Several changes have been introduced into the Chilean tax system with the enactment of Law No. 21.713 in late 2024. Among the new provisions under the latest reform, which primarily focused on tax compliance, the novel concept of “tax sustainability” was included.
The origins of ‘tax sustainability’
The relationship between ESG and tax, once thought circumstantial, has become more important in the past few years. Several factors have contributed to this shift; among which, the reputational aspect of the tax function and increasing visibility due to social media have been crucial. In this new approach to taxes, the taxation of a large company has gone from a secretive and complex matter to a more public and exposed one – but equally complex – subject to constant scrutiny.
The trend identified above has had an impact worldwide. One of the demonstrations of its influence can be evidenced by observing that several of the standards for non-financial reporting relating to ESG have started to include – some more boldly than others – a reference to taxes. These non-financial reporting standards have featured aspects such as the total tax contribution of multinationals, the publication of tax strategies, and the role of corporate governing bodies in overseeing tax decisions. In this sense, for example, Global Reporting Initiative standard 207 has, since 2020, included key reporting aspects relating to tax.
Chile has been observing these developments closely, and, accordingly, a new concept of tax sustainability was included in the tax bill that became Law 21.713, enacted in November 2024.
Even before the legal modification was approved by Congress, the Chilean Internal Revenue Service (IRS) had shown interest in understanding where large companies stood in terms of the relationship between ESG and tax. Indeed, in May 2024, the tax authorities invited several large companies to voluntarily complete a “questionnaire on social tax responsibility”. It can be said that the companies were hesitant to respond, as it was extensive and provided no prior notice, and few groups replied. It was not surprising that the IRS decided to make some of the questions mandatory, by including them in a compulsory sworn statement (Form 1913).
In these questionnaires, the IRS enquired as to:
The non-financial reporting standards that companies were adopting in relation to tax;
The corporate governance regarding taxation;
The existence of a tax control framework; and
Whether the total tax contribution of the company had been determined, and, if so, if it was published.
Finally, as published in October 2024, the new concept of tax sustainability was included as a new definition within the Chilean Tax Code.
The new provision
The provision comprises three core concepts:
The definition itself;
The possibility for taxpayers to secure a certification issued by an authorised independent certification entity; and
The possibility to sign a cooperation agreement with the IRS to promote tax sustainability.
The provision also states that there will be a public registry of companies that comply with the concept of tax sustainability.
With regard to the definition, the legal provision only focuses on mutual cooperation between the IRS and the taxpayer, moving towards transparency. It leaves ample room for interpretation as to what this means.
One of the key aspects that seems to be missing, or is not sufficiently clear, is effective incentives that would drive enterprises to move forward with respect to tax sustainability.
The path towards tax sustainability in Chile
Although the IRS has already issued a very general circular letter addressing its overall view of what is included within the tax sustainability legal concept, the most relevant pieces of administrative interpretation are still being drafted. The IRS is expected to issue two resolutions regarding cooperation agreements and the tax sustainability certification to be made by independent third parties.
The IRS has called upon private sector experts and representatives of large enterprises to gather input as to how it should address tax sustainability, and what actions to promote the concept should be included within the certification process. It is expected that the IRS will impose a requirement for taxpayers to disclose their tax governance bodies and their tax strategies, and that they will need to have a tax control framework.
These regulations will be issued in the next couple of months, and Chilean companies – at least, large enterprises – need to (i) address the question as to whether to implement tax sustainability actions and (ii) be prepared, getting certified or signing a collaboration agreement with the IRS. It is likely that most publicly exposed companies that are used to ESG reporting will take these questions to their boards to make an informed decision.
In any case, a relevant initial approach would be to perform a gap analysis and determine the company’s current standing regarding tax within its ESG reporting, and review its total tax contribution, while an eye should also be kept on IRS developments on this matter.
