Are Negotiations with Tax Authorities in Latin America Becoming a Trend?

Although local rules differ, and settlements in the region do not always take into consideration the specifics of each taxpayer, it is possible to negotiate with tax authorities in Latin America.

Brazil

In Brazil, tax settlements and negotiations with tax authorities are common at the federal, state, and municipal levels, and in the administrative and judicial spheres. Historically, Brazilian taxpayers wanting relief had to wait for the release of the next amnesty program by the government. Every few years, these programs grant standard discounts on tax fines and interest to taxpayers across the country. However, things have changed.

Now it is also possible for a taxpayer to negotiate tax debts directly with tax authorities by following specific legal requirements. According to the Brazilian tax authorities, 404 billion reals (US$77 billion) was recovered in taxes paid through settlements until December 2022.

It’s important to note that the tax settlement rules currently in place in Brazil provide for discounts on tax fines and interest, not on the assessed amount of the tax. Payments of tax debts can include up to 120 monthly installments. It’s also worth noting that it is not mandatory to enroll all tax debts in a settlement and that it’s possible to pay tax debts by using net operating losses (NOLs) and other tax credits.

Finally, when compared with other countries in Latin America, the settlements in Brazil are not typical arrangements with the tax authorities. The legislation that regulates the settlements generally does not provide for an open negotiation of tax debts with the tax authorities. The rules usually apply to a major group of companies or individuals, considered by type of tax debt, by industry, or by other characteristics. However, it is clear that arrangements which take into consideration the specifics of the taxpayers or their tax debts are becoming more common.

In Argentina, negotiation with tax authorities is feasible exclusively at administrative level, during tax audit processes. Taxpayers are entitled to negotiate the scope of the tax audits and to rectify their tax returns during such audits. If tax returns are rectified during the tax audits, certain benefits may apply, such as the reduction of applicable penalties.

Argentina

Tax settlements in Argentina, named conclusive volunteer agreements (CVAs), is applicable before the final tax assessment is issued and the correspondent tax audit is closed. This negotiation alternative is available only at the federal tax authorities’ discretion. In addition, the tax settlement cannot be applied in case there are criminal denounces. If the taxpayer rejects the tax authorities’ tax settlement proposal, the tax authorities are entitled to resume the tax audit. On the other hand, if the tax settlement proposal is accepted by the taxpayer, the factual circumstances involving the case cannot be challenged by the tax authorities.

Under current regulations, the terms and conditions of the tax settlement (CVA) must be approved by the head of the Argentine federal tax authorities. The terms of the tax settlement do not create administrative precedents unless they are exclusively based on legal matters, with no factual circumstances involved—in which case all taxpayers may benefit from the interpretation on legal matters set forth under the tax settlement.

In addition, although it is not specifically set forth under current regulations, there is an open question whether federal tax authorities may request a guarantee on the tax debt accepted by the taxpayer under a tax settlement. Finally, it is not yet possible in Argentina to negotiate and reach a tax settlement with federal tax authorities at the judicial level.

Chile

In Chile, negotiation with the tax authorities—i.e., providing proof of facts in objection to tax assessments—is possible during tax audits, administrative challenging processes, and judicial disputes. It is always possible for taxpayers to request a remission of interest and penalties additional to that automatically granted by the tax authority. Chilean taxpayers are able to rectify tax returns during a tax audit and administrative challenging process, or even after a tax settlement has been issued, by means of administrative requests.

During the judicial process, there are different proceedings that can formalize a negotiation with the tax authorities: request of settlement approved by the IRS’s commissioner (avenimiento); conciliation approved by the judge (conciliación); and administrative request, after withdrawal of the tax claim (revisión de actuación fiscalizadora).

It is also relevant to highlight that Chile has a mediation process promoted by the taxpayer ombudsman (DEDECON), between the IRS and the taxpayer. From 2020 to mid-2023, there were 24 cases of requests for settlements to the IRS’s commissioner in Chile, from which 21 were rejected, 2 were partially accepted, and only 1 was fully accepted.

There have also been 71 cases of conciliation approved by judges and several administrative reconsideration recourses (filed prior to initiation of a judicial process), from which, on average, 51.58 percent were fully accepted, 19 percent were partially accepted, and 29.42 percent were rejected. After withdrawal of a tax claim, administrative requests (normally filed after a judicial process was initiated) were, on average, 41.03 percent fully accepted, 25.13 percent partially accepted, and 33.84 percent rejected. Therefore, there are strong alternative tax dispute resolution mechanisms to be considered.

The IRS is also promoting the subscription of advance pricing agreements (APAs) in Chile for preventing disputes in transfer pricing. Since 2021, eight APAs have been subscribed, collecting US$653 million, which shows that there are great opportunities to negotiate with tax authorities in transfer pricing issues.

Mexico

In Mexico, since 2011, taxpayers have had the ability during a tax audit to request assistance from the Mexican tax ombudsman (PRODECON), who will act as a mediator between tax authorities and taxpayer in order to reach a settlement. This procedure is called the “conclusive agreement procedure” and should be requested by the taxpayer no later than 20 business days from the end of a tax audit. The filing of this procedure will suspend the terms of the tax audit. There have been more than 15,000 requests since this proceeding was created in Mexico, and most of the requests have reached a successful tax settlement.

During the conclusive agreement procedure, it is possible to offer different evidence from what was available during the tax audit, with the goal of rebutting the observations of the tax authorities in the tax audit. It is also possible to hold meetings with the tax authorities and PRODECON in order to explain the company’s operations and reach an agreement with the tax authorities. The maximum length of this procedure is 12 months. If, during the conclusive agreement procedure, a settlement is not reached, or if it is reached only partially, then the terms of the tax audit will continue until a tax assessment is determined, if any.

Also in Mexico, during a tax audit, it is possible for taxpayers to hold meetings with the tax authorities that are handling the tax audit, so that the taxpayers will be able to know the tax authorities’ position. In this stage, it is possible for taxpayers to explain their operations, tax and accounting filings, and other specific issues that may be questioned by the tax authorities. This approach is available from the beginning of a tax audit and can be extended until the end of the audit.

It is possible for taxpayers to obtain a reduction of tax fines (up to 100 percent) and a reduction of surcharges (up to 50 percent) in cases where the taxpayer complies with the corresponding requirements and makes a correction to its tax obligations.

The LatAm Region

Countries across Latin America are following a global trend making it extremely beneficial for both tax authorities and taxpayers to maintain a relationship based on transparency and open communication. Considering that the tax environment in the region is still very complex and that governments are in need of increasing tax collections to deal with social, economic, and political instabilities, the possibility of negotiating tax debts in good faith is a trend that has come to stay.

Rafael Gregorin is a partner with Trench Rossi Watanabe and Gian Carlo Evaso is a senior associate at the firm. Juan Pablo Menna is a partner at Baker McKenzie based in Argentina, Jorge Salazar-Cebrian is a partner at the firm in Mexico, and Cristián Bonacic is an associate at the firm in Chile. Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement to consult on foreign law.

From: Daily Business Review