Foreign Passive Income
The rental operation demonstrated, once again, the difficulties of implementing the tax reform. The new rule of article 41G of the Income Tax Law (the «41G»), which requires taxing the owners for the profits of a company controlled by them abroad, has generated many practical doubts for its application. Different professionals are applying different criteria. Probably the same happens in the control instances of the SII.
The typical case is that of an individual resident in Chile («Juan Manuel») who has an investment portfolio in a foreign bank through a foreign company or trust («BVI»). Normally, Juan Manuel will have regularized the BVI in the process of voluntary declaration of assets of the year 2015 (the «Super 8»).
Some of the situations that have generated doubts are:
1) Is it necessary to determine the income of BVI with full accounting?
The legal rule only says that the rules on determining the first category tax base should apply. Most of the professionals with whom I have talked understand that this does not imply a complete accounting of the companies. It would be enough a simplified accounting of income and expenses that allows the determination of a taxable base applying the rules of the tax of first category.
2) Can Juan Manuel’s direct investment losses be compensated with the income attributed to him in the same year by article 41G?
There is no response in article 41G or in the instructions of the SII. The general rules are contradictory. However, reasonableness and logic indicate that yes. The main argument is that both should be considered income of the same species that, because they were obtained in the same year, can be compensated. A contrary conclusion is repugnant to the very definition of «rent».
3) What tax cost should BVI use to determine its capital gains?
Normally, Juan Manuel would have declared BVI’s shares in the Super 8. To establish its market value, it would have been based on the market value of BVI’s investment portfolio, which was its only asset.
The Super 8 allows to recognize as a tax cost of the declared assets, its market value at the date of the declaration. In our example, the actions of BVI. The standard does not expressly contemplate the possibility of transferring the same cost to the underlying assets (ie, the investment portfolio), unless the BVI is dissolved. Therefore, with respect to each sale transaction in the portfolio, BVI should determine its profit or loss by looking at the historical cost of each instrument, according to the general rules. Certain statements of the SII could be read as a confirmation of this thesis. In my opinion, they are not clear or specific enough to give them the character of official interpretation on this point.
In any case, this literal rigor is contrary to the spirit and sense of the Super 8 rule. The Super 8 was established as a single tax and as a substitute for any other tax. Therefore, its interpretation should avoid creating instances of double economic taxation, or double non-taxation. Double taxation occurs when the value of the asset when declaring Super 8 was greater than the acquisition cost of the asset; it would be taxed twice for that greater value. The double non-taxation occurs in the opposite case. The lower acquisition cost implies that Juan Manuel, in the past, had higher revenues that were not part of the Super 8, and can take advantage of the same loss to lower his taxable base of 41G.
The Super 8 was a tax that paid attention to the economic fund, ignoring the formal structures. For example, the assets of a trust, legally owned by a trustee, were attributed to the beneficiaries or constituent. Also, the income obtained by companies abroad was understood as non-compliance, although formally, if they had not been withdrawn, they were not necessarily.
Consistently attending to the substance of the structures, the acquisition cost of the assets in the portfolio should be the value they had when declaring the Super 8. This, particularly when said portfolio was the direct source of the Super 8’s tax base, was accompanied all the historical background and evolution of that portfolio to establish its origin and traceability. In such cases, it should be understood that, in substance, the investment portfolio is in itself an asset declared in the Super 8, without prejudice to the fact that for simplicity, only its continent (ie, the BVI) was stated on the form.
These and other technical questions were not clarified proactively by the SII or identified in sufficient time by the advisors to request their clarification. They were presented during the preparation of the rental operation. This implies that for the 2017 AT there will be criteria legitimately div