Published on Thursday 5th September 2019
What is the tax authority in your jurisdiction, and can you give a general description of its structure? Provide a general assessment of the authority?
In Chile, the tax authority is the Internal Revenue Service (SII). The General Treasury Service (TGR) is responsible for the tax collection. Our tax system includes special and independent tax courts called Tax and Customs Courts (TTAs).
The SII is the public service in charge of the application and control of Chilean internal taxes. This entity does not have authority to legislate on tax matters. However, it does have the power to construe tax legislation through administrative pronouncements such as:
Interpretations of the tax law are mandatory for SII officials. Although such interpretations are not mandatory for the taxpayers, they are usually considered in preparing the tax return filings. The SII may not assess taxes if the taxpayer, in good faith, adopted an interpretation granted by such authority.
The SII is an entity that economically depends on the Ministry of Finance, but it has an independent structure and functioning. The head of the service is the National Director, who is appointed by the President. There are regional bureaux in each region of the country, except for the Metropolitan Region of Santiago (the capital), which has five offices. The head of each bureau is the regional director. There is a special office for the purpose of auditing and reviewing high income taxpayer (ie, those whose level of income or equity exceeds certain thresholds).
Generally, the SII operates within reasonable deadlines. However, we have been involved in certain procedures that took longer than expected, specially related to the reimbursement of taxes or administrative filings that do not have a special procedure established by law.
The most common practice is that the SII issues summons and tax assessments close to the expiry date of the statute of limitations (generally, three years as from the tax return, as described below).
Chile recently enacted a major tax reform. It was approved in September 2014, and it is fully in force since January 2017. Such tax reform granted more audit powers to the SII, and incorporated a General Anti Avoidance Rule. The latter allows the SII to request the competent tax court to ignore or disregard the formal aspects of a transaction and characterise the transaction according to its economic rationale. We have seen an increase in tax audits after the enactment of the tax reform, particularly related to rejected expenses and business reorganisations. There has not yet been any pronouncement by the Tax Courts under the General Anti Avoidance Rules.
As a consequence, in recent years audit processes have increased, mainly those related to rejected expenses and business reorganisations. Furthermore, in recent years the SII has required additional affidavits from both national and foreign taxpayers to gather more information related to corporate reorganisations, investments abroad and international transactions. The incorporation of the OECD’s Base Erosion and Profit Shifting plan (BEPS) has also required the SII to create additional affidavits to comply with the country-by-country report and other requirements.
Each year, the National Director of the SII announces the tax compliance plan, in which he or she sets forth the audit priorities and plans for the period. The SII has created a model to define such priorities.
The TGR is the public service responsible for collecting, safeguarding and distributing taxes and other fiscal incomes. The TGR is dependent on the Ministry of Finance. The head of the service is the General Treasurer who is appointed by the President. There is one regional treasury per region, and also provincial treasuries (21 in total).
In January 2009, the TTAs were created by Law No. 20.322. Before the enactment of that law, the SII’s Director acted as judge and decided tax cases in first instance. These independent and special courts decide both tax and custom related trials, and since the tax reform of 2014, the TTAs are also in charge of deciding the claims by the SII regarding the application of the general anti-avoidance rule.
There is one TTA in each region of the country, except for the Metropolitan Region, which has four tax courts.
There is a Tax Reform Bill being discussed in the National Congress, that incorporates the Office for the Protection of Taxpayers. This would be a new public institution, under the supervision of the Ministry of Finance that, upon request of the taxpayers, would act as ombudsman with the purpose of ensuring the protection and safeguard of taxpayers’ constitutional and legal rights. The Bill has been subject to several changes during its discussion in Congress and has not yet been approved.
Can you outline the typical process involved with tax disputes in your jurisdiction, from filing, to notice of deficiency, to litigation? Are there alternative procedures?
Income tax returns filings are due on April each year. After the filing, the SII may either accept the tax return or start an audit process. During the administrative audit process the tax authority may issue the following administrative acts: notification, summons and tax assessment.
The SII may start an audit process by issuing a notification, by which the taxpayer is formally requested to provide further details and supporting documentation regarding the tax return filing. The reason for issuing a notification may be that: there are discrepancies between the information contained in the tax return filing and the information filed by other taxpayers regarding the same transaction; there are differences between the annual tax return and the monthly statements filed by the same taxpayer; or the notification is part of a special audit plan intended to review specific transactions.
If the information submitted in the context of the notifications does not fully support the tax return, and these differences or doubts are not clarified, the SII can issue a formal summons. In that case, the taxpayer will be required to provide further details on some specific account items.
A summons is the first formal administrative act in which the SII identifies the issues with the tax return filing, explains the tax treatment that should apply, and asks the taxpayer to formally respond to the summons, providing the reasons and supporting documentation of its standing. The taxpayer has one month to respond to the summons, but upon the taxpayer's request, this term can be extended for one additional month. If the taxpayer can prove and explain the issues detected with his tax return filing, the procedure terminates with the taxpayer’s response, and the tax return filing is finally accepted by the SII.
If the taxpayer does not submit a response to the summons, or if despite such submission the SII still considers that there are tax differences not duly explained by the response, the SII will issue a tax assessment. Thus, in general terms, tax assessments are issued by the SII when taxpayers are not able to provide supporting documentation regarding the discrepancies detected in the SII summons, and therefore the payable tax amount is determined by the SII.
Taxpayers can file an administrative remedy against the tax assessment that will trigger the review of the audit process and assessment by the SII’s legal department. Recently, the procedure has been amended in two ways: (i) Law No. 21,039 of 2017 modified article 123-bis of the Chilean Tax Code extending the term for filing this remedy from 15 to 30 days, and establishing that filing the remedy will cause the suspension of the term for submitting the tax claim before the TTAs; and (ii) Circular No. 34/2018, that, to avoid unnecessary trials between the SII and the taxpayers, introduced a preliminary hearing before the legal department of the SII so the taxpayer can orally explain the facts and circumstances that serve as grounds of his or her claim. The hearing must take place during the first five days following the day in which the administrative remedy is admitted to process. Furthermore, according to the new Circular, the tax authorities can also summon the taxpayer to a final hearing after the decision is drafted to reach an agreement. Both hearings can be requested by the taxpayer.
The taxpayer may also file a tax claim before the TTAs within 90 days of the assessment. This tax claim procedure has also been recently amended by Law No. 21,039, which created a compulsory conciliation hearing between the parties before the evidence stage, and a second mediation audience after the evidence stage.
Finally, article 53 of the Chilean Tax Code provides that unpaid taxes shall be paid readjusted by inflation and charged with a monthly interest of 1.5 per cent.
Are there alternative dispute resolution mechanisms prior to trial, such as mediation or arbitration? Are such processes mandatory or contingent on the agreement of the parties?
Our tax legislation did not include alternative dispute mechanisms before the amendments of Law 21.039, enacted in October 2017. As mentioned above, today, the Tax Code sets forth a mandatory conciliation hearing before the evidence stage in a tax claim, in which the judge is obliged to propose the basis for reaching an agreement between the SII and the taxpayer. There is also a final conciliation hearing after the evidence stage finalised and before the TTA issues its final decision.
Note, however, that this possibility of reaching a settlement is only available in the context of a tax claim, and the agreement must be approved by the TTA using the criteria established by law. Chilean law does not recognise mediation or arbitration in tax matters or any other alternative dispute mechanisms before trial. However, even though the SII has no power for settling, it does have the faculty to abate a percentage of the fines and interest charged to the taxpayers, which shall be done in accordance with the general criterion established in a circular issued by the National Director of the SII.
A Tax Reform Bill currently being discussed in the National Congress includes an amendment related to alternative procedures. According to the modification proposed, taxpayers would be able to request the Tax Payers’ Protection Office (also a new institution that would be created) to act as an intermediary in a mediation process between the taxpayer and the SII, with the purpose of reaching an agreement and finally settle tax controversies with the tax authority. This Bill has not been approved yet.
What is the process for appealing trial court decisions?
Both the taxpayer and the SII may file an appeal against the TTA decisions, which will be judged by the corresponding Court of Appeals. Such appeal must be filed within 15 days of the notification of the TTA’s ruling. In addition, in the case of an unfavourable judgment issued by the Court of Appeals, the taxpayer, or the SII in certain cases, may file a special remedy before the Supreme Court.
Is there a formal discovery process in tax litigation and controversy in your jurisdiction, and is it the same as that for general litigation?
No, there is no formal discovery process. In general, there is no obligation to submit documentation, neither during the administrative stage before the SII (referred to in question 2) nor in the context of a tax claim before the TTA.
However, as the burden of proof during the administrative stage relies on the taxpayer, there are incentives to provide the SII with the relevant information.
Even though the administrative stage before the SII is independent of the judicial claim, both are directly related. According to article 132 of the Tax Code, the documents expressly requested by the SII during the audit process that were not submitted by the taxpayer in that stage, will not be admissible as evidence in a future tax claim procedure before a TTA. Chilean scholars have criticised this rule. Nevertheless, we are aware of at least two cases in which the Constitutional Court has declared its validity and constitutionality.
Is attorney–client privilege recognised in your jurisdiction? Does it cover drafts of tax documents? Do any similar forms of privilege protect communications between other professionals, such as accountants, and their clients?
The attorney-client privilege is regulated in the Chilean Criminal Code, Criminal Procedure Code and Civil Procedure Code. Its source is the constitutional right to defence regulated on article 19 No. 3 of the Chilean Constitution.
Article 360 of the Civil Procedure Code provides that lawyers are not obliged to declare on facts that have been confidentially communicated to them by its clients. Breach of the confidentiality duty of lawyers is a crime.
Furthermore, the Ethics Code of the Chilean Bar Association provides that privileged information includes not only what the professional can declare but also the documents in which such information is contained, which may include drafts of tax documents.
There are no specific legal rules protecting communications between accountants and their clients. However, a confidentiality duty is recognised by the professional rules of conducts issued by the Associations of Public Accountants.
Are there formal rules of evidence and procedure? Are they different from general litigation rules?
Yes, there are formal rules of evidence. In general, they are similar to general litigation rules, set forth in the Chilean Civil Procedure Code. However, the Tax Code provides certain specific rules that differ from the general rules governing evidence in a lawsuit before a general civil court.
Probably the most notorious difference is the criteria for assessing the evidence. While the Civil Procedure Code establishes fixed rules for assessing the value of the evidence, in a tax claim, the judge should analyse the evidence according to the rule of “sound judgement”. However, it should be noted that the analysis according to the principle of “sound judgement” does not mean an absolute freedom for the judge or arbitrariness in any case. The judge must act according to the process' merits and the submitted documentation. Therefore, the judgment must always be reasoned.
Other differences are the rules governing the discussion stage of the procedure, the available remedies and the rules governing witnesses.
Does the judge or opposing counsel question witnesses in tax litigation?
Yes, both the opposing counsel and the judge are entitled to question the witness in the tax claim procedure.
Can criminal charges be levied under tax law, and how often are criminal sanctions sought?
Yes, our tax legislation provides special tax crimes and penalties on article 97 of the Chilean Tax Code, such as fraud in filing a tax return, issuance of false invoices and obtaining benefits from donations subject to preferential tax regimes.
Regarding criminal charges, the SII is the one who files a criminal action against a taxpayer and according to article 162 of the Chilean Tax Code, the National Director of the SII has the exclusive power to do so. General Rulings and Circulars set forth the criteria to decide whether a criminal action shall be filed or not (eg, the seriousness of the irregularities detected, recidivism, and the use of tax advice, among others). If the SII decides not to file such action, the Tax Code provides a general list of fines that may be applied to the taxpayer, according to a special procedure established therein.
Although the SII decides whether filing a criminal action or not, once the criminal action is filed, the National Prosecutor Office will continue in charge of the criminal procedure.
In recent years, several criminal procedures regarding tax infringements received large press coverage. In certain cases, the SII decided not to pursue criminal sanctions, which caused discussions on the suitability of maintaining the power to file a criminal action in the hands of the SII.
Does the same agency prosecute both criminal and civil tax litigation?
No, although the SII decides whether to pursue criminal sanctions or not, the General Prosecutor Office is the public entity in charge of the prosecution of tax crimes. The SII may participate in the procedure as complainant. The competent courts are the general criminal courts.
The SII has a special department in charge of investigating tax crimes.
Are trials heard by the general courts, or are there specialist tax courts?
As explained above, Law 20.322 enacted in January 2009 created the TTAs, which are specialised courts. Before the enactment of such law, the SII director acting as tax judge decided tax trials in the first instance. These special courts decide both the tax and custom related trials, and after the tax reform of 2014 are also in charge of deciding the claims by the SII for the application of the general anti-avoidance rule.
There is one TTA in each region of the country, except for the Metropolitan Region, which has four TTAs.
The parties may file an appeal against the TTA’s decision before the competent Court of Appeals. In addition, in case of an unfavourable judgment issued by such Court of Appeals, the taxpayer or the SII in certain cases may file a special remedy before the Supreme Court. Both the Court of Appeals and the Supreme Court are general courts.
Which party has the initial burden of proof on common tax issues? What level of proof must be established?
The taxpayer has the initial burden of proof during the administrative procedure according to article 21 of the Chilean Tax Code. There are no legal rules on the level of proof required. According to Chilean case law, the taxpayer should reasonably prove the trustworthiness of its tax returns. For this purpose, he or she may use all the means of proof established by law (eg, documents, witnesses, experts, confession, etc).
Is interest available to the taxpayer following a successful claim for overpayment? If so, how are the rates calculated, and when do they begin to accrue?
According to article 57 of the Chilean Tax Code in the event of reimbursement of overpaid taxes, the TGR must refund the taxpayer the taxes paid in excess adjusted by inflation. Only if the cause of such overpayment is a tax assessment issued by the SII, the refund will accrue interest of 0.5 per cent per month, starting from the day of payment.
This rule differs from that applicable in case of late payment by the taxpayer, in which case a 1.5 per cent per month interest rate applies.
Which is the competent authority for resolving tax treaty claims in your jurisdiction? Outline how the authority operates in practice.
Tax treaties are incorporated into domestic law. A tax assessment by the SII or a general tax claim initiated by a taxpayer may be related to a tax treaty. In those cases, the TTAs will be competent to decide the controversy between the SII and the taxpayer.
On the other hand, following the OECD model, article 25 of the Tax Treaty signed by Chile provides for a mutual agreement procedure between the parties of the Tax Treaty. The competent authority to represent Chile in that procedure is the Minister of Finance.
Can tax law or regulations be applied retroactively, and under what circumstances?
Non-retroactivity is the general rule in our legislation. It is recognised in article 3 of the Chilean Tax Code that expressly provides that the tax law cannot be applied retroactively. The same criteria apply to interpretations of tax laws issued by the SII, which can only have effects in the future.
As this principle is only provided in the Tax Code, a future law may introduce exceptions, and thus apply retroactively. However, it is likely that such provision will breach the Constitution, and therefore will be invalid. In that regard, the Chilean Constitution only expressly recognises the prohibition for retroactive criminal laws (article 19 No. 3), which includes tax laws imposing criminal sanctions. However, according to national scholars, an eventual tax law imposing retroactively tax duties may be in infringement of the constitutional rights of property (article 19 No. 24).
What is the statute of limitations on tax claims, and what are some common ways it can be tolled? Are there exceptions to tolling?
Article 200 of the Chilean Tax Code provides that the SII may assess a tax, review tax return filings and charge taxes within three years from the day in which such taxes should have been paid (generally 30 April for income taxes). The term is extended for three additional months in case the SII issues a summons. Furthermore, in cases where no tax return has been filed or the tax return is determined to be fraudulently false, the term is extended to six years.
Such term is usually tolled by the SII through the issuance of a tax assessment against the taxpayer.
Tax claims are only initiated by the taxpayer against a tax assessment and other administrative acts issued by the SII. The legal term to initiate a tax claim is 90 days from the notification of the relevant administrative act. The term may be extended to one year if the taxpayer decides to pay the tax determined by the SII.
Is litigation over VAT or other non-income taxes significant in your jurisdiction?
Litigation over VAT is significant, especially in case of criminal procedures, but it is not as extensive as litigation related to income taxes. However, in recent years, we have also participated in the defence of taxpayers against tax assessments related to real estate tax, which is not as common as income tax litigation or even VAT litigation, but it involves significant figures.