The tax reform establishes a principle by which tax obligations are triggered and payable in accordance with the legal nature of the business or acts carried out by taxpayers, regardless of their form, denomination or flaws.
It also establishes the principle of the good faith of the taxpayers, by which the IRS must undertake the effects arising from the business or acts carried out by them. However, if a taxable event set forth by the law is eluded by means of the business or acts executed by taxpayers, there will be no good faith.
“Elusion” takes place if there is abuse or simulation, which are defined in general terms by the proposal. In the case of abuse, taxpayers shall fulfill the tax obligations arising from the taxable events set forth in the law. In the case of simulation, taxpayers shall pay the taxes corresponding to business or acts effectively executed by the parties, regardless of the simulated business or acts.
The tax reform recognizes the taxpayers’ right to choose between the different conducts and alternatives set forth by the tax legislation. The sole exercise of such option will not be considered as abuse.
The existence of abuse or simulation should be declared by a Tax Court, upon requirement of the IRS, which will have the burden to prove that elusion was the sole purpose of a given structure.
Individuals and companies involved with the design or execution of elusive tax planning will be subject to penalties of up to 100% of the taxes eluded. If the infraction were committed by a legal entity, the penalty will be applied to its directors or legal representatives, to the extent that there is a breach of their managerial and supervision duties.
