General anti-avoidance rule comes into effect
The September 29 2014 tax reforms (Law 20,780) introduced new provisions to the Tax Code (Decree-Law 830 1974, as amended), which empower the Tax Department to challenge transactions that have been carried out with the aim of avoiding taxes. These provisions introduce a general anti-avoidance rule for the first time. Previously, there was a legitimate business purpose requirement for corporate reorganisations.
General anti-avoidance rule
The general anti-avoidance rule is dealt with in the new Articles 4-bis, 4-ter, 4-quater, 4-quinquies, 26-bis, 100-bis, 119 and 160-bis.
Article 4-bis recognises the principle of good faith and states that good faith does not exist where the aim of a transaction is to avoid taxes. It also states that if a transaction is challenged as being abusive, the burden of proof lies primarily with the Tax Department.
Article 4-ter states that taxation cannot be avoided through the use of legal forms – recognising the substance over form test. The provision indicates that a transaction (or a set of transactions) will be considered abusive if:
- it is conducted to avoid the total or partial payment of taxes;
- it is conducted to diminish the taxable base or tax payable; or
- the applicable taxes are deferred.
However, the provision also recognises that the use of alternatives provided for by the tax laws that could result in such effects will not be considered abusive.
Article 4-quater states that the simulation of operations with the intent of avoiding taxes is considered abusive.
Article 4-quinquies establishes the procedures to be followed to establish whether there has been abuse or simulation in a specific transaction. The Tax Department must present the challenge to the Tax and Customs Court, as provided by Article 119.
Prior to court proceedings, the Tax Department must provide notice to the taxpayer regarding the allegedly abusive transaction. The challenge must be filed within nine months of the taxpayer’s response to such notice. If the taxpayer presents no response, the term will run from the date of notification.
This provision also includes a de minimis rule, as a transaction cannot be challenged if the avoided taxes do not exceed 250 monthly tax units.(1)
Article 26-bis recognises the right of taxpayers to request an advance ruling on a specific transaction. If the transaction is approved and performed in accordance with the details provided by the taxpayer, it cannot be challenged afterwards. The law specifically states that other taxpayers cannot rely on such rulings, as opposed to rulings in other matters which taxpayers can use as authorised guidance to justify their transactions.
Article 119 states that the Tax and Customs Court has jurisdiction to decide on these matters and provide procedural rules for handling such cases.
This provision also states that the applicable penalty will be 100% of the taxes avoided, with a maximum of 100 annual tax units (approximately $77,500).(2) In the case of legal entities, legal representatives and directors can be subject to penalties if they have failed to exercise their supervisory duties.
Circulars 55 and 65
The instructions that the Tax Department has issued to date are contained in Circulars 55 (June 24 2015) and 65 (July 23 2015).
Circular 55 deals with the specific issue of transactions that were not completed by September 29 2015. If a transaction was initiated before that date, but is concluded after the new provisions entered into force, it may be subject to challenge. In contrast, if the transaction was initiated and concluded before that date, the Tax Department cannot use the new rules to challenge it.
Circular 65 provides general instructions on the general anti-avoidance rule’s application.