Chile’s President Piñera proposed a major tax overhaul for Chile last week. The proposed bill states to be aiming to create a permanent pro-investment tax environment for Chile; it substantially improves and corrects several provisions of the Tax Code and the Income Tax Law of Chile amended in 2014.
Under the proposed Tax Bill, foreign investors in Chile, from jurisdictions without a double taxation treaty in effect, which would have ended paying up to 44%-45% income tax (as opposed to the 35% tax payable by those foreign investors from jurisdictions with a double taxation treaty in place with Chile) will pay income tax at an overall rate of 35% starting in 2020, even in the absence of any such double taxation treaty.
Debate between the Government coalition supporting the bill and the opposition leaders has already commenced. While it is not yet clear how much of the tax bill proposal will be approved, it is expected that the bulk of the tax bill should be approved, resulting in an investment prone tax climate for Chile.
One of the changes that most likely will spark legal debate with foreign providers of services through internet platforms from abroad (and potentially, some litigation), is the 10% proposed new specific tax on digital services. The Tax Bill proposed states that the digital tax follows the guidelines of the OECD. Double taxation treaties and Chilean Constitutional guarantee of non-discrimination will be closely scrutinized, and very likely invoked by some of the players affected by this specific new tax, to challenge its validity. Streaming or other technologies that allow Chilean residents to access movies, games, music and other content will be subject to the newly proposed digital tax.
Among other changes, the tax bill includes the following: (i) generally replacing the past Government two alternative tax regimes for a single one, where all corporate tax paid by a company is given as a tax credit to its shareholders/partners/owners; (ii) creation of a strong investment incentive, by allowing taxpayers to defer taxes when reinvesting taxable profits; (iii) granting taxpayers accelerated, and even 50% instant, depreciation for assets to under certain conditions; (iv) full digitalization of the taxpayer profile with the IRS, and of all communications and documents exchange in order to decrease the time spent by the IRS in handling tax cases before Tax Courts; (v) creation of a special regime for the small and medium size companies, whereby less accounts and records need to be kept, and special provisions are applicable to simplify tax filings and tax payment; (vi) creation of a new status of guarantees to all taxpayers before the IRS, and the Taxpayer Defender within the IRS, in order to make taxpayers’ guarantees enforceable, and make the rule of law stronger; (vii) increase of the Value Added Tax credit allowance for the construction of residential units; (viii) extension of the special tax incentive regime for extreme zones of northern and southern Chile; (ix) modernization of the Value Added Tax return to taxpayers under certain conditions; (x) simplification of the number and type of registries to be kept by taxpayers; (xi) enactment of administrative law principles that will make IRS’s decisions, rulings and resolutions subject to principles and rules of general administrative law, and application of the positive silence effect to the actions of the IRS not executed within a maximum term set forth in the law; (xii) substantial modernization of the narrowly construed tax deductible expense concept in Chilean Income Tax Law, including allowances for certain donations to charities; (xiii) strict requirement for the IRS to honor the statute of limitation terms of the tax laws in any tax assessment review, and express prohibition for the IRS to require waiver of the right to invoke the statute of limitation on any ongoing tax review; (xiii) changes to the provisions on tax assessments; (xiv) changes to the rules on interpretation of the tax laws by the IRS, so that general principles of Chilean law and civil and commercial law be considered by the IRS in its interpretations; (xv) better crafting of the anti-elusion and substance over form provisions of the tax code introduced in the last tax reform of 2014, and restriction on the IRS using any provisions of the Tax Code or Tax Laws other than the specific anti-elusion provision of the Tax Code in reviewing any taxpayer’s acts and contracts; (xvi) imposition of the obligation of using electronic invoicing not only for VAT sales but for all sort of services where an invoice is to be issued by Chilean taxpayers on taxed activities carried out in Chile; (xvii) creation of a new capital gains tax rule applicable to capital gains made by the sale of shares or equity rights for transactions other than the sale of shares acquired and sold in a stock exchange in Chile; (xvii) new definition of permanent establishment for Chilean tax purposes; (xviii) new provision on the use of tax credits for Chilean taxpayers for taxes paid off-shore; (xix) treatment of revenue resulting from royalties obtained by an off-shore investment vehicle as an active income, not subject anymore to the yearly Income Tax taxation in Chile as a passive investment, but as an active investment where deferral is allowed; (xx) new definition of tax havens for Chilean Income Tax purposes, where certain additional tax filings, and tax obligations result; information sharing now considered as an element to exclude jurisdictions from such qualification; (xxi) termination of joint and several liability of Chilean taxpayers for any capital gains applicable on off-shore capital gains resulting from direct or indirect changes of ownership of Chilean taxpayer entities; (xxii) better defined concept of project finance for purposes of related financing limits allowed under Income Tax, which are not subject to the excessive indebtedness tax rule; (xxiii) neutral tax treatment to off-shore reorganization of foreign investors with assets in Chile, where there are no domestic tax consequences in Chile; (xxiv) new tax on digital services of 10% of the payment, to be withheld and paid by domestic banking institutions: (xxv) amendment to polluting-sources-tax created under the 2014 tax reform; (xxvi) short term window to repatriate capital, disclose real estate and other off-shore investments, with a 10% tax for up to 2 years from the date of enactment of the Tax Bill; (xxvii) alternative 30% income tax payable on retained earnings (FUT) for a transitory period of up to 2 years from the date of enactment of the Tax Bill; (xxviii) settlement authority for the IRS to terminate pending tax cases; and (xxix) option to clarity differences between the tax stated capital and actual capital held, for up to 2 years from the date of enactment of the Tax Bill; (xxx) adjustments to the taxation of investment funds’ regime.
Most of the proposed changes have already been welcome by the investment community in Chile. In subsequent publications we will detail some of the more relevant changes for foreign investors in Chile, and will report on the advance of the Bill in Congress.