Chile announces tax reform proposals
Loreto Pelegrí of PwC Chile provides an overview of Chile’s proposed tax reform.
Chile's left-wing President-elect, Gabriel Boric, promised fiscal responsibility but always keeping in mind the reforms he committed to in his presidential campaign in which he was able to convince not only left-wing voters, but also a large part of the centre voters. A fundamental pillar of the social changes proposed by the President-elect is the tax reform.
The President-elect's tax programme estimates that the implementation of these tax reforms should be gradual, considering an increase in revenue of around 5% of gross domestic product (GDP) during his four-year term, and in the range of 8% of GDP over a total period of eight years.
The main proposals of the tax reform announced by the President-elect are discussed below.
New income tax regime
A disintegrated income tax regime is proposed for large companies and investment companies, i.e. the corporate tax paid at the company level would no longer be a credit for the partners or shareholders when they withdraw their profits or receive a dividend distribution.
However, according to the programme of the President-elect, the integrated system would be maintained for small and medium-sized companies (SMEs) and for those shareholders who are residents of a country with which Chile has a double tax treaty in force.
On this point it is important to remind that all treaties that Chile has entered contain a clause that is known as the ‘Chile clause’ which establishes that the reduced rate contained in the agreements on dividends is not applicable to the extent that the corporate tax is 100% creditable against the withholding tax.
In the event of a total disintegration of the system, around 40% of the agreements signed by Chile would require a renegotiation, whereas for the remaining 60% of the treaties a reduced rate would have to be applied, in which case the total tax burden would be lower than the current one in most cases. This is the reason why the President-elect’s team most likely decided not to disintegrate the system in case of DTTs.
In addition, a modification of surtax brackets and rates is proposed to increase the tax burden of those who earn more than $5,600 (approximately) per month.
Limitation on the use of tax losses
There are no details if it will be limited in years or a percentage of use.
The elimination or modification of multiple tax exemptions is proposed, such as:
Elimination of the presumptive income regime;
Elimination of the tax exemption on capital gains obtained from sales of shares and quotas with a stock market presence;
Reduction and/or modification of the tax benefits associated with the sale of real estate and shares;
Elimination of the exemption from corporation tax for private investment funds (FIP);
Elimination of the benefits applicable to DFL 2 real estate; and
Elimination of the tax exemption applicable to capital gains obtained from the sale of real estate acquired before 2004.
It must be considered that the elimination of the benefits associated with DFL 2 real estate, as well as the application of taxes on capital gains of instruments with a stock market presence, is already contained in a draft bill that is currently being discussed in Congress to finance a guaranteed universal pension.
It is proposed, among others, the incorporation of (i) a tax on the net worth possessed by the wealthiest individuals (rates and taxable base not defined yet); and (ii) a tax on the retained earnings of companies, whose taxation with final taxes is pending.
Likewise, the modification of the tax base of the inheritance and donation tax is proposed, to consider the commercial value of the goods received by donation or inheritance.
It is proposed to gradually increase the (i) tax on CO2 emissions, from $5 to $40 per ton, and (ii) the specific tax on fuels, to seven monthly tax units per cubic meter (approximately $435), eliminating exemptions for industries and transportation. Likewise, it is proposed to establish an ad valorem tax (rates and tax base not yet defined) on plastic containers and packaging, as well as on the plastic contained in commercialised waste.
It is proposed to establish a mixed mechanism: an ad valorem component (sales tax) together with a tax based on the operating or financial margin of the copper mining companies.
It has been understood that this last component would imply modifying the specific tax on mining activity in such a way as to make the current scale more progressive. Today there is already a draft bill that creates compensation in favour of the Chilean state, royalty ad valorem, which has received several indications in the Senate. Hence, it is expected that the President-elect will send a draft bill or take the one that is being discussed in such a way to eliminate any vice of unconstitutionality.
Among other initiatives, it is proposed, (i) the administrative application of the General Anti-Avoidance Rule by the Chilean IRS; (ii) allow the prosecution of certain tax crimes by the Criminal Prosecutor's Office; (iii) considerably increase the information sources of the Chilean IRS, including the creation of a registry of beneficial owners; and (iv) establish the figure of the anonymous whistleblower in tax matters.
Finally, it is important to consider that the President-elect's proposals will require the approval of the Chilean Congress to become law. In this sense, the coalition of the future government does not have a majority in the House of Representatives and the composition of the Senate will be divided equally between right and left parties, so it is expected that the President-elect's team will have to reach major agreements in the legislative discussion of these proposals, and will probably grant and concede in some matters, in order to move forward with the proposed change agenda.