By Javier Jaque, Managing Partner, CCL Auditores Consultores.
The Chilean Internal Revenue Service (SII) recently enabled a mechanism allowing foreign online betting platforms to pay Value Added Tax (VAT) on the transactions they carry out in Chile. In this context, a debate has emerged regarding whether illegal activities should be subject to taxation. However, it is important not to lose sight of the fact that the SII is a regulated institution whose role is to administer and enforce the country’s tax laws, regardless of the legal nature of the underlying activity.
Beyond the legitimate differences of opinion that may exist regarding how the State should address these activities, it is important to distinguish the responsibilities of each institution. The SII is legally mandated to apply and oversee compliance with existing tax regulations. Its role is not to determine whether an activity is legal or illegal, nor to define the public policy that should govern it, but rather to apply tax law objectively and consistently.
Since the early 2000s, the SII has maintained this interpretation. For example, the agency has imposed taxes on activities even when they were illegal, such as cigarette smuggling. When such activities are detected by law enforcement authorities, the SII still assesses the corresponding taxes. Around the same period, the well-known Dávila case at Codelco followed the same principle. In that case, the SII applied taxation to gains derived from fraudulent conduct, and both the courts and the tax authority concluded that increases in wealth resulting from illegal activities were not exempt from taxation merely because of their unlawful origin.
From a comparative tax perspective, the United States has long adopted a similar approach. The most famous example is the case of Al Capone, where the U.S. government imposed taxes on income derived from illegal activities. Although his operations were unlawful, tax authorities still required him to pay taxes on the income generated, demonstrating that tax obligations can coexist with the prosecution of other legal violations.
For this reason, it cannot be ignored that an economic activity is taking place in this case as well, and therefore taxes must be paid. A separate matter is whether other institutions, whose role is to prevent or sanction such activities, apply the full force of the law to ensure that they do not continue.
It is worth remembering that the courts themselves have recognized that illegal activities may be subject to taxation. Consequently, the SII must fulfill its role in society, which is fundamentally to apply the law in force and exercise the powers granted to it by legislation. Demanding otherwise would be asking the institution to abandon the very purpose for which it was created.