Disputes with the tax administration are usually initiated through the application of audit plans regarding tax assessments presented by taxpayers. Audit plans are 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:
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 (CTA) in March 2023 emphasises preventative audits in order to verify multinationals and their operations abroad, high net worth individuals in Chile and VAT on digital platforms.
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.
Through the 2014 tax reform, the Chilean legislature decided to implement the anti-avoidance guidelines and standards established in the BEPS project of the OECD, of which Chile is a member. A general anti-avoidance rule (GAAR) was incorporated in 2014, 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.
This new power of the tax authority was not formally applied until 2023. In application of the anti-avoidance rule, 56 audit procedures have now been initiated, seven of which have been prosecuted.
Accordingly, there is consensus that the anti-avoidance rule has played a dissuasive role, implying that both taxpayers and their advisers avoid engaging in tax planning that can be qualified as evasive.
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, at 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 a process be suspended until there is a final decision by the courts resolving the tax dispute.
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 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 focused on developing audit processes for 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 massive auditing processes (especially the annual business tax declaration and personal 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 within a general statute limitation period of three years, starting from the date of the 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.
The auditing processes initiated by the tax authority are also temporarily limited to a fixed-term period.
A general fixed-term period of nine months is established, with the following longer periods depending on the matter to be audited:
If these periods expire before the administration has notified a request for information in accordance with the special attributions established in the tax regulations, or before it has 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.
The taxpayer can offer for the auditors to visit the domiciles of the companies to carry out their audits, and the tax office can also 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.
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 audit taxpayers remotely and, at the same time, allowed taxpayers to reduce the costs of audits.
A general objective of the State has been to provide additional resources to those traditionally budgeted, so the CTA has focused on those areas that will have the greatest impact on the amounts to be collected, allowing it to secure resources to support the operation of the State.
Within this context, the Tax Compliance Management Plan for the year 2023 establishes the implementation of actions to ensure the tax compliance of the following groups of taxpayers:
The CTA 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 Common Transmission System (CTS) and the Convention on Mutual Administrative Assistance in Tax Matters (MAAT Convention).
This has allowed an increase in the exchange of information and experience between 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 CTA, 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 Switzerland 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.
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
The administrative tax procedure in Chile is as follows. Once the taxpayer presents its tax declaration, the tax authority generally has 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 a case, to validate the taxpayer's return, 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) with the tax authority within 30 days. The tax authority has 90 days to resolve the appeal. If it does not notify the resolution ruling on the administrative appeal within this 90-day period, the appeal will be considered to be rejected and “negative silence” will apply – 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 CTA. 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, said appeal is understood to be rejected, operating as negative silence or a tacit negative decision (see 3.1 Administrative Claim Phase). 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 accepted to be processed, the counterparty (the tax authority) must answer the claim within 20 days. An update in 2020 enabled the filing of tax claims via a web platform in order to update the tax judiciary with respect to the other procedures. 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. The probation period lasts for 20 days, during which the parties must present all the evidence (documentary and testimonial) to demonstrate their respective positions.
Once the period of probation has expired, the parties may present in writing any observations regarding the evidence presented, within the following ten days. At this stage, the court may once again call the parties to a conciliation audience, either on its own motion or at the request of a party. If the conciliation fails, the court shall call the parties to hear the judgment, regardless of whether any proceedings are pending. 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 Appeal (see 5. Judicial Litigation: Appeals).
In tax litigation, evidence is everything: if the evidence is clear and properly presented before the court, there is a strong possibility that the court will invalidate the claimed act.
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, the one who alleges the facts 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. 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 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 other matters. It is highly important for the taxpayer to have the background information on 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, if there is an unfavourable decision, the amount pending will increase due to the charging of interest readjustment and fines.
From another point of view, the consequences that may impact the tax result of the subsequent year must be considered, 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. If the tax debt is considered to be paid, the amount owed will be limited to the actual payment and, if 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.
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:
The Court of Appeal’s case assignment system is related to the territorial location of the specialised court that resolved the controversy in the first instance.
Judicial decisions adopted by the Courts of Appeal 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 have infringed the legal rules that were used to resolve the case in any way.
Once the appeal has been presented to it, the specialised court 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. If the appeal is declared 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 Appeal.
Finally, the hearing is held, in which the parties have a maximum of 30 minutes to present their arguments in the form of an oral presentation. Once the judges of the Court of Appeal have heard the arguments of the parties, they will issue the corresponding second instance judgment, which may modify (revoke) the appealed judgment or confirm it.
Regarding the procedure in the Supreme Court, the appeal is filed in the Court of Appeal 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 Appeal.
The tax and customs courts are tribunals specialised in resolving tax and customs matters. As special tribunals, they are independent of the judicial system, and their judges must be lawyers, appointed by the President of the Republic from a list of three persons proposed by the respective Court of Appeal.
The Courts of Appeal are part of the judicial system and are distributed according to the regions into which Chile is territorially divided (there are 17 Courts of Appeal, one for each region, with the exception of the Metropolitan Region, which has two), and each of the Courts of Appeal is distributed into chambers, which are composed of three judges. Only the Santiago Court of Appeal 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 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:
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.
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 at reducing penalties, a condonation of penalties and interests generated (not including taxes or readjustment) has been defined as a state policy. However, the taxpayer must comply with certain requirements, such as not being 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 GAAR have the option to request a formal pronouncement from the CTA as to whether or not the operation corresponds to a tax avoidance activity. This CTA ruling is binding for the administration. Also, the CTA maintains a list of tax avoidance schemes.
There are no other methods of dispute resolution besides 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, regardless of whether or not an investigation is initiated for the crime.
The most common tax crimes in Chile correspond to taxpayers using tax credits or benefits improperly, declaring tax returns omitting income, or obtaining tax refunds that are not due to them.
In Chile, the application of the 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:
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 any differences that 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:
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 the autonomous institution in charge of compiling the background information in order to conclude whether the acts may constitute a crime.
If it 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 a 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:
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:
In Chile, the GAAR regulation was instigated fairly recently, with the tax reforms of 2014. To date, 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.
Although mutual agreement procedures (MAPs) are not common mechanisms for the resolution of cross-border tax disputes in Chile, given that there was no regulation of the procedure for their application, this was regularised in 2022, so more of these agreements have been made.
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, in order 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, MAPs stand out as 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 GAAR in Chile has not been applied in cross-border tax disputes. However, the tax authority has impugned the 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, however, are 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.
APAs are recognised in Chilean legislation. In order to enter into such agreements, the interested taxpayer must present a request containing the following elements:
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 – eg, 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.
According to information provided by the CTA, five APA procedures have been implemented in the retail, food, chemical and pharmaceutical, and investment companies sectors.
In general, the main matters that generate tax disputes related to cross-border issues relate to transfer pricing, the use of credits attributable to corporate tax based on taxes paid abroad, and the legal treatment of payments as royalties or corporate profits.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
As Chile is a member of the OECD and signed the global tax agreement, it will be applicable in the country. In this sense, those Chilean companies that maintain subsidiaries abroad are preparing for the entry into force of this agreement by reorganising their corporate networks.
This is not applicable in Chile.
This is not applicable in Chile.
This is not applicable in Chile.
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 if the tax authority loses the case before the court. However, Chilean tax regulations establish that, in the case 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 of 31 December 2019, there are about 2,200 pending tax court cases in Chile. The statistics consider not only those that cases being processed in the first instance as “pending tax cases”, but also those that have a first instance sentence but are still being examined by the Courts of Appeal or the Supreme Court.
The value of the 2,200 pending tax cases is approximately USD6.3 billion.
According to the information provided by the administration of the Tax and Customs Courts, 1,787 cases were presented during 2020 and 2022, 48% of which were filed in the Metropolitan Region.
To date, no study has been conducted in Chile using concrete statistics that specifically identifies 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 2015–19, 35% of the total number of cases filed were related to tax adjustments, and 36.93% of the total number of cases completed in this period corresponded to tax adjustments.
According to report No 12 by the Chilean Judicial Observatory, during the period 2013–17, 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.
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Tax Controversy in Chile: an Overview
After the general elections in December 2021, Gabriel Boric assumed office as President of Chile in March 2022. His mission and campaign promises were based on progressive ideas and social benefits, which, in order to be financed, placed a heavy burden on the taxpayer's wallet. For this reason, a new tax reform was the first announcement of the new President of Chile.
This situation does not come as a surprise, since the tax situation in Chile did not change substantially between 1990 and 2014, when President Michelle Bachelet decided that a structural modification of the tax system was needed. This was the starting point for a series of important legal reforms and modifications in this area, as well as the first step in the use of the tax system as a kind of lifeline to comply with the proposals of each successive government.
This is not insignificant, as the successive mandates of Michelle Bachelet and Sebastián Piñera each claimed a different structural reform. As is to be expected, Gabriel Boric did not want to be left behind, not only because he criticised various situations related to taxation on countless occasions during his time as a deputy of the Republic, but also because he needed to increase tax collection in order to fulfil his electoral proposals. This is why he appointed Mario Marcel as the Ministry of Finance, as he was always critical of the tax system and its social purpose in his career and as deputy director of Governance and Territorial Development of the OECD.
It is against this background that the tax reform was presented in July 2022, aiming to increase tax revenue to finance the social projects to which the current government had committed itself. This proposal included a series of taxes (the most important of which was the wealth tax), the disintegration of the income tax system, and the granting of greater powers of control to the Chilean Tax Administration (CTA) to reduce tax evasion and avoidance.
However, as was to be expected, this project was widely criticised by the private sector, due to the disincentive to savings, the setback in the protection of taxpayers' rights, and the setback in simplification and incentivisation for small and medium-sized companies. In a few words, the objective was to completely redesign the tax system.
The reform bill was rejected on 8 March 2023, as the Chamber of Deputies did not have enough votes to pass it. However, everything seems to indicate that the government will insist on a new tax reform. It is not clear if this will be within a year, which is the minimum period established for initiating a new reform, or within a shorter period, in the event of reaching an agreement with the political opposition and the private sector. For this reason, the Ministry of Finance is holding dialogue sessions with the private sector and tax experts in order to move towards a joint reform project, grouping together each of the questions raised about the recently rejected reform. However, there are also two initiatives on the subject: one that attempts to increase the tax on mining activity, and another that tries to establish corrective taxes, pursuing taxation on activities that affect the environment.
General Anti-Avoidance Rule (GAAR)
As previously mentioned, the government hopes that the tax reform will greatly increase tax collection. One of the pillars on which it is based is the empowerment of the CTA by providing it with new and more extensive auditing and sanctioning faculties, giving special importance to audits under the GAAR. If this measure is insisted upon and approved, it will have a significant impact, including higher judicialisation, which in turn involves incurring higher costs for taxpayers, making the administrative tax defence system even more expensive, as it requires experts in the field to deal with it.
Although the GAAR procedure was introduced by Law No 20.780 in 2014, its application to date has been rare due to the recommendation of the BEPS project that seeks to prevent and reduce the erosion of the tax base and profit shifting. However, since the swearing in of President Gabriel Boric and the subsequent appointment of Hernán Frigolett as the new Director of the CTA, GAAR audits have been carried out effectively, even with requests for declaration already filed in the country's Tax and Customs Courts. This is why the modification of these powers of control in the terms proposed by the government would be a pillar in terms of control and sanctions.
In fact, it is important to note that the tax reform project, with regard to the GAAR audit powers, was based on the following four fundamental pillars:
In accordance with the above-mentioned points, the current regulation establishes that the difference in the payment of taxes must exceed 250 annual tax units (approximately USD232.819) in order to trigger the application of the means of control governed by the GAAR. The rejected reform proposed to eliminate this requirement without establishing any limit.
It was also proposed to modify the procedure. Today, the CTA must apply to the Tax and Customs Courts to request a declaration of abuse or simulation against a taxpayer. In the event of a new project being presented on the same terms, it is the taxpayers who will be obliged to appeal to the courts for the annulment of the administrative act issued by the CTA. This could certainly make it easier for the CTA to initiate innumerable auditing processes in application of the general anti-avoidance regulations, causing a certain judicial impact, since in practice this would imply greater litigation with the taxpayers.
As if the above were not enough, it was proposed to increase the statute of limitations for GAAR audits to six years from the execution of the legal act or business or, if it is a set of these, from the last of them, which could imply that the CTA prefers to use this power, relegating ordinary auditing actions to second place. It is currently temporarily limited by a three-year statute of limitations, as well as a maximum time limit for carrying out such audits.
It was also intended to eliminate the principle of speciality, which would mean that the CTA would apply this regulation even when there is another special regulation applicable to a specific situation. This would affect small and medium-sized taxpayers, who today defend themselves before the CTA by their own means and who will have to resort to more expert defences, especially at the judicial stage, at which the Taxpayers' Defence Office cannot act.
Although the Chamber of Deputies rejected this proposal, everything seems to indicate that those modifications will be persisted with in view of the reform's collection drive. This would lead to a tax authority with excessive auditing powers, clearly damaging the defence capacity currently held by taxpayers. By making GAAR audits more expensive, a large majority of taxpayers who cannot afford them would consequently be excluded, increasing their uncertainty by reducing their protection against revisions by the CTA. Considering that audits under the GAAR could become the CTA's favourite auditing power, this constitutes a real pre-judgment made by the tax administration.
Criticisms of the discarded project raised an important question around whether the reform of the tax system would substantially damage investment and the necessary incentives for it. In the medium term, tax revenues were affected because, with fewer savings and less investment, tax collection fell, which meant that the objective of the changes was not achieved.
In addition, the changes promoted by the government generated a situation that significantly affected Chile's competitiveness as an attractive jurisdiction for investment, thereby delaying or reducing the country's possibilities for economic growth and development, since the more expensive and unstable nature of the Chilean system makes it unattractive, and investors are likely to move their resources to other, more favourable countries.
Increasing revenue collection
However, in order to increase revenue collection, two regulations have been put in place. With regard to capital gains, a modification was made during the government of Sebastián Piñera, abolishing the exemption from tax on capital gains with a stock market presence, to make way for the payment of a Single Tax of 10% for these gains. This changed a situation that tax experts had already recommended, but also took advantage of the global pandemic situation and the need for greater revenue to justify it. In turn, a sales and services tax was also imposed on most services, increasing this burden, without prejudice to the establishment of a luxury tax on ships, aircraft and vehicles that exceed a certain valuation by applying a 2% tax on the commercial value.
The aim of the disintegration of the tax systemproposed in the rejected reform project was to increase the low tax collection to personal levels (an average of 6.6% of the final tax collection), which was not a viable project. This is due to the fact that the proposal would imply modifying the double taxation avoidance treaties signed by Chile (around 39 treaties), with all the difficulties and repercussions that doing so would entail.
Another aim was to change the paradigm of the Chilean tax system. Instead of the payment of the first category tax being a kind of advance on the final taxes, the two taxes were intended to be treated separately and thus generate a higher tax burden for companies and their partners; in fact, today the first category tax collects around 23% of the revenue from taxes.
On the other hand, the project contemplated the application of a wealth tax, which caused conflicts rather than associated benefits, since its rationale was certainly more political than technical. In effect, this taxation gave rise to conflicts associated with the valuation of assets and liabilities of that wealth, which could give rise to interpretative differences between the valuation made by the taxpayer and the CTA, with audits and possible penalties for the former, as has occurred in other jurisdictions that have ended up eliminating this tax. The tax has caused more problems than it has raised revenue.
Under this reality, it is possible to assume that a new tax modification project would consequently involve a reconfiguration to increase personal taxes, as well as the application of a wealth tax, given that, in accordance with all the internal and external issues mentioned, it seems quite difficult to disintegrate the system or to apply the aforementioned tax, taking into consideration the current political and legal instability of the country. However, the process is still under development and it is not yet possible to venture an opinion.
Implications of rejection of the reform
All of the above leads us to reflect on the implications of the rejection of the reform, and of the projects that preceded it and were approved, since, at first glance, it can be deduced that the tax system is perceived by each of the governments in office as a safe and essential instrument in their political campaigns. This is an issue that needs to be considered in the process of writing a constitutional text, which is also under development in Chile.
Evidently, this does not provide citizens with a guideline on the way in which the tax system is structured and should be perceived, leading to a constant economic imbalance and legal uncertainty in this regard, which also affects foreign investment in the country.
The tax uncertainty is, in turn, emphasised by the fact that a proposal to change the Constitution that has been in force since 1980 was rejected by a wide margin, despite there being widespread calls for amendment. Indeed, in legal matters there has been a seesawing of uncertainties. It was believed that the fundamental charter was going to be repealed by a new constitution, drafted by a body created for this purpose, with gender parity and the inclusion of indigenous peoples, but in the end this project was widely rejected, which represented a heavy defeat for the government, which was publicly inclined to approve it. Notwithstanding the above, a new Constitutional process has already begun, and will end in December 2023.
As can be seen, both constitutional processes have led to an absolute lack of legal certainty in Chile. The addition of tax uncertainty has led to the loss of a key characteristic that has previously strengthened Chile at the international level: confidence in political decisions.
This does not mean that the legal and tax system does not require adjustments, where tax burdens are viewed in their entirety, benefits and exemptions that may not have any basis today are eliminated, and incentives associated with the formalisation of micro-entrepreneur taxpayers are created. However, unlike what has been happening, those changes must be structured with a long-term view and, above all, considering the opinion of experts in the field and the OECD's theoretical recommendations rather than the actual needs of the country.
There is no certainty as to the path that will be followed in the eventual processing of the tax reform, but it must consider the inspection tools that the CTA currently possesses and does not use and ensure that investment is promoted and entrepreneurship is encourage, establishing reasonable tax burdens. All this must occur without ignoring the discussion of respect for the rights of taxpayers and without advocating a rollback of these rights, while also deploying a strong control of informal business activities to bring these resources into the fiscal funds.
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