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.
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