Regional development contributions in Chile: Modifying investment projects
Astrid Schudeck and Rafaela Moreno of PwC Chile evaluate the tax implications arising from the introduction of regional development contributions as a part of the Chilean tax reform.
On February 24 2020, a new Chilean tax reform was enacted introducing several modifications to the current system, among which, a regional development contribution was introduced. This contribution will be an important tax consideration when investing in the construction, mining and industrial sectors.
The new regional development contribution levies taxpayers subject to the First Category Tax, performing investment projects in Chile which imply (i) the acquisition, construction or imports of fixed assets for an amount equal or greater than $10 million and (ii) the need to go under the environmental impact evaluation system (SEIA).
Projects subject to the SEIA are established in Article 10 of Law No. 19,300, and include, under certain conditions, aqueducts, electric high-voltage transmission lines and substations, airports, highways, industrial projects, among several others.
In respect to the specific features of this contribution, it is important to consider that the investment on these kind of projects, when applicable, will be subject to a one-time 1% tax rate on the amount surpassing the $10 million over the acquisition value of all fixed assets of one same investment project. This must be understood as the group of structures and facilities where the fixed assets are located and that due to the nature of the project, constitute part of a coherent commercial and geographical unit. The tax base will consider the amount of all the fixed assets comprehended in the project, considered their value as a whole (i.e. not individually), when such is over the $10 million.
The regional development contribution however presents many uncertainties.
Firstly, the tax reform provides an exemption for investment projects in the health, education, science, technological investigation and development, and home and office construction areas. Nevertheless, it seems that the exemption is not automatically applicable, as the taxpayer needs to have a specific resolution from the Finance Ministry granting the exemption. We expect that the Finance Ministry will provide for an expedition process for obtaining it.
On the other hand, it becomes clear that new projects which must undergo the SEIA and comply with the $10 million requirement are subject to this new contribution. Nevertheless, projects already constructed present some interesting questions.
The new provisions establish that the contribution will not apply over substitutions or replacements of fixed assets, unless it implies a project amplification which must go under a new SEIA. However, the wording of the tax reform does not provide a definition for the concepts of substitution or replacement, nor is it resolved if the modification by itself should surpass the $10 million or if the amount of the project as a whole will be considered – particularly in the case of existing projects before the tax reform entered into force.
It will also be important that Chilean Internal Revenue Service (IRS) confirms that the contribution paid may be deductible from the taxable income of taxpayers subject to such.
All of these specifications are of utmost importance for Chilean established companies or investors to consider a 1% extra cost on their projects, not only the new ones but also the ones which will undergo maintenance, replacements, upgrades or other similar process in order to continue with business activities.