Chile moves forward with comprehensive tax reform
Friday, 7 September 2018
Lawyers in Chile have welcomed proposals to overhaul the country’s tax regime and say the measures are crucial for boosting investment and growth in the country.
On 22 August, Chile’s Minister of Finance Felipe Larraín, under President Sebastian Piñera, filed for an exhaustive set of tax reforms to reduce corporation tax in an effort to boost foreign investment and economic growth in Chile. “The objective is to revamp investment without decreasing the corporate tax rate, but the tax burden for investors,” says Alejandro Rubilar, senior counsel for Chile at JP Morgan.
The bill proposes the abolition of the current dual income tax system, which has been criticised for being too complicated. Instead, the dual system would be replaced by a fully integrated corporate income tax regime, allowing shareholders to discount all taxes paid by the companies they own from their own tax burden. The bill would also simplify and redefine the corporate tax registries. “One of the most significant changes is the return of a new and single fully integrated tax system, together with a simplification of tax compliance rules,” says María Pía Salas, partner at Chilean firm Gálmez Salas y Cía. “A lower, effective total tax burden and better understanding of the overall tax obligations should indeed be great incentives for the growth of the economy.”
Indeed, as an incentive to boost foreign investment, the total corporate tax burden for nonresident investors in a non-treaty jurisdiction would be lowered from 44.45% to 35%. This reduction in the tax rate could be particularly relevant for US investors in Chile since the Chile–US income tax treaty has not entered into force. Foreign investors with subsidiaries in Chile would be allowed to expense 50% of their investment in capital assets during a two-year period. Increased expensing would be allowed for investments located in the Chilean geographic region of Araucanía, the country’s poorest region. The two-year time frame will ensure that investors take the opportunities as soon as possible, according to Salas. “The proposed changes will incite change; the proposals are expected to stimulate new investments and fuel the economy, especially in the next few years,” she says.
Small and medium-sized enterprises (SMEs) will also benefit from the reform. “Under the new proposed rule, SMEs would be subject to an even further reduced corporate tax rate (25%) and the immediate depreciation of any fixed assets,” Rubilar points out.
For many lawyers, the purpose of the new reform is to simplify measures introduced by the reform implemented during the previous administration of Michelle Bachelet in 2014. The reform increased the cost of doing business in Chile by raising corporate taxes and closing some tax exemptions. At the time, the move was fiercely opposed by the business community and opposition parties, who argued that it would stall investment at a time of slow economic growth. “The 2014 tax reform has been pointed out by many as one of the top reasons why Chilean economic growth has deteriorated over the past few years,” Salas points out. “The changes not only raised the tax burden as a whole, but they also raised the transaction costs of being a “good citizen” dramatically, having taxpayers often frustrated with the amount of effort, energy and economic resources they have to spend in tax compliance, tax accounting and basic tax planning because of the complexity of the current tax system.”
In addition to the measures aimed at boosting the country’s investment climate, the bill also introduces changes to help avoid erosion of the tax base by introducing a 10% tax for digital services provided to Chileans by foreign online platforms, such as Netflix and Airbnb. Ridesharing companies like Uber, on the other hand, will be required to establish subsidiaries in Chile and new permanent establishment regulations will be put into place.
The bill also aims to overhaul existing rules on tax evasion and avoidance by changing
financial regulations, a likely reference to the general anti-avoidance rules (GAAR)
incorporated into the tax code by the previous administration. Lorenzo Gálmez, also partner at Gálmez Salas y Cía Abogados, argues that changes will allow more simplicity and legal certainty for both local and foreign investors. “The redefinition of Chilean GAAR rules will reduce the ambiguity of its terms that have been impossible to enforce, and shall provide legal certainty to investors that are paralysed when they cannot foresee how their acts will play out under the current legal framework,” he says.
As Piñera does not currently have a majority in Congress, he will now have to negotiate with opposition parties in order to pass the reform, and further changes are likely to be made while the bill is debated. Despite this, however, local lawyers are unanimous that a positive change is on the horizon. “The bill presents changes that go in the right direction in terms of income taxes, indirect taxes, legislation on IRS controls and powers, taxpayers’ rights and tax procedures,” says Juan Manuel Baraona, from Baraona Fischer Spiess. “Nothing is perfect, of course, and there are aspects that may be criticised or improved. But, in general terms, it seems to me the initiative is a good one.”
First published on the Latin American Corporate Counsel Association website, September 2018