CHILE: An Introduction to Tax
Chilean Tax Overview
Over the next year we will see major amendments to the Chilean tax legislation. We will no longer deal with just minor adjustments to the law, but rather significant changes to a tax system that has not had enough time to settle. In effect, there have been major tax reforms in 2014, 2016 and 2020.
This should not be surprising given the fact that tax is now at the forefront of any possible proposal brought forth by the political spectrum. It is impossible to ignore politics when referring to the tax outlook in Chile, especially as there is a new Constitution under discussion.
President-elect Gabriel Boric has stated that one of his priorities once he takes office in March 2022 will be a tax reform. The future Minister Secretary-General of the Presidency has also confirmed this, which is understandable considering their ultimate goal of introducing (and financing) a welfare state in the country.
Despite some of the more radical proposals in Boric's original program being removed, after narrowly losing the first round of the presidential race to a conservative candidate, there are still critical tax measures on the table. Less radical reform is also expected based on the appointment of the future Minister of Finance, Mario Marcel, a highly regarded economist whose sole appointment brought a breath of fresh air to the markets.
Some of the most important tax amendments that will be discussed in 2022 include:
(a) Bolstering the IRS and the GAAR. Introduced in the Chilean tax code in 2014, the general anti-avoidance rule has had little to no application in Chile. This comes from the fact that the declaration of tax avoidance is subject to a very particular administrative procedure - involving the approval of the agency's commissioner - followed by a judicial proceeding. Furthermore, the IRS bears the burden of proof when a GAAR trial is in place, whereas the burden lies on the taxpayer in an ordinary tax trial.
As a matter of tax policy, however, it is undeniable that the introduction of the GAAR has deterred aggressive tax planning and promoted tax compliance.
The upcoming amendments to the GAAR relate to improving the wording of the law and making its scope of application more transparent. The GAAR would also be enforced administratively by the IRS, with no prior involvement of a tax court.
The reinforcement of the IRS under Boric's program includes beefing up the agency and increasing the number of auditors. As proposed, shrinking the so-called tax gap would involve more robust reporting requirements, and improving the exchange of information with other agencies, such as the Central Bank, the Chilean SEC and the CBP.
The more disputed measures on this topic are piercing bank secrecy and allowing the Chilean attorney general to prosecute tax crimes.
(b) Mining tax. One of the most important measures to increase government revenue in Boric's program is amplifying the mining tax. Mining companies' tax bills would rise with the introduction of a new mining contribution comprised of the sum of (i) a 1% to 3% tax applicable to the sale price of minerals, and (ii) a progressive tax ranging from 0% to 40% that will be determined based on the market value of the mineral and applied to an adjusted mining taxable income. This new royalty tax will also apply to lithium mining projects.
A bill which is currently in its final stages in Congress includes all these amendments. However, its constitutionality has been questioned, which may end up being a reason the bill becomes entangled and invalidated by the Chilean Constitutional Court. It would not be a surprise to see Boric eventually take and sponsor this very same project and resolve its constitutional flaws to propose a boosted and renewed mining tax project.
(c) Green taxes. There are several measures that, along with being new sources of funds for the government, tackle climate change and foster a cleaner environment. Known as Pigouvian taxes, the program includes the increase of the burden applicable to CO2 emissions and fuel oils, the introduction of a new ad valorem tax to plastic packaging and the elimination of certain exemptions that benefit specific industries.
This type of tax exists in France, Denmark, the U.K., Finland, Canada, Mexico, among others. A successful example of their efficacy is British Columbia's carbon tax, which reduced fuel consumption and greenhouse-gas emissions by an estimated 5-15%.
It will not be easy for Boric to pursue his agenda and satisfy both his left-wing base and the centrists that he won over following the first ballot. Moreover, the distribution of political forces, especially in the Senate, shows that a tax reform cannot be taken for granted. Seeing that an early source of funding for your programs is the keystone of a successful presidency, Boric's best negotiation skills and pragmatism will be fundamental.
The enactment of a bill that reduces and eliminates tax exemptions in February 2022, just two months before Sebastián Piñera ends his presidency, took some steps in the direction of the new government. Among the amendments introduced were the expansion of the services subject to VAT and the elimination of an exemption applicable to capital gains coming from highly traded securities.
A 2022 tax reform will not shore up the tax agenda. The second wave of amendments is already in line, including a total reformulation of the income tax system. In effect, one of the president-elect's deferred tax proposals was detaching the applicable taxes to a company and its shareholders (currently, individuals and foreign shareholders can claim tax credits for taxes paid by a company). Known as the disintegration of the income tax system, the proposal will take over from a very atypical feature in our income tax law, which has been present for decades.
Juan Cristóbal Ortega, Tax partner
Fischer y Cía.
[email protected]
+562 3210 4500