Fundamentals of Tax Law: A Comprehensive Guide

Posted on Oct 27, 2024 in Law & Jurisprudence

Tax Law Fundamentals

Financial Activity and Tax Law

Financial activity is the branch of law dealing with the collection, administration, and distribution of financial resources for public entities. Financial law is the broader category, while tax law is a specific type within it.

Tax Law Definition and State Income Sources

Tax law studies the legal rules governing taxes, duties, powers, and prohibitions. Sources of state income include:

1. Exploitation of state-owned assets
2. Use of its legal personality
3. Power to levy taxes
4. Use of its power to sanction

State expenditures are categorized as:

1. Operational: necessary for running the state apparatus
2. Social works and development

Tributes and Their Elements

Tributes are cash payments required by the state to obtain resources for fulfilling its purposes. Key elements include:

1. The state’s authority to establish, modify, and extinguish taxes
2. The mandatory nature of tax payments
3. Payment exclusively in cash
4. Resource generation for state purposes

Tax Classification

Taxes are classified as follows:

1. Taxes: Payments to the state for a specific action, without direct consideration in return.
2. Contributions: Payments to cover increased property value due to public works.
3. Fees: Payments for specific public services (e.g., tolls).

Tax Categories

Tax is a coercive requirement of a sum of money from individuals to fund the state’s purposes.

1. Collection Method:
   1. Direct: Collected through a role system (e.g., land tax)
   2. Indirect: Require prior declaration and payment (e.g., VAT)
2. Tax Incidence:
   1. Direct: Affect the taxpayer’s assets directly
   2. Indirect: Transferred to another party
      1. Transfer tax: Taxpayer transfers the burden to a third party (e.g., VAT)
      2. Surcharge tax: Included in the price of goods or services (e.g., VAT)
3. Taxpayer Link:
   1. Personal: Differentiated based on the taxpayer
   2. Real: Applied equally to all persons involved

Tax Power and Limits

Tax power is the state’s legal right to require taxes within its jurisdiction. It has legal and political limits.

Constitutional Principles

1. Legality: Taxes can only be imposed, reduced, or eliminated by law.
2. Equality/Generality: Taxes should affect only individuals specified by law.
3. Equity and Justice: Taxes should not be disproportionate.
4. Ownership: Taxes cannot be confiscatory.
5. Neutrality: Taxes should generate resources for the state, not specific purposes.

Political Limits (Double Taxation)

Double taxation can be domestic or international. Solutions include:

1. International treaties (agreements)
2. Unilateral methods:
   1. Deduction: Foreign tax as a deductible expense
   2. Codes: Lower rate for foreign income
   3. Credit: Foreign tax as a credit against total tax
   4. Credit for unpaid foreign tax

Types of Income (Chile)

Income can come from capital or labor. Section 42 of the LIR (Income Tax Law) addresses dependent and independent employee income.

Global Complementary Tax

Applied to individuals’ total annual income. First category income is credited against this tax. Sections 29-33 of the LIR detail taxable income calculation.

Tax System

The state’s power to establish taxes includes creating rules for collection, management, and compliance monitoring. A tax system comprises rules for taxation powers, administration, and enforcement.

Tax System Features

1. Simplicity: Taxpayers should understand tax obligations.
2. Flexibility: Adaptability to economic changes.
3. Sufficiency: Taxes should finance government spending.

The Chilean tax system aims to prevent unequal tax burdens and provides investment incentives.

Chilean Tax Regulations

Chilean tax regulations are classified as:

1. General: Rules for tax administration and enforcement (Tax Code)
2. Special: Detailed rules for specific taxes (e.g., DL 724, LD 725)

Sources of Tax Law

1. Positive Sources (Binding): Constitution, laws, regulations, decrees
2. Doctrinal Sources (Informative): Court rulings, author opinions

Tax Law Effects (Time and Territory)

1. Time: Effective upon enactment and publication (exceptions exist)
2. Territory: Generally applied within national territory (exceptions exist)

Subjects in Tax Law

1. State and its agencies: SII (Internal Revenue Service) and Treasury General
2. Taxpayers: Individuals and legal entities

Tax Liability

Tax liability is the legal relationship where one party has the right to expect specific behavior from another. It involves a legal link (usually tax), subjects (active and passive), and an object/content (taxpayer’s provision).

Cause of Tax Liability

Tax obligations have a practical purpose: benefits for taxpayers from the state. Charges exceeding set limits are disproportionate or unfair.

Subjects

1. Active: The state
2. Passive: Taxpayer (can be a manager or substitute)

Object/Content

The taxpayer’s provision to the tax authority, including primary and secondary obligations (e.g., registration, accounting, payment).

Taxable Event

The specific event defined by law that triggers the tax obligation.

Elements

1. Legal fact
2. Monetary content
3. Personal link
4. Legal provision
5. Tax law effect

Tax Base

The quantification of the taxable event, considered in relation to a specific period and location.

Tax Rate

The amount of money owed for each taxable event.

Classification

1. Fixed rate
2. Variable rate:
   1. Portion variable rate:
      1. Proportional: Constant rate regardless of tax base
      2. Progressive: Rate increases with tax base
      3. Regressive: Rate decreases with tax base
      4. Gradual: Different fixed rates for different tax base ranges
   2. Specific variable rate: Applied to non-monetary bases (e.g., weight, volume)

Tax Credits and Exemptions

Tax credits and exemptions are incentives for economic policy and investment attraction. Exemptions are legal immunity from tax liability.

Tax Liability Cycle

The taxpayer can self-identify or be identified by the tax authority. The tax liability can be determined by the debtor, a joint debtor, a judge, or the SII.

Extinction of Tax Liability

Methods of extinguishing tax liability include payment, remission (cancellation), and prescription (statute of limitations).

Tax Administration

Tax administration involves appearance (in person or through an agent) and notifications (personal, ID, registered letter).

Tax Control Rules

The SII has the power to examine documents, summon individuals for testimony, and examine accounts. Limits include professional secrecy and family relationships.

Tax Offenses and Penalties

The Tax Code defines simple tax infringements, simple tax crimes, and tax crimes, each with different penalties.

Tax Claim Procedure

Taxpayers can challenge tax settlements, payment orders, or decisions through administrative appeals (RAF) or lawsuits.

Tax and Customs Courts

.

1. claimable acts are the same.
2. sue the term is 90 days and within those 90 days will have 50 days to lodge an administrative claim.
3. resources first and second instance are the same.
4. action for infringement of the rights or protection tax: when you violate the constitutional guarantees can bring such an action before the tax court.

Regarding the appointment of judges council tax say the public address lists should be 10 people that have the following requirements: 5 years of practice in tax and other requirements to be a judge. This court will be sent to the appeals court to elect a slate and finely be president of the republic who elect them.

INCOME TAX.

The relevant legislation is contained in the DL. 824 of 1974. This law contains various taxes, such as:
1.Impuesto first class. Such a tax levied on individuals or corporations for its income derived from the exploitation of capital.
Currently this tax is a flat fee amounting to 17%. This tax is also called corporate tax is the most typical because firms pay.
The most common is that imposed on legal persons, but that does not exclude that imposed on individuals that generate income.

2.Impuesto second category: it is a tax levied on income received by individuals resulting from their work people, on the exploitation of capital.
To see this tax their supports two categories:
a) as such: that taxes the liberal professional and other independent activities.
b) Tax-dependent single work: I will pay a flat tax, even you must declare it is the employer who says so.
These are progressive rates ranging from 0 to 40% depending on amount of income.
When it comes to tax second category refers to both as a whole, however, their regulation is completely different.

Global complementary 3.Impuesto: total income received by natural persons domiciled or resident in Chile. They end tax. Ranging from 0 to 40%.

Additional 4.Impuesto: is a variant of global tax and imposed additional income received in India by foreign natural or legal persons. Its rate is casuistry, Gral rule is 35%.

Ex Spanish company that has revenues in Chile for 100 they learn in state coffers by 17%. As the parent company is in Spain, Chile matrix will retain 35% when you want to take their profits.

Another variant of the first category tax:
a) Tax 1 single category: it is different from the tax of 1 category since the tax is paid 1 tax of 1 category + global complementary or additional tax. In contrast to the flat tax is paid on that alone.
b) Tax on expenses disallowed: it applies only to corporations, has the unique character and is charged a rate of 35%.

The LIR in Art 2 gives a definition of income, which tells us what their number one income means all income are gains or profits are to yield a thing or activity and all benefits or increases profits heritage that are received or accrued whatever its nature, origin and description.
It is a fairly broad definition, virtually all income earned in tax will be affected. The only limit is recognizing LIR Art.17 of income are not income.

This definition in Art.2 speaks of income received and accrued.
Revenues: the one on which you have a title or right and which is a credit to the owner. Independent enforceability of its current credit I have to demand it at any time.
Income received: is one that has physically entered the estate of a person.

Art.2 Also defines:
Calendar year: that which elapses between 1 January of one year and ends on December 31.
Business year: that period of time usually elapses between 1 January of a year to 31 December, with two exceptions: that it is started or end of shift activities within that business year.
For example, in the tax of 1 category is paid in tax year 2009 the business year 2008.
Tax Year: this n that are paid as taxes or a share of them.

The LIR distinction between nationals and foreigners:
-Domiciled and resident in Canada, must pay the taxes generated in Chile and worldwide sources.
-Foreigners domiciled or resident in Chile, only the first three years must pay tax on income Chileans. (it may request an extension to the regional director).
“The non-domiciled but resident in Chile will pay only for generating income in Chile.

Article 2 .- For the purposes of this Act shall apply, as are not contrary to, the definitions in the Tax Code and also, unless the nature of the text implies another meaning, means:

1 .- income, income gains or profits which are to yield a thing or activity and all benefits, profits and equity increases that are received or accrued, whatever its nature, origin and description.

For all tax purposes is part of the assets of the companies benefiting from the provisions of article 14 bis, income received or accrued while not withdrawn or distributed.

2 .- For unearned income, the one on which has a title or right, regardless of their current enforcement and that is a credit to the owner.

3 .- The term “income received”, that it has entered materially to the estate of a person. It should also be understood that income earned is perceived that the obligation is met by a mode of payment other than extinguish.

4 .- “minimum presumed income, the amount is not subject to any deduction for the taxpayer.

5 .- The term “effective capital”, the total assets excluding those values that do not represent actual investments, such as intangible assets, nominal, transient and order.

Active means any property that has a firm, tangible, and intangible.
Liabilities: everything a company or a person owes to others.
Heritage: the amount of liquid asset I have as difference.
Current assets: assets that the company has easy movement.
Fixed assets: real estate, those made by the company, without wishing to sell.

Article 17: establishes a revenue limit would not constitute income as compensation, insurance, employee benefits, provisions, adjustments, etc..

1. Compensation for any damages (without trial) and moral damage shall not itself be a rental income provided it has been ordered by a court by court order.
Loss of income if income is establishing.

2 º. The compensation for industrial accidents, whether they consist of fixed sums, annuities or pensions. Article 17 No. 2. In this case, we are witnessing the implementation of Act No. 17,344,
which provides benefits for industrial accidents and occupational diseases. The worker must lose entre15% and 40% of its production capacity. Survivors’ pensions when they exceed 40%.

3 º Amounts received by the beneficiary or insured life insurance of desgravamen, endowment or annuity during the contract period at the end of period specified therein or at the time of transfer or settlement, excluding income from annuities AIA.

4 The sums received by the recipients of pensions or annuities received by beneficiaries of pensions not exceeding a ¼.

5 The value of contributions received by the societies which follow that we are in presence of transfer of assets and not income-income constituents.
Company contributions
-revaluation of the equity.
Revaluations are made-to capital under the law.
-Surcharge obtained in cases of SA placement of shares of its own broadcast. This is if those amounts are not distributed. Eg a SA decides to place shares on the market, they report a more useful in my records, these are an additional $ 50 per share which is not income.

6 The No. 6 of Article 17 states that do not constitute income or profits funds are distributed to shareholders in the form of shares wholly or partly released or the increase of their nominal value, as also part of the dividends coming from the income referred to in section 17.
It is in the presence of the corporation, upon reaching the Ordinary Shareholders, decided to capitalize on profits, either through actions that are distributed to members, representing capitalization or by increasing the nominal value actions.
This provision in its final part states that do not constitute part of the income dividends paid to shareholders and income coming from own section 17, subject to adjustments of the numbers 25 and 28 of Article 17 possible, as stated in Article 29 of the same legal text, should be considered gross income if it is taxpayers who must keep accurate accounting.

Eg I have a company with a capital value is 1000 and my 1000 + d-stock for $ 1 and capitalize on those profits, that is, increase the nominal value of the capital, the latter if they are income.
What constitutes income are not the returns of the initial capital.

7th refers to the return of social capital and that these adjustments are made under this Act or previous legislation and that do not correspond to taxable income to be capitalized to pay taxes on this law. This is one taxpayer who gets back its capital from any cause and could be its withdrawal from society.

8th is not income, the highest value obtained in the following situations:
a) The sale or transfer of shares in SA
The acquisition value of the share due to adjustment by the CPI between the last day of acquisition and the last day of his alienation.
Ex addiction Value: $ 100, IPC $ 10% profit $ 90. Income is income not establishing the purchase price + adjustment.

Method of taxation of profits on the acquisition value (test question).

Utilities? usual full tax is paid, ie 1 ° category + supplementary or additional value. (She is considered normal practice IBS)
? Unusual, is distinguished:
-A person connected: Full taxation
Unrelated-person: we have to distinguish: if between the acquisition and disposal occurred less than 1 year full tax is paid.

As taxed on profits earned by the purchase price adjusted properly. The distinction is embodied in Article 17 No. 8 subsection 5.
General rule:
Usual 1: SII indicates that the social turn is the sale of shares it considers normal. And taxation is complete seri-class tax more global or additional tax.
2 º No Habitual: a. taxation related persons is complete.

B. unrelated persons. We must distinguish: if between the disposition and acquisition of shares less than a year passed, the tax payment is complete.

If more than one year elapses be distinguished: if the acquisition takes place prior to 01 January 1984, an income that will be establishing income. And if the acquisition took place after 31 January 1984, the tax paid first class only.

Article 17 N ’11 states that do not constitute income shares that delivers partners. In the case of legal persons such as corporations and foundations, the resources contributed by the individuals that constitute it are not income.

Article 17 No. 12 refers to the highest value obtained in the alienation of movable occasional personal use of the taxpayer or of all or some of the objects that are part of the furniture in your residence.

Article 17 No. 13 states that do not constitute income of the household allowance, pension benefits, compensation for severance pay and retirement to a maximum of one month per year of service with limited to six months.
This rule provides that the allowance, amount paid to workers for their loads and come in amounts of state and pension benefits that workers derive not constitute income.

Likewise, neither is the compensation for years of service and the other embodied in the Labor Code, as compensation to every event and the lack of notice, since the term eviction is to be understood in the context of compensation to be arise from the term of employment.
Debiesen also be covered voluntary compensation arising from a contract or collective bargaining agreement, since the rule in point relates to compensation for retirement.
The No. 14 Article 17 refers to food, mobilization or accommodation provided to the employee or worker only in the interest of the employer or employer, or the amount you pay money for this cause. Wherever reasonable opinion of the respective Regional Directorate.

The No. 15 of Article 17 refers to translation and travel allowances, according to the Regional Director.

The No. 16 Article 17 refers to the amounts received for expenses, provided that these costs are established by law. Ex public officials.

The No. 17 of Article 17 refers to the amounts received from pensions or pensions from a foreign source.

The N ° 18 of Article 17 refers to the amounts received or expenses paid in connection with scholarships. Both workers and their children.

The No. 19 Article 17 refers to alimony that is required by law to certain persons, only for them.

FIRST TAX CATEGORY

ACTIVITIES INCLUDED IN THE CATEGORY
This is the tax levied on income constitute income, whether earned or received by those taxpayers who are listed in Article 20 of the Act of Income Tax and which entail the exploitation of capital. First analyze the activities that received revenues or give rise to this tax, whose rate is 15% on net profits.

1) Income from real estate: Article 20 N • 1

We are witnessing the income comes from exploitation of real estate, real estate whichever distinguish between agricultural and nonagricultural.

1. Agricultural real estate.

In this case, taxpayers who own or operate any agricultural real property title will be taxed as follows:

Contributors income taxed at 1.1 effective.

In actual income, as a rule, can reduce the amount of tax to pay the land tax paid during the year.
If charging land tax as a credit against the First Category Tax and a surplus, it will be lost, since it is capable of charging no return. The land tax rebate which the First Category Tax on income in this regime should be effectively adjusted according to the variation of CPI between the last day of the month preceding the payment date and the last day of the month prior to year end. They are required to pay tax at effective income farmers the following:

1.1.1. Those who are constituted as a corporation.
1.1.2. Those with higher annual net sales of 8,000 units monthly tax.
In relation to this limit of annual sales, must be understood not only sales of the taxpayer as such, but that total agricultural sales of other companies turn Those which is associated with excluding stock companies.
1.1.3. Communities, cooperatives or companies who are not constituted only by natural persons.
1.1.4. Taxpayers affected by both income as farmers and other activities of Article 20 of the Law on Income Tax.

2. Nonfarm real estate.

Treatment must be distinguished from them, as to whether you do that exploits as owner or tenant for life or not.

2.1. Owner or user.
Under Article 20 N ° 1 letter d), also operates a system of presumed income from exploitation of non-agricultural real estate, consisting of a 7% tax on the appraised value of the owner or usufructuary
Now, if income is being declared effective, they should be under the general rules issued by the director, having made clear that, in any case, income is taxed at effective, provided that it exceed 11% of the fiscal value. Now, in the case of corporations that exploit non-agricultural real estate, income will be taxed effectively lowered the tax may pay the land tax paid on the adjusted exercise.
Finally, we note that the presumption does not operate on those who exploit non-farm real estate intended for use by the owner or his family as well as on the goods covered by the DFL No. 2 of 1959 and Act No. 9135. nonfarm real estate, consisting of 7% of the fiscal value on the owner or user.

2.2. No owner or user.

Who operates agricultural real property other than as owner or usufructuary. be taxed as income effectively.

2) Income from movable capital. Article 20 N2

This number refers to the income derived from movable capital, consisting of interest, pension or other income arising from the dominion, possession or mere possession of these instruments.
Are established by the N • 2 of Article 20 different instruments that provide returns essentially deposits and loans.
As to when the tax is levied in this case we must note that this happens when we see the rents.

3) Income from activities 3 of Article 20.

This refers to income coming from commercial and industrial activities in general.
Indeed, arto 20 N ° 3 makes a list of activities the revenues or perceived result to set the fact taxed. The list is exhaustive and includes the following activities:

1. Industry and trade, meaning the first in a broad sense as industrial processes that involve both processing and value-added inputs and raw materials. On trade, it must be understood in a concrete manifestation of the traditional business and not a concept as broad as that of Article 3 of the Code of Commerce.
2. Mining, ex1racción of wealth from the sea and other activities ex1ractivas. In this aspect ex1ractivas and activities involving the exploitation of natural resources both renewable and nonrenewable.
3. Airlines, insurance, banks, savings and loan associations, mutual fund management companies, investment companies or capitalization, financial companies and the like. These activities are common factor in services are dominated by capital.
4. Construction. This is an activity in which capital is a productive factor essential, so the income they generate are in this category.
5. Journalism, advertising, broadcasting, television, automatic data processing and telecommunications.

4) Income from activities of No. 4 of Article 20.

This issue warn some income coming from services-dominated capital over work:

1. Brokers, whether or not graduates, excluding brokers who are natural persons and whose income derived exclusively from their work or personal performance without employing capital.
2. Brokers with established office, the latter being the taxpayer makes this remain in this category.
3. Martilleros.
4. Customs agents, shippers and others involved in maritime trade, port and customs.
5. Insurance agents who are constituted as legal persons.
6. Schools, colleges and private educational institutions and other private institutions of this kind. In this issue fall all private educational establishments, such as pre-university, technical training centers, etc..
7. Clinics, hospitals, laboratories and similar establishments individuals.
8. Companies of fun and entertainment.

5) Income from activities of No. 5 of Article 20 (Standard Generic).

They are found in this issue all income received or accrued as taxation is not expressly provided for in this category and is not exempt. We know that Article 20 comes into the first category include income received or accrued from activities dominated by capital.
Hence then it must be borne in mind that what this is No. 5 states that any income earned or received that is not specifically listed and is the exploitation of capital is based on the l ‘category.

6) Income from lottery prizes. No. 6 Article 20 —

Be applied as a single tax rate of 15% compared to lottery prizes, including prizes for tickets unsold or uncollected in the previous draw.

TAX BASE: DETERMINATION OF LIQUID INCOME TAX

Articles 29 and following of the Law of Income Tax are to establish the procedure by which we arrive to determine the taxable net income of First Category Tax, ie the tax base affects the rate of 15%. This procedure involves considering the following stages.
This procedure involves considering the following stages:
a. Gross income. Gross revenues are those derived from the exploitation of
goods and activities included in the category. This includes all income except for income not constitute an article 17 of the Act. However, for taxpayers who must or may carry reliable accounts, the adjustments of certain titles of No. 25 The provisional monthly payments of No. 28 of Article 17 will be seen in gross income. Also considered gross income referred to in item 2 of article 20, that is, income from movable capital, such amounts being included in gross income the year they are earned, except income from arto 20 NQ 2 was included in
the year that was received. These taxpayers may lower the amount of tax withheld from such income tax that for these purposes shall be considered as provisional payment.

Article 29 of the Act specifies the following rules with respect to the following gross receipts:
1.1. Contracts of promise of sale of properties to be included in the year that you sign the sales contract concerned.
1.2. Construction contracts for lump sum, the gross income shall consist of the value of the work performed and included in the year they are made by the respective collection.
1.3. Gross income from maintenance services, repair and maintenance of a work for public use in grant is equivalent to the difference of subtracting sums of total monthly income earned by the concessionaire for operating concept of granting the amount obtained by dividing the total cost of the work by the number of months of actual operation or, if you wish the dealer, for the third term. For taxpayers who are in the numbers 1, 3, 4 and 5, excluding, therefore, those obtaining income from movable capital, it is possible to move from gross income to gross income.

Gross. One that is not deducted from gross revenue the direct cost of goods and services required to produce income. Article 30 of the Act provides income tax rules relating to direct costs, distinguishing between goods purchased in the country and imported:
1. Acquired in the country. In the case of goods purchased in the country, the direct cost is the value or purchase price, according to the invoice, contract or agreement and, optionally, the value of freight and insurance to the purchaser holds.
2. Interned. In the case of goods into the country, is considered a direct cost on CIF value, ie the product cost, insurance and freight, plus the duties of hospitalization, the costs of customs clearance and, optionally, the freight and insurance to the cellar the importer. Article 30 gives himself rules in relation to minerals, the promises of sale and other direct costs.

3. Produced by the taxpayer. In the case of goods produced or manufactured by the taxpayer, be considered as the direct cost of the raw material value and the value of labor.

Net income. To reach it must be deducted from gross income all expenses required to produce a concept distinct from direct cost, as spending is not involved in the production process as inputs or raw materials, but essentially we are dealing with disbursements to which he resorted to achieve the income generated in the year. Article 31 establishes a list of expenditures that are necessarily incurred and to be deducted from gross income to result in net income, in an enumeration is not exhaustive and we proceed to analyze:

1. Interest paid or accrued on amounts due during the year referred to the tax, excluding interest and adjustments paid or owed for loans or credits used for the acquisition, maintenance or operation of property not producing income taxed in the first category .
2. The taxes imposed by Chilean law, if they are related to the company’s turnover and if other taxes are not the same DL NQ 824, nor ralees levied on goods or special contributions are building or improvement.
Text explicitly states that no law should be spending on taxes that have been replaced by an investment of taxpayers.
3. The losses sustained by the business or commercial enterprise during the year referred to the tax, including those that result from crimes against property.

The latter article states that may be deducted from the accumulated losses of previous years must be attributed the losses to profits not withdrawn or distributed and that obtained in the period following the losses and if they are not absorbed by the earnings reported, the difference is charged to the following year and so on.