Chile rejects tax reform bill

In July of 2022, Chile announced a new tax reform seeking to improve tax justice, address tax evasion and encourage economic growth to finance other structural reforms that expand social rights and promote productive and regional development. President Gabriel Boric defended it by saying that redistribution of wealth is key to address the ailments manifested in the 2019 protests.

The reform’s first two legislative initiatives aimed at modifying the income tax system and rates (establishing a new Wealth Tax), and to introducing measures against tax evasion and avoidance. On the 6th of March of 2023, the Chamber of Deputies voted against these initiatives, forcing the government to wait for a one-year term set forth by the Constitution before submitting a new bill on tax reform.

The other two initiatives affect mining and the environment: one of them introduces a new mining royalty, while the other one establishes corrective, green and regional taxes. The first one has been approved by the Chamber of Deputies and is currently being studied in the Senate, while the second should be submitted for discussion at Congress in the coming months. 

The article looks into the income tax reform and mining royalty proposals in more detail below.

Introduction to the Chilean Income tax system

The Chilean Income Tax system affects business income, salaries and remuneration, and other personal income. Those considered residents of Chile (a 183 day test over a 12m period) or domiciled there (have an intention to remain in Chile) are generally subject to income tax on their world-wide income. Those without Chilean domicile or residence are taxed on their Chilean source income.

The corporate income tax regime is currently partially integrated into income tax on the shareholders for larger entities – it is possible to credit corporate income tax, either fully or partially against final income taxes. For example, for larger entities only 35% of the corporate tax is suffered by the shareholder, unless the final taxpayer is resident in a country with which Chile has a double tax treaty, in which case the corporate tax may be fully credited.

The failed reforms to income tax

The first two rejected legislative initiatives tried to further limiting the use of tax credits from corporates against personal taxes. It attempted to recognise that companies are separate and independent entities from their owners – separating taxation of companies from the taxation of their shareholders. This was one of the most controversial aspects of the proposal, as it didn’t compensate shareholders for the tax suffered by companies. Some expressed concern that it would deepen inequality, rather than remove inequality.

On the other hand, the measures would have modified monthly resident income tax brackets and rates and the global complementary tax (annual tax), impacting higher earning employees. It also aimed to establish an annual wealth tax and a new tax for those who lose their domicile or residence in Chile, and have assets over approximately US$4.6m. The opposition claimed that the wealth tax was contrary to the path followed by many OECD countries and would have encouraged the migration of capital. To date, 125 high-net-worth individuals have started the process for changing their tax domicile – but since the rejection of this initiative, many of them have paused this process.

Regarding tax evasion and avoidance, the reform introduced new provisions for the Chilean Tax Authorities to apply.  These included the application of the General anti-avoidance rules, new valuation rules, special statute of limitations, increased sanctions and penalties, extension of information obligations, the anonymous claimant, among others. If an offender is legally sanctioned with the obligation to pay an amount of money as a fine, the claimant is entitled to 10% of the fine – who could be anybody, even part of the company it reports. This idea did garner some support as it would have helped combat tax avoidance and the commission of illegal conduct. However, others believed it could have generated perverse incentives, especially for people trusted by taxpayers, to report certain situations – affecting duties of loyalty and confidentiality.

Mining royalty

The proposed mining royalty would have two components; a flat rate of 1% on annual copper sales of mining operations (whose annual sales exceed the equivalent of 50,000 metric tons of fine copper) and a component on mining margin (applicable on adjusted mining operating taxable income). The measure may have the effect that although it may initially generate greater resources once in force, it may also lead to a reduction in long-term collection due to the exit of many companies – stagnating investments.

Conclusion

Although the tax reform bill could improve fiscal collection and help combat tax evasion and avoidance, enabling the expansion of social rights – it might have been perceived as radical or too ambitious, potentially encouraging the migration of capital and double taxation. Hopefully, the current dialogue between the government and economic and social actors will lead to a consensus.