Global Tax Alert (News from Americas Tax Center) | 10 April 2014

Chile proposes tax reform

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On 1 April 2014, a Tax Reform bill was sent by the Chilean Government to the National Congress for discussion. This Tax Reform bill introduces a number of important amendments to the current tax laws and regulations.

Tax rates

The Tax Reform bill would increase the corporate tax rate (First Category Tax) from 20% to 25% over a four-year period. The rate would increase to 21% in 2014, 22.5% in 2015, 24% in 2016 and 25% in 2017 thereafter.

The penalty tax rate applicable to expenses determined to be nondeductible, as defined by the law, and differences due to transfer pricing adjustments would increase from 35% to 40%.

The highest marginal rate of income tax on individuals would be reduced from a maximum 40% rate to a 35% rate, except for political and legislative authorities.

The Tax Reform bill also increases the Specific Tax on alcoholic beverages and certain non-alcoholic beverages, depending on the nutritional composition thereof, in the last case.

Elimination of FUT

Under the FUT (Fondo de Utilidades Tributables or Accumulated Tax Profit Fund), partners and shareholders are generally not taxed on business profits until those profits are distributed. The Tax Reform bill would eliminate the FUT that allowed for a deferral or withholding from personal taxes and create a new system under which shareholders are taxed on an accrual basis, effective April 2018 (affecting incomes earned in 2017). In accordance with this new system, the annual taxable profits of companies will be deemed automatically distributed at year end to those entities or individuals that as of 31 December of each year are considered partners, shareholders, or the parent company (for branches or other permanent establishments in Chile). The corporation would be required to apply a 10% withholding tax to distributions made to Chilean resident partners or shareholders.

The rules applicable to mutual funds and investment funds will also be modified.

A transitory system will be in place between 2014 and 2016.

Taxes on capital gains

The Tax Reform bill would modify taxes on capital gains. The main modifications relate to real estate and share capital gain taxes.

The Tax Reform bill would eliminate the tax exemption for gains from most transfers of real estate. However, the exemption would still apply to gains derived from the sale of a primary residence, assuming certain requirements are met.

The Tax Reform bill also would modify the capital gains regime by taxing as ordinary income gains on the disposition of shares or social rights held for a year or less. Gains held for more than a year would be taxed at the capital gains rate. However, shares traded in the Chilean stock exchange would remain exempt from capital gains tax.

The bill also would modify how tax basis is calculated for purposes of capital gains. For example, loan derived interest related to an acquisition of shares or social rights would no longer be deductible for corporate income tax purposes. That interest would be capitalized into the tax basis of the shares or social rights (assuming a sale made by a Chilean entity).

Changes to international tax regulations

The Tax Reform bill would make a number of changes to the international tax regulations, including:

  • Introduction of general anti-avoidance rules. Under these rules, the tax authorities will have the right to challenge the agreements, structures and other activities developed by taxpayers when those activities have been performed in order to avoid paying taxes.
  • A new obligation to recognize foreign passive incomes from controlled foreign entities, on an accrual basis (CFC Rules)
  • Changes to expense regulations so that expenditure in favor of related foreign residents will only be deductible upon payment
  • Introduction of joint responsibility for capital gains taxes for local companies subject to indirect transfer rules
  • Changes to transfer pricing regulations and excess indebtedness rules

Incentives to investment and savings

The Tax Reform bill would modify the incentives for investment and savings as follows:

  • Changes to the depreciation mechanism (immediate depreciation for micro- and small-sized companies and up to one tenth of the useful life for medium-sized companies)
  • Extension of accelerated depreciation effects to taxpayers subject to final taxes
  • Special rules for small-sized companies:
  •  Entities with annual sales not greater than 25,000 UF1 would not be obligated to maintain full accounting and would have a reduction in provisional monthly payments. The new rules also would change the person liable for VAT.
  •  Fixed asset acquisition credit would increase to 6% for small and medium-sized companies.

Green taxes

The Tax Reform bill would establish a tax on emissions from stationary sources and a tax on light vehicles considered as a source of pollution.

Indirect taxes

The Tax Reform bill would establish new regulations to apply the Value Added Tax (VAT) on the sale of immovable property. It also would restrict the special VAT credit available to construction companies for houses priced at 2,000 UF or less. Additionally, the Stamp Tax maximum rate would increase from 0.4% to 0.8% (to be 0.66% per each month or part of a month).

Repeal of DL 600 (Foreign Investment Statute)

The Tax Reform bill would repeal DL 600 effective on 1 January 2016. However, contracts signed before 2016 will remain in effect for the term covered by the contract.

Other anti-avoidance and evasion regulations

The Tax Reform bill would make the following changes to the anti-avoidance and evasion regulations:

  • Incorporate the General Anti-Avoidance Rules into the Tax Code
  • Vest the IRS with the authority to obtain information from other governmental entities (Superintendence of Securities and Insurance, Chilean Copper Commission, etc.), with regard to purchases paid using electronic means and the possibility to use statistical methods to determine tax differences. In general, an increase of the audit powers of the tax authorities is proposed.
  • Limit on presumed income regimes now limited to micro companies, which will be repealed in 2015 (real estate, agriculture, transport and mining). A new tax system based on presumed income or the new Article 14ter would be created for companies with sales below 2,400 UF.

Endnote

1. The Unidad de Fomento (UF) is a Unit of account (standard monetary unit) that is used in Chile.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Ltda., Santiago
  • Felipe Espina
    +56 2 676 1328
    felipe.espina@cl.ey.com
  • Osiel Gonzalez
    +56 2 676 1141
    osiel.gonzalez@cl.ey.com
  • Antonio Guzmán
    +56 2 676 1316
    antonio.guzman@cl.ey.com
  • Mauricio Loy
    +56 2 676 1419
    mauricio.loy@cl.ey.com

EYG no. CM4347