial and/or decision. If the TOP’s decision is declared null and void, a replacement decision (“sentencia de reemplazo”) may be issued, or a new trial may be conducted under a different panel of judges.

The authors do not know of any operations challenged under GAAR or SAAR rules to evolve into criminal cases.

The authors are not aware of any instances where the mechanism under double tax treaties to eliminate double taxation has been utilised. The formal instructions issued by the tax authority in this regard are very recent (Circular 13 of 2022 and 19 of 2023).

The authors are not aware of any cases where the General Anti-Avoidance Rule (GAAR) applied in cross-border situations governed by bilateral tax treaties has been contested in court. Conversely, the application of Specific Anti-Avoidance Rules (SAARs) is frequently challenged in court due to their varied application across different scenarios.

The authors anticipate that both the tax agency and the tax courts will increasingly prioritise the principles of substance over form, along with the principal purpose and business purpose tests. Notably, there have been some precedents in this area, (the most cited of which is the Coca-Cola Embonor case). Additionally, the first case involving GAAR was recently adjudicated by the TTA of Bio Bio on 19 March 2024.

There have been very few transfer pricing adjustments in Chile, making it challenging to discern any consistent patterns in this regard.

Informally, the authors have learned that a few advance pricing agreements (APAs) have successfully reached satisfactory conclusions, but do not have any details in this regard.

Most cross-border disputes currently being litigated involve issues such as withholding taxes, capital gains from the sale of assets located in Chile, capital gains from the sale of foreign assets with underlying Chilean assets, corporate restructuring, and challenges to tax-free reorganisations.

To mitigate such litigation, revenue ruling requests could be of help.

This is not applicable in Chile.

This is not applicable in Chile.

This is not applicable in Chile.

This is not applicable in Chile.

The authors are aware of the fact that Chile has been part of the MLI but are not aware of the details of the position that Chile has taken in this respect.

The authors are not aware of the existing policy in this respect.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

There are no fees required to be paid to the state or tax authorities simply for the privilege of engaging in litigation. However, if one party is completely defeated in court, the judge may order that party to pay the litigation costs.

There are no fees payable simply for the privilege of engaging in litigation.

The authors do not know of any cases in which a Chilean court has decided to request any sort of damages to a taxpayer who has faced a tax assessment declared null and void.

There are no court fees associated to the use of ADR mechanisms.

On 31 December 2023, there were 2,366 tax cases pending at the first instance (TTA). Their value is undisclosed, as tax cases are reserved.

The authors are not aware of the existence of this statistical information.

The statistics on outcomes in tax litigation are heavily influenced by various factors, including undefended cases and those that are withdrawn early. Despite these distortions, the available data show a significant advantage in favour of the tax authority.

The authors adhere to the following guidelines when managing tax litigation:

• Thoroughly analyse each aspect of the tax audit procedure to ensure compliance with all formalities and timing restrictions.
• Identify any contradictions between the positions taken by the tax agency during the audit process (or in previous audits) and those asserted in the tax assessment under litigation.
• Detect inconsistencies in the various positions the tax authority adopts during litigation.
• Scrutinise all factual assumptions made in the tax assessment to determine whether they can be substantiated or refuted.
• Review each legal interpretation presented in the tax assessment to assess the credibility and legitimacy of these legal stances or interpretations.
• Examine discussions on factual issues, ascertain which party bears the burden of proof for each, and choose how these factual matters can be demonstrated in court.
• Avoid addressing topics not directly relevant to the dispute.