On March 11, 2018, President Sebastián Piñera began his second term, which will run until March 11, 2022.
During his presidential campaign, one important measure announced was a tax reform or “modernization” that would resolve certain difficulties arising from the previous 2014 tax reform, driven by the then-outgoing administration of Michelle Bachelet and that came into force on January 1, 2017.
In making good on this campaign promise, on August 23, 2018, President Piñera sent a bill to Congress to tackle a number of tax issues. The bill is currently under discussion and it is as yet unknown when it may become law. The most optimistic watchers think we could have some news on this in the second half of 2019, although the discussion process has been much slower than expected.
Fully incorporated system
One feature of the bill most heartily welcomed by investors is to shift the income tax system back to a fully integrated system, similar to the one in place before the last Chilean tax reform came into effect in early 2017. Under the integrated system, final individual resident taxpayers and any type of nonresident entity could claim a credit equal to 100% of the corporate tax paid by the company or partnership from which profits were being distributed. This ended with the 2014 reform, and since 2017, taxpayers in the “semi-integrated” or “partial imputation of credit” system could only claim a credit of up to 65% of corporate tax paid. This means an additional tax of 9.45% is charged to the investor, which drives the nonresident rate to 44.45% (from 35%) and the maximum personal tax rate for Chilean resident individuals up to 44.45%.
The bill also specifically addresses legal certainty, incorporating provisions that require the tax administration to respect the general legal system and particularly the rights of the taxpayers. The bill would also create of taxpayers’ ombudsman office, inspired by Mexico’s PRODECON agency.
Tax modernization bill
In addition to the return to the single integrated tax regime, for the time being, the bill mainly addresses the matters listed below. We say “for the time being” because as the bill passes through legislature, it will surely see some tweaks and changes.
The term to recover VAT paid on fixed asset acquisitions is shortened from six to two months.
A series of measures would benefit SMEs, chiefly a new simplified tax status based on revenues received, a reduced corporate tax rate of 25% (the general rate for other companies remains at 27%) and the possibility of accelerated depreciation on certain assets.
As a general rule, administrative affirmative silence is established to the benefit of the taxpayer, whereby the applicant’s request is deemed granted if the legal term for an administrative decision lapses and no resolution is given.
The general anti-avoidance rule, in force since October 2015, was made more specific and improved to enhance legal certainty.
Inheritance and gift tax rules would be improved and modernized.
The bill would establish a new tax on digital services provided by nonresidents to Chilean individuals.
The bill proposes a transitional amnesty program for voluntarily reporting undisclosed foreign income and assets, subject to a 10% tax.