What does the tax reform bill say about aggressive tax planning?

The tax reform project promoted by the Chilean government covers seven areas: modernization of the tax administration, control of informality and tax crimes, new powers for the Taxpayer’s Ombudsman, regulation of tax obligations, strengthening of auditing agencies, and protection of probity. Aggressive tax planning completes the seven tax reform concepts. 

The current project differs from the previous tax reform project in its approach, scope, and specific contents. One of them is aggressive tax planning, a phenomenon that has been gaining relevance in the developed world in recent years. This behavior is characterized by strategies designed to minimize the payment of taxes in a legal manner but taking advantage of loopholes or ambiguities in tax legislation.

As economies have become more globalized and sophisticated, so have how some taxpayers avoid their tax obligations. This has led to a significant loss of revenue for states. For example, the OECD estimates that between $100 billion and $240 billion is lost each year due to tax non-compliance by multinationals. To address this problem, the international community has strengthened its efforts through the BEPS (Base Erosion and Profit Shifting) agenda.

In the specific case of the European Union, it is estimated that between 50 and 70 billion euros are lost annually due to aggressive corporate tax planning. The Anti Tax Avoidance Guidelines (ATAD) have been established to combat this problem, legally binding EU Member States to take concrete actions.

The European Commission has stressed the urgency of advancing efforts to combat aggressive tax planning. Such behavior damages public finances by reducing state revenues, resulting in a heavier tax burden for individuals, creating competitive distortions between companies, and affecting confidence in the tax system.

The general anti-avoidance rule is a tax audit tool subject to a regulated administrative process where the entity issues a final act, such as a resolution or tax assessment. The taxpayer may challenge these acts in administrative or judicial proceedings or both. The particularity of the Chilean system is that it does not require prior judicial authorization to exercise the auditing power, as in other countries.

General Anti-Circumvention Rule

The General Anti-Avoidance Rule (NGA) maintains the principle of specialty as a general rule. It regulates cases where special rules interact with the general rule, allowing the latter to be applied when the circumvention seeks to avoid the application of a particular rule and in cases of aggressive planning where some acts apply to a specific rule. 

It incorporates the idea that the abuse of legal form implies impropriety, a lack of consistency between the economic effects and the legal acts the taxpayer performs, always according to the tax legislation. It is also recognized that the NGA applies to cases where abuse or simulation is used to access tax benefits or special regimes.

The following is a review of the changes being promoted by the Chilean government in this area

Appraisal and corporate reorganizations

Appraisal: The regulations are updated to allow the SII to appraise operations not carried out at market values using specific valuation methods, although individuals may choose not to apply them.

Business Reorganizations: “Tax neutrality” is introduced for national or international reorganizations with a legitimate business reason, including a more precise definition of this term to provide greater legal certainty.

These amendments ensure that transactions are pretty valued and business reorganizations are carried out transparently and for valid business reasons.

The amendments to the income tax law include:

Transfer Pricing: the rules are updated following OECD recommendations, allowing advance agreements and self-adjustments to comply with the arm’s length principle.

Passive Income Control: The rules are strengthened to prevent abusive maneuvers and improve the treatment of related parties.

Preferential Tax Regime: A new criterion is defined based on adequate information exchange agreements or the assessment of the Global Forum to determine whether a country or territory has a preferential tax regime.

These updates seek to improve the tax system’s fairness and efficiency regarding international operations and tax transparency.

The updates to the Inheritance, Allocations, and Gift Tax legislation are:

Donations: Revocable donations are now subject to taxation.

Valuation of Assets: Clear and objective rules are introduced for the valuation of assets, maintaining the tax appraisal for real estate and vehicles.

Payment of the Tax: Payment of the tax in up to three annual installments is allowed without interest or penalties.

Control Rule: The control rule is strengthened to prevent operations that seek to avoid paying this tax.

These amendments aim to improve clarity, equity, and efficiency in applying the tax.

 

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