Tax Controversy 2021

Last Updated May 20, 2021

Chile

Law and Practice

Authors



Recabarren & Asociados specialises in the provision of high-quality tax consultancy services to clients seeking expert legal and tax advice. The firm advises companies and individuals at a national and international level, through highly specialised work teams that are able to respond to the individual needs of each client. The firm is made up of 30 experts in tax matters who counsel clients from widely different areas, such as retail, mining, family offices, real estate, infrastructure, and technology companies, among others. Recabarren & Asociados focuses exclusively on tax matters, such as tax examination processes, tax defence and litigation, tax planning for companies and individuals, business restructuring, consultancy for large and medium-sized companies, and advice for family businesses and HNWIs.

Disputes with the tax administration are usually initiated through the application of audit plans regarding tax assessments presented by taxpayers. Audit plans are previously designed by the tax administration in order to verify the correct fulfilment of tax obligations by taxpayers. 

Tax assessments have to reflect the economic facts correctly recorded by the taxpayer in their accounts, as well as the correct calculation of the applicable taxes.

These audit plans can be of two types.

  • Massive plans, which are designed for a huge number of taxpayers, and which are generally carried out with the support of computerised systems.
  • Selective processes, in which the tax administration divides taxpayers into groups and specifies the type of taxpayer, the tax to be audited, the tax administration's requirements, and tax risk issues. All of these are previously identified according to risk matrices. 

On the other hand, it is possible to initiate an audit process by making a request for the application of tax benefits, such as tax refunds.

Traditionally, the main taxes that generate tax controversies are those related to corporate tax and personal taxes, as well as sales tax or value added tax. 

However, the Tax Compliance Management Plan published by the Chilean Tax Administration in March 2021, emphasises preventative audits in order to verify the correct application of Real State Tax exemptions and franchises. All the above consider that a new tax is applicable to taxpayers who have properties with values higher than USD550,000.

In order to avoid tax controversies, it is important for taxpayers to take certain precautionary measures related to the application and natural interpretation of the rules. It is also important to keep records of operations that have taken place during the fiscal year. 

The recommendations are as follows.

  • Interpretation and application of tax rules. It is necessary for taxpayers to update their knowledge based on official instructions issued by the Chilean Tax Administration (CTA), since the criteria contained in these instructions will be compulsorily applied by tax auditors in the audit processes. It is possible that the criteria of the administration may contradict the doctrine generated by the Courts of Justice, in which case, this could be resolved in favour of the private party at the judicial stage, although there may be a risk at the review stage, in the event of contingencies with the CTA.
  • In many tax audits, the tax administration makes extensive background and information requests to the taxpayers in order to determine if their accounts and the taxes determined are in order. Therefore, it is necessary to keep the supporting documents, as well as provide them in an organised manner in the context of an audit process, explaining how such information can be used to confirm the tax declaration or the origin of the benefits or credits request by the taxpayer.
  • Finally, and given the internationalisation of tax law, the increasing co-operation between the different tax administrations, the signing of multiple treaties to avoid double taxation, and the application of common criteria aimed at attacking the phenomenon of tax avoidance and evasion, such as the OECD's Base Erosion and Profit Shifting (BEPS) project, it is the responsibility of taxpayers and their advisers to keep up to date with international criteria on relevant subjects.

Through the 2014 tax reform, the Chilean legislator already decided to implement the anti-avoidance guidelines and standards established in the BEPS project of the OECD, of which Chile is a member. Specifically, in that year, a general anti-avoidance rule was incorporated, with the purpose of enabling the administration to start collecting the taxes charged on the acts or businesses effectively entered into by taxpayers, beyond situations of simulation or abuse of the law. 

Although this new power of the tax authority has not been formally applied, and the Authority has not had to use the judicial process that enables it to initiate a tax controversy with a specific person or company, charging the application of the general anti-avoidance rule, there is consensus that it has played a dissuasive role, implying that both taxpayers and their advisers avoid engaging in tax planning that may be classified as evasive, reducing from that perspective tax controversies on the matter.

When the tax authority determines a tax difference, the taxpayer is not required to pay or guarantee the payment of taxes in order to file an administrative or judicial appeal. However, in the judicial appeal stage, the entity in charge of the collection of tax (General Treasury) can initiate a process to obtain the payment of the tax difference from the taxpayer. Nevertheless, it is possible to make a timely request that such process be suspended until there is a final decision by the courts resolving the tax dispute. 

It should be specified that in those cases where the tax assessment refers to certain taxes classified in Chile as withholding, surcharge or transfer (additional tax, workers' tax, etc) or sales tax, the charging document for the initiation of the collection procedure may be initiated immediately, without the need to present an administrative or judicial claim. The same situation applies for tax crimes and tax refunds or improper amounts.

In the context of a modern tax administration that maximises tax collection, the CTA has prioritised its actions, directing them towards developing audit processes with respect to those taxpayers that have a High Net Worth and Key Risk classification on possible relevant non-compliance tax matters, which represent 89% of total collection, according to the information provided by the tax agency.

On the other hand, and in the context of the massive auditing processes, especially the annual business tax declaration and personals declarations, the administration initiates auditing processes in respect of taxpayers whose information is inconsistent or differs from the information that has been collected by the tax authority from third parties, such as banks, financial institutions, public record-keepers and investment companies.

The tax administration may initiate an auditing process, recognising a general statute limitation period of three years, a lapse of time that starts from the date of tax payment that is the focus of the auditing process. However, this period may be extraordinarily extended to six years, when the taxpayer is obliged to present a tax declaration but has not done so, or when, having presented it, the tax declaration has been found to be intentionally false.

On the other hand, the auditing processes initiated by the tax authority are also temporarily limited to a fixed-term period.

General fixed-term period: nine months is established, with longer periods depending on the matter to be audited.

  • Twelve months for audits on transfer pricing, corporate reorganisation processes, and accounting of transactions between related companies, among others.
  • Eighteen months for audits on tax offences, application of the general anti-avoidance tax rule and requests for information from a foreign tax administration.

Once these periods have expired, without the administration having notified a request for information in accordance with the special attributions established in the tax regulations, or having determined any possible tax differences, the process must be certified as completed.

Traditionally, tax audits are carried out at the tax authority's offices, with respect to the information and background information formally requested directly from taxpayers, complemented with data and background information on the taxpayer being audited, which can be compiled from tax statements submitted by third parties. Although this information is provided in paper form, it is also possible to provide it in electronic form.

There is the possibility for the taxpayer to offer that the auditors visit the domiciles of the companies to carry out their audits, as well as for the tax office to request such a mechanism, in those cases where the volume of documentation or the nature of the activities to be reviewed makes it necessary.

Technological Tax Reforms

It should be noted that the numerous reforms of tax regulations in Chile have implemented electronic auditing processes, which means that the tax authority may request the taxpayer to give it telematics access to the technological systems in which they keep their accounting and backups.

Finally, the latest tax reforms also allow the creation of electronic files, in which the auditing processes are carried out and maintained, allowing this to be done remotely, from the beginning of the process by requesting background information, responding to it and communicating or notifying the decision adopted by the tax authority. This method has allowed the CTA to keep auditing taxpayers, regardless of the restrictions generated by the COVID-19 pandemic in the country.

In the context of the crisis generated by the COVID-19 pandemic, which will require an additional injection of resources from the State in addition to those originally budgeted, the Chilean Tax Administration focused on those areas that will have the greatest impact on the amounts to be collected, allowing it to ensure resources to support the State's operation.

Within this context, the Tax Compliance Management Plan for the year 2021 establishes the implementation of actions to ensure the tax compliance of different groups of taxpayers:

  • high net worth individuals (HNWIs) and their families;
  • multinational enterprise (MNE), from the perspective of compliance with the parameters established in the BEPS project, and to ensure that the profits generated by such companies in the national territory are taxed in Chile, avoiding the transfer of profits and the erosion of the tax base;
  • copper mining, aquaculture and public works concessionaires; and
  • business groups, in terms of their effective contribution to taxation, especially corporate taxation, verifying that their profits are not transferred to other tax jurisdictions with lower taxes.

The Chilean tax administration is an active member of the international tax community, being part of the Forum of Tax Administrations (FTA) of the OECD. In this context, Chile participates in the information transmission platform, Common Transmission System (CTS), as well as in the Convention on Mutual Administrative Assistance in Tax Matters ("MAAT Convention").

This has allowed an increase in the exchange of information and experience between the different tax administrations and the CTA, with the clear objective of promoting general tax compliance, which implies fighting tax fraud and evasion. However, these exchanges of information do not involve the performance of joint formal auditing tasks in the national territory.

It should be noted that in 2015, the Chilean Tax Administration, like others around the world, received information collected in the so-called "Falciani List", which involved HSBC bank account holders, including Chilean residents, who maintained accounts in that tax entity to avoid paying taxes. This information was duly processed by the CTA and led to audits of the taxpayers involved. A similar situation occurred in 2017 with the Chilean companies mentioned in the "Panama Papers" case. This task was carried out in co-ordination with the 37 foreign tax administrations that are part of the Joint International Task Force on Intelligence Sharing and Collaboration (JITSIC).

To avoid a legal dispute with the tax administration, which can determine tax differences or refuse the application of any benefit in favour of the taxpayer, it is advisable to consider the following recommendations.

  • Before anything else, analyse in the correct way the requests for information or background information made by the tax authority, so as to be clear about the purpose of the audit, which will be useful to determine the substantive arguments to be presented in the administrative defence. In this regard, the 2020 tax reform incorporated as a taxpayer's right that IRS actions must be founded, which implies that they must be clear and precise as to the reasons that motivate such actions.
  • The taxpayer must keep the backup files of all the operations that support the economic facts that are recorded in its accounting, and determine the tax treatment given to such operations.
  • The taxpayer must maintain direct contact with the administration, especially with the functionary in charge of the process, in order to answer any doubts or concerns that the functionary may have regarding the subject being audited. It is recommended that this contact is always made by the same person.
  • If the taxpayer does not have an internal staff of experts in auditing and tax controversy resolution processes, it should be advised from the beginning of the audit by an outside expert.
  • The taxpayer must make all the required background information available to the tax authority, providing it with an explanation as to the incidence that each document has to support the taxpayer's position before the possible imputation of the tax authority. The answer must be clear, avoiding ambiguities or positions that could be understood as interpretative in favour of one of the parties.

When the tax authority notifies a tax act or adjustment determining tax differences; or one that affects the payment of a tax or the elements that determine it; or charging taxes, the administrative appeal phase is optional. For this reason, the taxpayer may freely choose, in accordance with the legal deadlines, between initiating an administrative procedure before the tax authority itself, or taking legal action before the courts specialised in tax matters.

Administrative Tax Procedure

Tax declaration

The administrative tax procedure in Chile is the following. Once the taxpayer presents its tax declaration, the tax authority has, as a general rule, a period of three years to start any auditing procedures on such declarations. In the exercise of these faculties, the tax authority may request background information and answers from taxpayers in order to present a declaration or to correct, clarify, extend or confirm a previous one. Within the legal deadlines established for carrying out the review process, the tax authority may close the referred procedure by issuing the corresponding administrative act, being able, in such case, to validate the taxpayer's return, or determine tax differences, or modify the elements used to determine the return.

Administrative appeal processes

Once the taxpayer has been notified of the referred tax act or assessment, they may file an administrative appeal called a "Voluntary Administrative Reposition" (VAR) within 30 days before the tax authority. The tax authority has 90 days to resolve the appeal. If the tax authority does not notify the resolution ruling on the administrative appeal within the 90-day period, the appeal will be considered to be rejected, and "negative silence" will operate, in other words, it is understood that all the taxpayer's arguments have been rejected. Against the resolution that resolves the VAR, the taxpayer may exercise another administrative appeal called a "Hierarchical Recourse" (HR), which must be heard and resolved by the national director of the Chilean Tax Administration. The deadline to submit this appeal is five days, and the tax authority has a period of 30 days to resolve it. No appeal may be initiated against this latter decision. It is also worth mentioning that, with the presentation of the above-mentioned administrative appeals, the legal term to exercise legal actions before the courts specialised in tax matters is suspended.

The CTA has fixed-term periods to resolve administrative claims presented by taxpayers. Where the administrative authority does not resolve a VAR appeal within 90 days, the latter is understood to be rejected, operating as negative silence or a tacit negative decision (see 3.1 Administrative Claim Phase). Likewise, as indicated, the taxpayer may file a "Hierarchical Recourse" with the director of the tax authority in the event of obtaining an unfavourable resolution in its VAR appeal. 

Tax litigation is initiated by presenting a claim (lawsuit) before the courts specialised in tax matters, called the Tax and Customs Court. These judicial actions can only be exercised if the taxpayer has been notified by the tax authority of a tax act or adjustment, determining tax differences, or collecting taxes, among other acts that are the object of a tax claim.

Once the tax claim is filed at the specialised tax court, and the claim is accepted to be processed, the counterpart (the tax authority) must answer the claim in a term of 20 days. Once the claim has been answered, the court will call the two parties to a conciliation audience. If the parties fail to reconcile or do not reach an agreement, the judge will issue a decision accepting the case for a probation period. The latter decision may be appealed by both parties. Once the probation period has begun, it will have a 20-day duration, in which the parties must present all the evidence (documentary and testimonial) to demonstrate their respective positions. Once the period of probation has expired, within the following 10 days, the parties may present in writing any observations regarding the evidence presented. At this stage, the court may, on its own motion or at the request of a party, once again call the parties to a conciliation audience. If the conciliation fails, whether or not there are any proceedings pending, the court shall call the parties to hear the judgment. Once the sentence has been pronounced by the judge of first instance, both parties may file an appeal, which will be heard and resolved by the respective Court of Appeals (see 5. Judicial Litigation: Appeals).

In a tax litigation, evidence is everything. Therefore, if the evidence is clear and properly presented before the court, there is a strong possibility that the court will invalidate the claimed act. 

Likewise, in complex technical cases or where an abundance of evidence must be considered, expert reports play a fundamental role in supporting the jurisdictional work. 

The documents may be provided together with the presentation of the claim, or during the evidential period. 

Testimonial evidence, on the other hand, must be submitted during the evidential period. 

Official documents, expert reports and other evidentiary procedures must be requested during the evidential period.

As a general rule, in Chilean law, it is the one who alleges the facts who must prove them. With the tax reform of February 2020, the law specified that, in civil tax litigation, each party must prove its respective claims in the process. Likewise, evidence in tax litigation is guaranteed in wide terms, admitting official letters, expert reports, evidentiary proceedings, and any other evidence capable of producing certainty.

On the other hand, in criminal tax litigation, the accuser is the one who must accredit or prove the alleged facts, while the accused may submit evidence to dispute the alleged facts. 

The strategic options to be taken in a tax litigation will depend on the particular circumstances of each tax case, the legislation in force at the time of the declared tax, and previous court decisions in cases with similar characteristics, among others. It is highly important for the taxpayer to have the background information that demonstrates the situation that is disputed by the tax administration. 

Also, the judicialisation of the case should be analysed from an economic perspective, since the implication is that the litigation will be in process for a long time, and in case of an unfavourable decision, the amount pending will increase due to the charging of interest readjustment and fines.

From another point of view, a strategy must consider the consequences that may impact on the tax result of the subsequent year, in order to defend the client's interests. 

Another strategy that is considered is to pay the tax debt, even when it is in tax litigation. This is because, although the legislation allows the tax debt to be suspended during the judicial process of the litigation, the amount owed will increase due to the accrual of interest and readjustment of the debt for the time that the debt is suspended. In this way, in the event that the tax debt is considered to be paid, the amount owed will be limited to the actual payment, and, in the event that a favourable judicial result is obtained, the tax authorities will have to return the amount with the pertinent readjustments. 

It should be noted that it is even possible to consider the payment of the taxes due before initiating the judicial phase, since the legislation allows only a short term for the written presentation of the tax claim to the specialised courts. The referred payment will have the effect of extending this 90-day term, and this payment must always be made before the expiry of the original term. This last option is convenient in cases of high complexity.

In Chilean law, judgments pronounced by the High Courts of Justice do not oblige other judges, since they have a relative effect. However, the jurisprudence of the specialised courts, as well as that emanating from the courts in tax matters, is very relevant and will be taken into consideration by the judges at the time of resolving tax litigation. 

Similarly, international guidelines are also relevant in Chile, given that, depending on the matter under discussion, judges refer to international standards in order to support their decision regarding the tax controversy submitted to them.

The system for appealing tax disputes consists of two instances, a first instance that corresponds to the specialised and independent courts of the tax administration, and a second instance that corresponds to the respective Courts of Appeal. The second instance has the power of reviewing the first instance decision. 

The Court of Appeals case assignment system is related to the territorial location of the specialised court that resolved the controversy in the first instance.

Finally, the judicial decisions adopted by the Courts of Appeals may be subject to a recourse under strict law, called a "cassation appeal", which will be heard and resolved by the Supreme Court, Chile's highest national court. Under a cassation appeal, the Supreme Court will verify whether or not the judicial decisions adopted by the judges of the instance have infringed in any way the legal rules that were used to resolve the case. 

Specialised Court

Once the appeal has been presented to the specialised court, they must decide whether it complies with the formal requirements of the law and whether it was presented within the corresponding time limit. If the appeal is not granted, an extraordinary appeal may be filed, which will be heard by the respective Court of Appeal. Once the appeal has been admitted, the specialised court must send the entire record of the case to the respective Court of Appeal.

Court of Appeal

Once the Court of Appeal has received the appeal, it shall issue a certificate stating that the appeal has been received, and an entry number shall be assigned to it. After that, the Court of Appeal must examine the appeal presented in the same terms as the specialised court. In case of declaring it inadmissible, a special appeal can be presented, which is resolved by the Court of Appeal itself.

In the second instance, the parties may submit additional evidence, which does not imply that there is an additional evidentiary term, but is an opportunity to incorporate more background information that was not included in the first instance decision, due to the reviewing nature of the Court of Appeals. 

Finally, the hearing is held, where the parties have a maximum of 30 minutes to present their arguments in the form of an oral presentation. Once the arguments of the parties have been heard by the judges of the Court of Appeal, they will issue the corresponding second instance judgment, which may modify (revoke) the appealed judgment or confirm it.

Supreme Court

Regarding the procedure in the Supreme Court, the appeal is filed in the Court of Appeals that issued the second instance judgment, which verifies that it has been filed within the deadline. Once it has been submitted to the Supreme Court, it is assigned an entry number and the formal elements of the appeal, as well as the substantive elements, are examined. 

If the appeal is declared admissible, a hearing audience will be called, in which the parties' arguments will be heard, and a replacement sentence will be dictated, either deciding that there was a violation of legal norms and that this infraction substantially influenced the resolution of the dispute, or confirming the decision of the Court of Appeals.

The tax and customs courts are tribunals specialised in resolving tax and customs matters. They are special tribunals, independent of the judicial system, and their judges must be lawyers. 

The judges of the tax and customs tribunals are appointed by the president of the republic from a list of three persons proposed by the respective Court of Appeal.

The Courts of Appeals correspond to a court that is part of the judicial system and are distributed according to the regions into which Chile is territorially divided (there are 17 Courts of Appeals, one for each region, with the exception of the Metropolitan Region which has two), and each of the Courts of Appeals is distributed into chambers, which are composed of three judges. Only the Santiago Court of Appeals has a specialised chamber for tax matters.

The judges are appointed by the president of the republic at the proposal of the Supreme Court. 

The Supreme Court is composed of 21 members, 16 of whom are judges who have served at different levels of the judicial system and five of whom are not members of the judicial system. 

The judges are appointed by the president of the republic with the agreement of the Senate, from a list of five persons with prestigious academic and professional backgrounds.

Through the 2020 Tax Reform, alternative dispute resolution mechanisms have acquired special relevance, as previously, there was no effective method that could be used by the parties to a judicial tax dispute, even when there was agreement between them.  

In this context, the 2020 Tax Reform established the following: 

  • total or partial out-of-court settlement, by which the taxpayer proposes directly to the CTA certain bases of agreement, in order to bring the pending litigation to an early end;  
  • transitional out-of-court settlement, in force for two years, until February 2022, according to which, at the taxpayer's request, the conflict will be ended by means of payment of the adjusted taxes, with the tax authorities providing in exchange a total remission of the interest and penalties that may have accrued; and 
  • either party can request a new conciliation hearing during a judicial process in the first instance. 

Regarding out-of-court settlement, the taxpayer must submit a written presentation with the terms of the agreement to the CTA, for the national director of the CTA to approve or reject. If it is accepted, it must be presented to the specialised court for approval.  

On the other hand, the out-of-court transitory settlement must be initiated by means of a presentation to be made by the taxpayer on the tax administration's website, and must comply, among other things, with offering a sufficient guarantee to secure the payment of the total amount of the readjusted debt.  

Once these requirements have been verified, a resolution will be issued, which will be submitted to the court hearing the pending legal action. Finally, a certificate will be issued which will put an end to the legal dispute. 

With respect to conciliation, either party may ask the specialised court to call for a new conciliation audience. The judge must propose the terms for a settlement.  

Although there is no controversy mechanism aimed to reduce penalties, a condonation of penalties and interests generated (not including taxes or readjustment) has been defined as a state policy. However, it is necessary that the taxpayer complies with certain requirements, for example, that they are not on the exclusion list, which includes taxpayers who are under investigation for tax crimes. 

Regarding dispute avoidance mechanisms, taxpayers that have an interest in transactions that may be considered as a tax avoidance from the perspective of the general anti-avoidance rule, have the option to request a formal pronouncement from the CTA as to whether the operation corresponds to a tax avoidance activity or not. This CTA ruling is binding for the administration. Also, the CTA maintains a list of Tax Avoidance Schemes.  

There is no other method of dispute resolution than those mentioned in 3.1 Administrative Claim Phase and 4.1 Initiation of Judicial Tax Litigation. In the case of dispute resolution by means of a tax claim, the forms of ADR mentioned under 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction and 6.2 Settlement of Tax Disputes by Means of ADR can also be used. 

Chilean regulations recognise the possibility for taxpayers that make transactions with related parties to propose to the CTA the signing of an advance pricing agreement (APA), which will refer to the determination of the normal market price, value or profitability of such transactions. Other tax administrations may also participate. 

As long as the formally signed agreement is in force, the CTA may not determine transfer pricing tax differences in the transactions covered by it, provided that the prices, values or returns have been established or declared by the taxpayer in accordance with the terms of the agreement. 

In Chile, research proceedings for tax crimes can only be initiated by the presentation of a criminal action by the national director of the CTA. Even though this is a power that has been criticised, as the Public Prosecutor's Office and prosecutors are not free to investigate, this situation has been maintained to the present day. 

In general, in order to decide the prosecution, the CTA gathers the background information, on the merits of which it adopts a well-founded position on the possible commission of an offence. 

It should be noted that the collection of taxes evaded by the taxpayer will be charged by the tax authority, independently of whether or not an investigation is initiated for the crime. 

The most common tax crimes in Chile correspond to those in which taxpayers use tax credits or benefits improperly, or when they declare tax returns omitting income, or obtain tax refunds that are not due to them. 

In Chile, the application of the general anti-avoidance rule (GAAR) prevents the conduct from being classified as unlawful from a criminal perspective, corresponding to a case of exclusion from this rule that attacks avoidance and not evasion. 

In the event of the commission of a tax crime, the tax administration may initiate civil proceedings, with the objective of collecting the taxes that have been fraudulently evaded by the taxpayer, and criminal proceedings, pursuing the application of the pecuniary and criminal sanction that the criminal tax type establishes. 

These processes are different and independent. However, the determination of the evaded tax that will be collected in the civil process has transcendence over the criminal field, since it translates into the fiscal damage generated by the evader. 

While the main objective of the tax administration is to ensure the tax compliance of taxpayers, determining differences if they exist, the CTA also proceeds with criminal prosecutions. 

In order to determine on a well-founded basis which cases will be subject to criminal prosecution, the tax administration carries out a prior information compilation process. 

The parameters considered in order to obtain a criminal sentence are mainly related to: 

  • the amount of tax damage generated by the taxpayer's conduct; 
  • the exemplary effect of the accusation or complaint; 
  • possible reoffending; and 
  • the quality of the evidence compiled. 

It should be noted that the decision not to pursue a criminal proceeding and only recover the taxes may be cancelled at any time, and criminal proceedings may be initiated, as long as the statute of limitations for such action has not expired. 

Once a denunciation or complaint is presented for a tax crime, the investigation is carried out by the Public Prosecutor's Office, as an autonomous institution, in charge of compiling the background information in order to conclude whether the acts may constitute a crime. 

In the event that the investigation generates sufficient merit, the investigation will be formalised at the competent criminal court, at which stage, preventative measures can be requested, such as house arrest, prohibition to leave the country, or prison. 

Finally, there is the possibility that the determination of the existence of the crime and the application of sanctions may be carried out in the same Guarantee Court, using simplified procedures, or it may be referred to the Criminal Court, which will hear the background of the investigation in a complex and extensive criminal procedure.  

In Chile, the prison penalties established in tax crimes are applied to managers, administrators or those who perform such work, but it must be demonstrated that they have participated directly and immediately in the acts that constitute the tax crime. 

In criminal matters, Chilean tax legislation establishes possibilities for the reduction of a penalty restricting freedom in the event of possible payments or credits with respect to the tax differences determined. This means that the payment of the tax due will be an attenuating circumstance of responsibility when there is a careful reparation of the infringement by the convicted taxpayer. 

Chilean legislation establishes that the CTA shall be considered as a victim in criminal proceedings, and shall therefore act in such capacity. This allows the tax administration to adopt alternative solutions with the taxpayer, such as, reparatory agreements. In this special case, the tax regulations establish the following requirements for its conclusion: 

  • payment of an amount not less than the pecuniary penalty; and 
  • payment of the tax due and the accrued adjustments and interest, without being eligible for remissions of any kind. 

At the same time, and without the intervention of the tax administration, it is possible for the Public Prosecutor's Office and the taxpayer being prosecuted to apply for a conditional suspension of the proceedings, in which case, certain requirements must be satisfied, including, in some cases, the approval of the regional prosecutor. 

Depending on the criminal procedure applied to resolve the tax crime complaint filed by the tax administration, there are two possible recourses to be presented by the affected party. 

  • Recourse for annulment, which is presented directly to the Oral Criminal Tribunal that issued the impugned sentence. This recourse is generally resolved by the competent Court of Appeal, although in some cases, depending on the reasons for the recourse, it will be heard by the Supreme Court. (Chapter 5) 
  • Appeals against sentences issued by the Court of Guarantee in abbreviated proceedings. These appeals are resolved by the competent Court of Appeal. (Chapter 5) 

In Chile, the existence of a GAAR regulation has a relatively recent origin, specifically in 2014 with the tax reforms of that year. To this day, there have been no legal proceedings to enable the CTA to formally apply this regulation, so there have been no disputed transactions to inform. A similar situation has occurred with transfer pricing matters, which, even though they have generated tax litigation at the civil judicial level, have not referred to the existence of tax crimes.

In Chile, the Mutual Agreement Procedure (MAP) is not a common mechanism for the resolution of cross-border tax disputes. According to information from the OECD, for the year 2016–2017, four cases were initiated, three of them related to transfer pricing. The fourth one was solved by the CTA.  

In turn, according to public information and within the agreement between Chile and Colombia to prevent tax evasion in relation to taxes on income and patrimony, the CTA took the decision to contact its Colombian counterpart. The purpose of this was to define answers to questions regarding the tax treatment of payments for services made by a company resident in Colombia to a company resident in Chile, under the application of the most favoured nation clause of the agreement in question, with the clear objective of avoiding a situation of double taxation. 

However, considering the time taken for the judicial processes in which an international double taxation situation can be disputed, MAP stands out for offering a more expeditious resolution of the contingency, so it is possible that these mechanisms will be used more frequently in future controversies involving taxpayers. 

The general anti-avoidance rule (GAAR) in Chile has not been applied in cross-border tax disputes. However, the tax authority has impugned situations of application of international treaties to avoid double taxation, through specific anti-abuse rules (SAAR), which has generated tax adjustments that have been claimed in court by taxpayers. 

In Chile, there are no international adjustments under multilateral transfer pricing treaties that can be disputed in court. Transfer pricing adjustments are, however, made by the tax authority based on the faculties provided by Chilean law. In the first cases, the main objections held by the tax administration centred on the fact that there was an error in the use of the comparable values applied to make the adjustments, which were not credible, and the transfer pricing methods used did not correspond to any of those contained in the OECD guidelines for such purposes. 

Advance pricing agreements (APAs) are recognised in Chilean legislation. In order to enter into such agreements, the interested taxpayer must present a request containing the following elements: 

  • descriptions of the operations carried out with related parties, their prices, values or normal market profits;  
  • the period to be covered by the agreement;  
  • the documentation or background information upon which it is supported; and 
  • a transfer pricing report or study in which the methods recognised by Chilean law have been applied. 

The taxpayer's proposal must be accepted or rejected by the CTA within a maximum period of six months. If a favourable response is obtained, the taxpayer's proposal will be reduced to a memorandum of understanding, which will be signed by the CTA representative and the taxpayer. 

The agreement will have a duration of three years, and may be renewed or extended by agreement of the parties, with the possibility for both the CTA and the taxpayer to revoke the agreement in advance, for example, when the essential information or circumstances that were taken into account at the time of its signing, extension or renewal have changed substantially. 

Finally, the CTA will be restricted from determining transfer pricing tax differences on the transactions covered by the agreement, as long as the prices, values or returns have been established or declared by the taxpayer in accordance with the terms of the agreement. 

In general, the main matters that generate tax disputes related to cross-border issues relate to transfer pricing, use of credits attributable to corporate tax based on taxes paid abroad, legal treatment of payments as royalties or corporate profits. 

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In Chile, it is not necessary to pay any fee or amount to litigate at the administrative phase; this phase is absolutely free of charge. 

The only related cost would be for advisers or if it is considered necessary to have an expert present a legal or technical opinion on the matter. 

There are no fees that must be paid in advance in order to respond to litigation in court; the right to defence is established in the Chilean Constitution as a right of every person. 

It is possible that the losing litigant may be ordered to pay personal expenses, eg, the fees of lawyers and other persons involved in the case. In those cases where the court considers that the losing litigant did not have a plausible motive to litigate, each party will have to pay their own expenses. 

Under Chilean law, there is no possibility of requesting compensation from the CTA, should the tax authority lose the case before the court. However, Chilean tax regulations establish that in the case of payments of taxes, adjustments, interest, readjustments and penalties, paid on the basis of a tax valuation made by the tax administration and subsequently annulled, the amount paid will be refunded with interest of 0.5% per month. 

As in the administrative and judicial stage, there are no fees or amounts to enable the use of alternative dispute resolution. 

According to the latest statistical report developed by the tax and customs courts, prepared with the information existing as at 31 December 2019, there are about 2,200 pending tax court cases in Chile. The statistics consider as "pending tax cases" not only those that are being processed in the first instance, but also those that have a first instance sentence, but are still being examined by the Courts of Appeal or the Supreme Court.  

On the other hand, the value of the 2,200 pending tax cases is approximately USD6.3 billion.  

To date, no study has been conducted in Chile using concrete statistics, specifically identifying cases initiated and terminated in relation to the different taxes that exist in Chile (corporate tax, global complementary tax, additional tax, and sales and services tax, among others).  

However, according to the information provided by the Administrative Unit of the Tax and Customs Tribunals, for the years 2015–2019, of the total number of cases filed, 35% were related to tax adjustments. Likewise, 36.93% of the total number of cases completed in this period correspond to tax adjustments. 

According to report No 12 by the Chilean Judicial Observatory, during the period 2013–2017, tax judges only accepted 30% of the tax claims (or lawsuits) presented by taxpayers. Of these, 70% of the rulings issued by tax judges were in favour of the tax authority. 

In a tax dispute that has been judicially litigated, it is advisable to consider the following guidelines. 

  • Have expert advisers in tax litigation and defence. The proceedings are conducted in specialised courts and involve oral hearings. Therefore, it is very important to have the support of a team of professionals. 
  • Documentary evidence is essential for the case. In order for a judge to rule in favour of a taxpayer, the taxpayer needs accounting backups, so it is advisable to keep these in order, and to be able to explain their incidence or importance for the theory of the case to be presented in court. 
  • Maintain a complete knowledge of the sentences dictated by the independent courts, as well as the instructions and positions on the application of the tax rule that have been dictated by the CTA. There are cases where the tax position is contrary to judicial jurisprudence and even to the CTA’s own formal technical opinions. If such a situation is presented, it will become an important defence against the claim of the tax authority. 
  • Similar to the current situation, Chilean courts had established that there must be invariability in the treatment granted to a taxpayer by the CTA, and that this can only change when there are important reasons for this, which must be sufficiently substantiated and justified. 
  • The taxpayer must be aware of the consequences that a tax lawsuit may have, especially considering its long duration. That is, there could be new audits on the same matter, which could lead to other disputes with the CTA, but for different tax periods. 
Recabarren & Asociados

Isidora Goyenechea
#3162 5th floor
Las Condes
Santiago
Chile

+56 2 2594 0550

contacto@recabarrenasociados.com www.recabarrenasociados.com
Author Business Card

Trends and Developments


Authors



Recabarren & Asociados specialises in the provision of high-quality tax consultancy services to clients seeking expert legal and tax advice. The firm advises companies and individuals at a national and international level, through highly specialised work teams that are able to respond to the individual needs of each client. The firm is made up of 30 experts in tax matters who counsel clients from widely different areas, such as retail, mining, family offices, real estate, infrastructure, and technology companies, among others. Recabarren & Asociados focuses exclusively on tax matters, such as tax examination processes, tax defence and litigation, tax planning for companies and individuals, business restructuring, consultancy for large and medium-sized companies, and advice for family businesses and HNWIs.

Emphasis of the Chilean Tax Administration and Risk of Future Conflicts

The impact of COVID-19

On 3 March 2020, the first case of COVID-19 was confirmed in Chile; it was the beginning of an uncertain journey that we are still experiencing, and we do not know when it will end.

Everything that happened in Chile and the world during the pandemic was previously only in the imagination of film scriptwriters, but never in the head of any other human being; indeed, not even those fiction writers believed that their vision would ever be so real. But it became extremely real, with travel restrictions and shutdowns of all activity, and outbreaks and mutations of the virus spreading fear and uncertainty all over the world. 

Governments reacted by improving their already weak health systems and forcing the population to isolate by establishing long quarantines. Thus, people were unable to generate their own resources.

All governments of the American continent addressed the pandemic by making direct transfers to the population. But resources are limited. Some basic needs that have been postponed will soon reappear, and the state will once again have to come up with material responses.

In Chile, the pandemic came at a time of internal political conflict, intensified by political sectors that encouraged popular movements to produce uncertainty and violence based on radical positions that seek to gain political and social control. In addition, the government response was weak. Consequently, this attitude altered the institutional map and forced heavy pressure on the tax system, which had already been undergoing substantive transformations since 2014 in order to increase national tax revenues.

The new Tax Compliance Plan

Accordingly, the Chilean Tax Administration (CTA) presented the “2021 Tax Compliance Plan” for the next two years. This instrument, together with a list of Tax Avoidance Schemes, makes it possible to anticipate the intensity of the audit actions which will be performed by the CTA.

Consequently, the plan focuses on two essential segments of taxpayers.

  • High net worth individuals – close control will be deployed to verify that they are declaring all their income and family relationships.
  • Multinational enterprises (MNEs) – the focus will be on transfer pricing, qualification of services and benefits, verification of interest paid abroad, the nature of financing operations, levels of indebtedness, and the location of profits and operations in jurisdictions with special tax treatments, among other control actions.

Interception of the National Congress

The second situation in the tax sector relates to the National Congress. In brief, this entity had taken some attributions exceeding the power bestowed on it by the Chilean Constitution, particularly regarding the creation of laws. Moreover, a constitutional reform allowed the population to withdraw a percentage of their own pension funds to support their needs. This was followed by another law with the blessing of the Chilean government, and a third is currently on the way.

The wealth tax

In addition, Congress presented another constitutional reform to establish a wealth tax, which could affect natural persons with personal assets of over USD22 million. However, the motion to pass this constitutional reform has no legal basis, since the president of the republic of Chile has the exclusive initiative to create tax laws, in accordance with the Chilean Constitution. In addition, this constitutional reform has serious deficiencies, as it does not contain rules to determine the tax basis, seeking to affect only assets, without considering liabilities. This wealth tax also lacks technical precision, which is evident from international experience regarding the creation of this kind of tax. Several countries have backed away from the application of a wealth tax, due to the low revenue it produces and the negative incentive it has for taxpayers. Particularly, this type of tax encourages the taxpayer to change residence to a jurisdiction without wealth tax, as has occurred in OECD member states, such as France. In addition, the application of this tax, under the conditions indicated in Chile, will inevitably result in legal and constitutional conflicts, given the illegitimacy of its origin and the deficiency of its regulation. 

Congress has started walking a dangerous path, exceeding its constitutional powers. Also, it is important to take into account that Chileans recently voted for the establishment of a new constitution, which is going to be written by a group of people who represent different political sectors. The quorums needed to pass and approve important rights such as property rights are still under discussion.

Regarding wealth taxes, the director of the Chilean Tax Administration has said that the CTA will not be allowed to supervise and collect this tax. He stated that, since Chile's wealth taxes have a constitutional background and not a legal one, the CTA does not have the legitimacy to supervise the fulfilment of these taxes, due to the fact that the CTA can only supervise compliance with internal taxes established in legal norms.

Anticipated judicial action

Due to all these factors, we foresee a high level of judicial actions concerning tax issues in Chile. Even though the legal changes of 2020 have improved the definition and consistency of taxpayers' rights, there is a lot of pressure to generate more resources to cover the enormous expenses of the last two years. In addition, the determination of progressive political sectors will probably increase the burden on taxpayers, in order to reach the always-insufficient tax collection goals, with special emphasis on high worth taxpayers, MNEs and enterprises in the mining sector. 

On the other hand, the creation of taxes outside the constitutional order will produce uncertainty in administrative and judicial matters, as the affected taxpayers will dispute the tax collection in court. Investment and confidence are essential to Chile's economic recovery post-pandemic and this problem will persist, affecting the expected tax revenue and consequently disturbing the delicate peace that presently reigns in our country.

Recent changes in the Chilean tax system

Additionally, the Chilean tax system has been undergoing profound changes since 2014, with the first tax reform that sought to modify its essence, to exchange the integrated income tax system for an attributed one. In short, this tax reform introduced the concept of transparency in the Chilean tax system. Although this is common in most countries in the world, this constituted a huge innovation in Chile, because of the integrated system that had been in operation since the 1980s. However, this system was not properly implemented since it was complicated to operate and led to confusion among taxpayers, accountants and advisers. It was therefore discarded by Sebastián Piñera's government in a new tax reform (the third in five years) and the tax system was rebuilt, once again, on the integration of the capital and personal taxes of shareholders. Nevertheless, nowadays it is only possible to use 65% of corporate tax as credit against personal and final taxes. Before 2014, it was possible to use 100% as credit.

The latest tax report

To address the populist wave that has taken over Chile, which till 2019 was an exception in Latin America, and to counteract politicians who want new tax changes, the Chilean government assigned a committee of expert economists from several political sectors to identify and eliminate tax exclusions and benefits that would increase company taxes and those of high worth individuals. The purpose is to collect more money from different tax sources. The initiative also seeks to increase the tax on mining production, modifying its calculation base and extending it to lithium, which follows a different path but with the same purpose. However, the report was criticised by tax experts, due to the lack of solutions at an operative level, based on the knowledge of accountants, auditors and lawyers. Also, some of the assumptions contained in the report were not based on proper data to achieve a formal conclusion, and therefore, left gaps in addressing present and future tax problems. Despite this, the report was praised as a first step towards solving some of the issues of the Chilean tax system.

Conclusion

In conclusion, it is worth noting that the economic discrepancies resulting from the pandemic will generate direct action in most countries in order to increase the pressure on tax collection. Currently, countries are suffering under heavy budget problems and need to get as many resources as they can in order to continue to provide for the people, particularly the middle and lower classes. The increase in rates and the establishment of new taxes will put stress on the tax administration to obtain more revenue from taxpayers. The situation will no doubt affect Chile deeply, due to the social discontent that preceded the pandemic, the economic deterioration that this extensive problem is bringing to families, the constitutional process in which the country has been involved since the plebiscite of October 2020, which could result in a very profound constitutional change, and discussions that have not yet begun. These are all factors that serve to complicate the relationship between the tax administration and taxpayers, and will inevitably end in legal disputes in many processes of the review of the movements of national and foreign taxpayers.

Recabarren & Asociados

Isidora Goyenechea
#3162 5th floor
Las Condes
Santiago
Chile

+56 2 2594 0550

contacto@recabarrenasociados.com www.recabarrenasociados.com
Author Business Card

Law and Practice

Authors



Recabarren & Asociados specialises in the provision of high-quality tax consultancy services to clients seeking expert legal and tax advice. The firm advises companies and individuals at a national and international level, through highly specialised work teams that are able to respond to the individual needs of each client. The firm is made up of 30 experts in tax matters who counsel clients from widely different areas, such as retail, mining, family offices, real estate, infrastructure, and technology companies, among others. Recabarren & Asociados focuses exclusively on tax matters, such as tax examination processes, tax defence and litigation, tax planning for companies and individuals, business restructuring, consultancy for large and medium-sized companies, and advice for family businesses and HNWIs.

Trends and Development

Authors



Recabarren & Asociados specialises in the provision of high-quality tax consultancy services to clients seeking expert legal and tax advice. The firm advises companies and individuals at a national and international level, through highly specialised work teams that are able to respond to the individual needs of each client. The firm is made up of 30 experts in tax matters who counsel clients from widely different areas, such as retail, mining, family offices, real estate, infrastructure, and technology companies, among others. Recabarren & Asociados focuses exclusively on tax matters, such as tax examination processes, tax defence and litigation, tax planning for companies and individuals, business restructuring, consultancy for large and medium-sized companies, and advice for family businesses and HNWIs.

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