CHILE: An introduction to Tax

The Chilean tax law arena has been anything but stable in the last few years. The current administration, which came into office in 2022, has made two attempts to introduce changes to Chilean tax legislation in a wide range of matters including tax compliance, income tax and indirect taxes, among others.

The first of these attempts was rejected by the Chilean Congress in early 2023. In this initial bill, the government tried to make an overarching tax reform, including structural changes to the laws governing income tax and VAT, and the Tax Code, among others.

After this first failed attempt, the government regrouped and divided the legislative initiatives. The original idea was to file three separate tax bills:

• the compliance with tax obligations bill;
• a bill addressing structural changes in income taxation; and finally
• a bill addressing specific taxes, known as corrective taxes.

Of these three, only the first one has been sent by the government to congress.

Given the initial lack of parliamentary support, and after several discussions, negotiations and compromises, the Chilean Congress recently passed the so-called Tax Obligations Compliance Law (Ley de Cumplimiento de las Obligaciones Tributarias), which is mainly focused on tackling aggressive tax avoidance. This law is the most recent development in Chile as of October 2024, and accordingly, will be further developed below.

It is not clear if the current administration will attempt to pursue other tax changes, in areas such as the Chilean income tax system or corrective taxes, within the remainder of its period in office as originally intended.

Chile Approves the Tax Compliance Bill

As mentioned above, in September 2024, the Chilean Congress passed a bill titled the Tax Obligations Compliance Law. According to government estimations and forecasts, this regulation is expected to collect 1.5% of the annual Chilean GDP, approximately USD4.5 billion, when it is fully operative (this amount has been questioned by the experts). The administration has stated that it expects to allocate these funds towards welfare reforms such as the Universal Guaranteed Pension, reducing health-related waiting lists, and increasing resources to improve public security.

The main areas affected by the bill are the following:

1) Amendments to the Chilean General Anti-Avoidance Rule (GAAR) – Although in the original bill sent by the government it was intended that the GAAR would be fully applied in an administrative phase, this idea was finally repealed. Consequently, the GAAR is still decided by the tax and customs courts by virtue of a request made by the Director of the Chilean Internal Revenue Service (Chilean IRS).

The changes introduced reflect the relationship between specific anti-avoidance provisions and the GAAR, and the existence of a specific department within the Chilean IRS that is tasked to review and recommend the application of the GAAR to the Chilean IRS director.

Finally, a threshold of approximately USD74,000 in the tax benefit resulting from preventing tax avoidance is needed for the Chilean IRS to pursue the case before the courts.

2) Changes in the structure and governing bodies of the Chilean IRS.

3) Amendments to the Chilean Banking Secrecy rules – A new general procedure was established, according to which, the Chilean IRS may require the taxpayer to provide their banking information directly. There is a period in which the taxpayer can respond to the Chilean IRS. However, in the case of denial, the Chilean IRS can only access such information by virtue of a request issued before the tax and customs courts.

Additionally, in a specific procedure for certain cases, such as where a tax crime is involved, the Chilean IRS may issue an exceptional request to the tax and customs courts, which have five days to respond.

4) Amendments to the rule referring to the assessment powers of the Chilean IRS and the tax neutrality of certain corporate restructuring processes – This mainly refers to the specific legal provisions that deal with national reorganisations and, for the first time, international reorganisations.

5) Amendments to Chilean VAT law referring to the importation of goods sold by digital intermediary platforms that are not domiciled or resident in Chile – In this sense, goods that are purchased through digital intermediary platforms and that are valued at under USD500, are considered located in Chile and subject to VAT, if: (i) they are sold remotely; (ii) the seller is not domiciled or resident in Chile; (iii) the goods are destined for Chile; and (iv) the purchaser is a person who is not a service provider or habitual seller.

This VAT will not be borne by the Importer of Record. Rather, the digital intermediary platform will be required to utilise the simplified registration regime currently available for electronically supplied services in order to pay this VAT.

Focus on Tax Assessment by Chilean Tax Authorities

Beside tax reforms, another area of development in Chile has been concern about improving tax collection. This problem was exacerbated after the social uprising of 2019 and the economic effects of the COVID-19 pandemic, which are still evident.

In this matter, the Chilean IRS has been tasked with a central role, echoing the fiscal budget constraints.

In recent years, the Chilean IRS has issued a yearly plan to report to the general public where its assessment focus areas will be. This document is the so-called “Management Plan for Tax Compliance”.

Common themes in the last few years in this tax compliance plan have been, among others, high net worth individuals, transactions between related companies abroad, and digital economy-related transactions.

First Judicial Case Resolved Applying the GAAR

The efforts by the Chilean IRS to tackle tax avoidance and foster revenue collection have also manifested in an augmented number of cases where the tax authorities have requested the application of the Chilean GAAR before the tax and customs courts.

Considering this, the Tax and Customs Court of Concepción ruled against the taxpayer, stating that a transaction constituted tax avoidance. It must be noted that this case has been subject to a great deal of public scrutiny, given that most tax experts regard the resolution as lacking legal grounds. The case has been appealed, and hence, its result is not yet final.

However, this case reflects that the Chilean IRS has been focused on increasing revenue collection, in line with the trend previously noted, including the request for transactions to be declared as tax avoidance by the courts.