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Chilean President Pinera’s Tax reform bill

On 22 August 2018, Chilean President Sebastian Piñera announced his tax reform bill, with the aim to both simplify the current tax scheme and to add new era tax provisions, such as e-commerce and digital platforms.

The bill is an extensive document that still needs to be discussed in the Chilean Parliament, where it is likely that the opposition will reject some of the proposed measures.

Although the bill does not reduce the Corporate tax rate (currently 27%, rate that should be more ‘competitive’ according to some industry organisations and think tanks), it does include significant measures that could make Chilean tax system easier to navigate and encourage both local and foreign investments.

Some of the proposed provisions that could be relevant to foreign investors with interests in Chile are:

a) Full integration of corporate tax: one of the recent changes introduced in the previous Michelle Bachelet’s tax reform was the partial offset of corporate tax against final taxes (for either residents or non-residents), in certain circumstances. Pinera’s bill would allow shareholders to discount all taxes paid by the companies they own from their own final tax burden.

The measures above will mean, in practice, for foreign non-treaty jurisdiction investors, this change could reduce the current effective tax rate that can be as high as 44.45% to 35%. At the same time, it is expected that tax reporting mechanisms should be simplified. In this respect, it must be noted that as per PwC’s ‘Paying Taxes 2018’ report, Chile ranks 72th (out of 190) in terms of how easy is for companies and individuals to pay their taxes, being the ‘time to comply’ on of the worst metrics in Chile’s performance.

b) Depreciation of fixed assets: with the aim to boost investing in these type of assets, the proposed bill also aims to introduce a more favourable system of accelerated or even outright depreciation (for certain entities). There would be, as well, a reduced timeframe to request refund of GST paid on fixed assets. METS entities with interests in Chile should consider their strategy in Chile should these changes be implemented.

c) 10% tax on digital services provided to individuals in Chile by foreign online platforms. Note that this will not affect online ride-hailing services such as Uber and Cabify (both largely used in Chile). Whereas these will not be subject to this tax, the government is pushing separate legislation that would require such companies to establish subsidiaries in Chilean soil.

d) Reduced (20%) tax on capital gain obtained by Chile tax residents on disposal of shares, subject to certain conditions.

e) New tax evasion and avoidance rules, a likely reference to the General Anti-Avoidance Rules incorporated into the tax code by Bachelet’s administration.

What’s next?

Once the bill has finalised its discussion and final signature by the President, the Chilean tax authority (SII) will publish a Public Ruling (Circular) outlining the practical application of the new provisions, and also clarifying some matters included in the new legislation. Multinationals with interests in Chile are encouraged to consider the expected tax burden and tax compliance measures once the new law is passed.

By Nicolas Soza (Senior Manager - PwC / Director  - ALABC) - Nicolas can be contacted at Nicolas.a.soza@pwc.com

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