On the 29th of September of this year, one of the most important and controversial norms of the tax reform: the general anti-avoidance rule came into effect.
This norm intends to cutback aggressive tax planning providing new faculties to the Chilean IRS.
Indeed, this norm has incorporated what is widely known as the "substance over form principle". This is to analyse the business purpose of a commercial structure instead of only its legal form.
The new article 4 of the Tax Code has provided that the Chilean IRS may re-characterize acts and sanction those individuals that have acted in "abuse" of the law by means of tax planning structures made only or mainly with no other purpose than reducing the tax base or tax liability or deferring tax payment through time. The tax structure may be considered individually or understood as a whole and will be deemed to be abusive when they do not produce any relevant business results or economic effects other than lowering down the tax burden of the legal entity or individual, what ever legal nature that they may adopt.
In addition, the Chilean IRS may also sanction tax- planning structures carried out by means of "simulation". These are acts disguised or covering their nature, amount or date in order to take illegitimate tax advantages.
Notwithstanding the above, this norm has also incorporated the recognition of the economic principle of liberty to choose the best economic option when carrying out business.
According to this new norm, tax planning is still a legitimate option as long as it is done without abuse or simulation; however, the law seems to be written by what many have described as a schizophrenic legislator. On one hand, it allows a legitimate tax structure exercising the right of a cost-benefit analysis when forming any business, and on the other, any time the advantage is carried out through an "abusive" form or "simulated" act it will be punished, even sanctioning the professional behind such scheme. The big issue is exactly where to draw the thin line between these two perspectives.
This right and wrongdoing on a case-by-case basis is what our Tax Court will have to decide upon. The IRS will also play an important role as the law provides that a preliminary opinion may be requested to the IRS, however, it may be very possible that the liberal approach of companies may not match with the conservative interpretation that often the IRS takes.
Common law countries have a long tradition on these matters. In the United States, the principle "substance over form" was first adopted in 1935 in the case Gregory vs Helvering. In Chile, such principle was only accepted by 2011 in a prominent case between Coca Cola Embonor and the Chilean IRS. This perspective has been a real break-through to stop aggressive tax planning, however, as the global economy has increasingly become more open and competitive it has failed to keep up. Over the years, many multinational companies have taken advantage of the countless loopholes that inevitably the international taxations systems leave behind, either inside their own scope or as different jurisdictions legislations are pieced together. International holding companies and cross border transactions have become a grey area for tax planning.
In this regard, there have been many efforts by countries to boost tax collection and to avoid losses, however, it seems that tax offices are often one step behind due to the lack of proper legal tools to persecute aggressive tax planning schemes. A good technical manner to approach this issue and safeguard tax compliance is through specific norms. Transfer pricing rules are a good example. These rules deal mainly with what is known as "profit shifting" from a high tax jurisdiction to low ones, trying to avoid that all profit ends up in a tax heaven. This said and although specific rules work very well under a predetermined scope, they have not been enough to stop "accounting and legal creativity" reducing taxation in some occasions to outrageous levels.
For this matter, countries have come up with general rules such as the one described herein. The problem with this is where to draw the line between a legitimate business structure, including taxes as a cost of business, and when this turns into an abusive scheme.
Risk will always be an issue; however, in our opinion, if there is substance to the tax planning and it makes sense then companies should continue trying to ensure they are being tax efficient by utilising the legal tools that are available in each country. With this in mind, a company needs to understand that at some point they may be confronted regarding their strategy and they need to be prepared to explain their position.
For now we can recommend to double check tax compliance according to each countries reality taking into consideration expert opinions for the jurisdiction in question. In this regard, management should be able to assess the risk of tax savings versus the benefits with the assistance of independent experts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.