Chilean Government announces content of the so-called Fiscal Pact

Through a national broadcast on the morning of August 1st, President Gabriel Boric revealed the main guidelines that will be part of the so-called "Fiscal Pact," which the government seeks to promote after the unexpected rejection of the tax reform project last March by Congress.

As previously reported, the government will not insist in the Senate (requiring the high quorum of 2/3 to continue the legislative debate) and will instead present the initiative in separate bills: one related to combating tax evasion and avoidance, and the second focused on tax reforms aimed at increasing revenue. 

More details were provided in a memorandum from the Ministry of Finance, from which we can extract the following points:

 

1. Components of the Fiscal Pact

The government announced that the Fiscal Pact will contain 6 components:

i. Principles for a modern tax system in Chile

ii. Needs and public spending priorities for the country's inhabitants

iii. Commitments to reforms aimed at strengthening transparency, efficiency, and service quality in government

iv. Promotion of growth through investment, productivity, and formalization of the economy

v. Enforcement of tax compliance and income tax reform

vi. Institutional mechanisms for monitoring and evaluating the Fiscal Pact

The government will rely on two committees of experts to identify "the fiscal space available from growth and efficiency surpluses," whereby the difference between the fiscal cost of identified spending priorities and the mentioned surpluses will be financed with a tax reform, focusing on better tax compliance enforcement on one hand and increased taxes and tax benefits on the other. The first panel will consist of local experts from various backgrounds, and the second will be composed of professionals from the OECD.

 

2. Proposals for each component

Although specific details of the content of each proposal are not yet available, they can be grouped under the following structure:

2.1. Principles of the tax system

Based on the conclusions reached through the "Dialogues for a Tax Pact" process (in which several social actors, including business associations, NGOs, and academics participated), the following would be the principles inspiring the content of the new reform:

• Legality

• Tax Justice

• Sufficiency

• Economic Efficiency

• Non-Interference

• Reciprocity

• Commitment to tax compliance

• Simplicity

• Taxpayer Education

• Taxpayer Assistance

• Stability and Certainty

• Technological Development and Adaptability

 

2.2. Public spending priorities

The government identifies 4 key areas of priority to which the resources obtained through the Fiscal Pact will be allocated: pensions, healthcare, public safety, and social protection. These areas would require USD $8,000, equivalent to 2.7% of GDP annually:

• Pensions: 1.2% of GDP

• Social Protection: 0.3% of GDP

• Public Safety: 0.3% of GDP

• Healthcare: 0.9% of GDP

According to the government memorandum, up to 1.5% of GDP could be achieved through measures for enforcing tax compliance (naturally including measures against tax avoidance and evasion, as well as strengthening tax administration services and combatting informality, among others). The remaining 1.3% would be financed by what the memorandum refers to as "Income and Efficiency Surpluses."

 

2.3. Commitments to strengthen transparency, efficiency, and quality of service in the State (Efficiency Surplus)

The government identifies 20 initiatives to enhance the efficiency, quality, and transparency of public spending, organized into 4 areas, with the measures proposed for each in the Fiscal Pact:

• Quality and efficiency of spending

o Evaluation of programs and public policy (four-year agenda), coordinated by an Agency for Quality of Public Policy.

o Streamlining public investment processes.

o Strengthening ChileCompra (the government's procurement platform).

o Advancing in decentralization.

• Quality of service and innovation

o Digital government.

o Measurement of user satisfaction.

o Innovation in the public sector.

o Productivity in healthcare.

• Transparency and integrity

o Control of contributions to foundations and NGOs through a common and permanent regulatory framework.

o Government staffing levels.

o Availability of information.

o Effective beneficiaries.

o Institutionalizing internal auditing in government.

o Modern auditing techniques for procurement and transfers.

• Fiscal discipline and responsibility

o Macroeconomic fiscal responsibility.

o Capital gains.

o Fiscal discipline in subnational governments.

o Streamlining financial and legal obligations.

o Optimizing the use of public properties.

o Timely payment to State suppliers.

 

2.4. Promoting growth (investment, productivity, and formalization of the economy: Growth Surplus)

In this regard, the government announces 38 initiatives distributed in three areas. Some of these measures were already included in the original tax reform project rejected last March:

• Public and private investment

o Regulatory streamlining for investments.

o Semi-instantaneous depreciation.

o Tax Credit Fund for investments with a multiplier effect.

o Temporary reduction of stamp tax.

o Incentives for investment in Small and Medium Enterprises (SMEs).

o Long-term strategic vision on infrastructure.

o Expansion and streamlining of concession programs.

o Logistic efficiency in cargo transport.

o Special reactivation plan for the construction sector.

o Investment plan in infrastructure and water management.

• Productivity and human capital

o Additional “development” corporate tax rate (the original project set it at 2%).

o Tax benefits for private research and development.

o Creation of the Productivity and Development Fund.

o Strengthening care systems to increase female participation in paid jobs.

o Financing venture capital and developing the venture capital industry.

o Targeting, coordination, and effectiveness of programs for smaller companies.

o Clean and competitive mining.

o Lithium policy.

o Renewable energies.

o Green hydrogen.

o Digital economy.

• Formalization of economic activity

o Requirement for commencing activities (for importers and customers with POS systems).

o Traceability of operations.

o Appraisal of the VAT taxable base.

o Crimes related to transportation and storage (for goods that have not fulfilled tax obligations).

o Increased border control against smuggling.

o Sanctions against irregular digital commerce.

o Seizure of financial assets or goods.

o Tax responsibility of public entities.

o New entrepreneurship route.

o Simplified tax regime.

o VAT benefit (for initial entrepreneurship).

o VAT on the import of goods.

o Exemption on the import of goods.

o IRS-generated income tax return proposal for SMEs.

o Special regimes and tax liabilities.

o DEDECON (Taxpayer Ombudsman).

o Tax education.

Additionally, the government identifies five priority areas for product diversification: clean and competitive mining, Lithium, renewable energies, green hydrogen, and the digital economy, enunciating a series of measures for each area. Among them:

• Mining

o Fiscal stability after the approval of the mining royalty.

o 30% reduction in the processing time for mining projects.

o Application of tax credits (through a tax credits law) to emission reduction and hydraulic efficiency projects.

• Lithium

o Application of tax credits (tax credits law) to projects with direct extraction technologies and value chain extension.

• Renewable energies

o Application of tax credits to new projects.

• Green hydrogen

o Financial facility of USD $1,000 with international organizations.

o Streamlined environmental impact assessment.

o Application of tax credits to innovative projects with a multiplier effect.

• Digital economy

o Increased investment in science and technology to 1% of GDP.

o Public investment in connectivity in excluded areas.

 

2.5. Enforcement of tax compliance obligations and income tax reform

The government reaffirms the goal of obtaining an additional 1.5% of GDP in revenue through the tax compliance enforcement component. Several of these measures were also included in the original tax reform project.

The announced measures in this regard are:

• Tax compliance enforcement

o Modernization of the tax administration.

o Transparency.

o Measures against informality.

o Tax justice and equity

• Measures against tax evasion.

• Prevention and control of the use of legal loopholes to evade tax obligations.

• Income tax reform

o Tax benefits

• Entrepreneurship route for micro, small, and medium enterprises.

• Tax incentives for investment in productivity.

• Benefits for the middle class.

o Higher taxes

• General income tax regime (including the introduction of a "monotributo" for newly formalized companies with income below 1,800 UF, raising the income threshold from 75,000 to 100,000 UF for entry into the ProPyme regime, incentives for joining the transparency tax system, and a more gradual transition from the ProPyme to the general regime, among others).

o Personal taxes.

o Reduction of tax exemptions.

o Incorporation of OECD rules on minimum global taxation of multinational groups (Pillar 2 BEPS 2.0).

The last indicated point is notably remarkable, namely the adoption of the so-called "Pillar 2" of the OECD's BEPS 2.0 initiative (which takes effect in 2024 in most developed economies), as it involves the introduction of a large and complex normative body and a paradigm shift in international taxation that Chile had not signaled a desire to adopt until now.

 

2.6. Institutional mechanisms for monitoring, tracking, and evaluating the Fiscal Pact

Finally, the creation of a monitoring, tracking, and evaluation system for the implemented measures is announced, in the form of a Monitoring Commission that seeks to safeguard compliance with the commitments made. Additionally, every three years, the National Council for Evaluation and Productivity will conduct an evaluation of the implementation of the Fiscal Pact, identifying the degree of compliance and results achieved.

 

3. Next steps

Through the press, the government informed that the announced measures would not be presented through insistence in the Senate due to the high quorums required. Therefore, the bill referring at least to the matters that were included in the original tax reform would only be presented by March 2024.

In this context, the government announced that there would be a bill dedicated to tax compliance enforcement and another one for tax benefits and changes in income tax. However, the specific content of each bill has not been specified.