CHILE: An Introduction to Tax
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In the last two years, Chile has been changing. It is carrying out a process of reform of its political framework, which will probably lead to some changes of its economic model. Any changes bring uncertainty; however, it also brings room for improvement.
Some adjustment may be necessary steps to achieve a developed, fairer and more egalitarian society, which in turn gives more stability to long-term policies. This is due to the results of the national plebiscite held on October 25, 2020, where the country voted to change the Constitution of the Republic.
Alongside this process, and like other countries, Chile needed to deal with the health and economic crisis caused by the coronavirus pandemic. In this context, Chile has been undergoing a successful vaccination process of approximately 82.84% of the target population, one of the most successful vaccination indexes in the world, while implementing a “universal family emergency income” as key instruments to flatten any negative effects. Naturally, this has put great pressure on the Chilean Treasury and taxes needed to rise to the challenge.
Taxes have been a relevant actor in the crisis scenario. This tax year 2021 was the first under the implementation of a new setup of rules by the recent 2020 Tax Modernization Reform (Law N° 21.210). Also, the government needed to implement a series of contingent tax measures to mitigate and reactivate the economy (Laws N° 21.256 and N° 21.354 as of 2021). Some of the most important examples of the above are the following:
• Debut of new tax regimes set out by the Tax Modernization Reform. The Chilean Internal Revenue Service (“IRS”) issued the instructions to detail the application of the new tax regimes. These are: the general regime to medium and large companies denominated “Semi-integrated regime” where the corporate income tax (27%) can be partially credited against final taxes (0-40% to individuals resident in Chile and 35% to non-resident companies or individuals); a small companies regime denominated “Pro-Pyme” where the corporate tax (25%) can be fully credited against the final taxes; and a “Transparent Pro-Pyme regime”, where only final taxes are applicable.
• Continuing of an ongoing modernization and improvement of online auditing and cross-checking system. The purpose of these measures is twofold. Firstly, to facilitate compliance by taxpayers while focusing on auditing control and inspection. Secondly, developing a technological platform contributing to the IRS’s auditing function, while at the same time helping taxpayers to comply with tax returns, requests, etc. Examples of this modernization are the mandatory use of electronic ballot, or a free mobile application that works as the IRS’s virtual office.
• Flexibility in tax measures to reactivate the economy. An important measure in this regard was the postponement of the payment of the Value Added Tax (VAT) for small taxpayers who experienced a decrease of at least 20% of their sales and services income. This measure produced a temporary relief for vast number of taxpayers. It is also worth mentioning that other measures also focused on more flexibility regarding the submission and payment of income, real estate contributions, etc.; thus, demonstrating the willingness of the Ministry of Finance and the tax authority to collaborate with taxpayers in critical times.
• Specific tax measures to alleviate the tax burden for small and medium companies. Law N° 21.256 as of 2020 established four basis areas to help the segment of medium and small enterprises. First, the corporate tax rate would be reduced from 25% to a 10% for tax years 2021 to 2023. Second, the law allowed the possibility to request a tax refund of accumulated VAT credits, providing certain requirements. Third, the possibility of a 100% instantaneous depreciation in the acquisition of fixed assets (granted until 2022). Fourth, certain incentives that encourage regional investment projects to reactivate some specific territories.
Although during the last year there were several measures as described above that contributed to economic and social stability, it is most likely that the country will continue to be challenged, especially when the Constitutional Assembly begins its session.
This process has the prospect of potential economic and tax difficulties in the setting of the new rules. In fact, a new Constitutional framework may pose a risk to the legal certainty that Chile had maintained in part during the last 30 years, since its outcome is uncertain.
Notwithstanding the above, historically and as recently shown in the present crisis, Chile always seeks the way to move forward to a more stable and modern society. The tax system is no exception to the rule.
Due to the pandemic and the natural concerns that clients have towards a new set of rules, the role of tax lawyers has been crucial in decision making.
Furthermore, a ground formation towards international tax matters has been revealed to be essential as some of these topics become more strategic than ever. For example, nowadays the legal assistance towards outbound investments is much more recurrent, not only for companies or family offices, but also for individuals. In this respect, some foreign institutions such as trusts, private foundations and insurance policies are much more common. This leads to the necessity to work with colleagues in other regions.
In conclusion, 2021 has been a critical year and a very interesting year for tax practitioners. Not only because there have been many contingent measures that have to be continuously updated, but also since the impact of taxes in decision making has been evident, at all levels, including the levels of the government, companies and individuals.
This leads to the fact that the tax profession is much more contingent, transversal and worldwide than ever. We hope this new way of doing business stays and grows in the future.
Marcela Silva P.
Grupo Vial Abogados