Since penalties are only one of many administrative and procedural aspects of a tax system, it is difficult to conclude whether a particular penalty is fair or not without considering the other aspects of the tax system. Nonetheless, OECD member countries agree that the following conclusions can be drawn regardless of the other aspects of the tax system in place in a particular country. First, imposition of a sizable “no-fault” penalty based on the mere existence of an understatement of a certain amount would be unduly harsh when it is attributable to good faith error rather than negligence or an actual intent to avoid tax. Second, it would be unfair to impose sizable penalties on taxpayers that made a reasonable effort in good faith to set the terms of their transactions with associated enterprises in a manner consistent with the arm’s length principle. In particular, it would be inappropriate to impose a transfer pricing penalty on a taxpayer for failing ... Read more

In 2003 Molinos Argentina had incorporated Molinos Chile under the modality of an “investment platform company” regulated by Article 41 D of the Chilean Income Tax Law. Molinos Argentina owned 99.99% of the shares issued by Molinos Chile, and had integrated the share capital of the latter through the transfer of the majority shareholdings of three Uruguayan companies and one Peruvian company. Molinos Argentina declared the dividends originating from the shares of the three Uruguayan companies and the Peruvian company controlled by Molinos Chile as non-taxable income by application of article 11 of the DTA between Argentina and Chile. On that factual basis, the tax authorities applied the principle of economic reality established in article 2 of Law 11.683 (t.o. 1998 and its amendments) and considered that Molinos Argentina had abused the DTA by using the Chilean holding company as a “conduit company” to divert the collection of dividends from the shares of the Uruguayan and Peruvian companies to Chilean ... Read more