Chile's president Sebastian Piñera has recently proposed a new tax reform for the country. This tax reform bill hopes to modernise and simplify the tax system in Chile as well as incorporating new rules to promote growth.
The Executive branch presented the bill before the Chamber of Deputies on August 23, 2018 in its first legislative stage. The tax reform bill was passed to the Treasury Commission where it is under review. The bill may still be modified until enacted. The administration hopes that the bill will come into effect on January 1, 2019.
The new tax proposal contains details outlining:
- migration to a single corporate tax regime replacing the current dual tax regimes
- increased expensing for investments in capital assets
- taxation for the digital economy
- amendments to international tax provisions.
The tax reform legislation would return Chile to the single integrated corporate tax system in which double taxation of business profits would be eliminated for all medium and large companies. Taxes paid at the corporate level would fully serve as a credit against the owner's final taxes.
Corporate Income Tax (27%) and final taxation applied to non-resident owners (35%) would remain unchanged. In all cases, the effective tax rate profits repatriated by a non-resident investor in a non-treaty jurisdiction would be subject to a 35% rate.
A single tax of 20% is proposed for capital gains derived from the sale of shares or social rights for individuals, unless the capital gain complies with Section 107 of the Chilean Income Tax law. Special regimes are established for instruments related to stock options derived from labour contracts.
The definition of deductible expenses for tax purposes has been expanded to include expenses that are not directly related to the company's activities but also includes indirect expenses. Taxpayers would be allowed to expense 50% of their investment in capital assets during a two-year period. Increased expensing would be allowed for investments located in specific areas of Chile.
For small and medium-sized tax payers (PYME), the bill establishes a Corporate Income Tax of 25%. Currently, PYMEs must apply to be eligible for PYME regime, however, the bill would automatically grant PYME status in the event revenue does not exceed UF 50.000 per year.
International tax provisions
The bill modifies regulation on taxes paid abroad and changes the credit caps for operations performed in countries that do not have treaties to avoid double taxation in force. The law includes the concept of "Permanent Implementation". The bill also modifies the calculation of foreign tax credit. The new method would include the new concept of "taxable income of foreign source" and places new caps on tax credit.
The bill requires companies to report the following items annually:
- business year's profit distributions, identification of beneficiaries, type of income (i.e., taxable or exempt) and the tax credit factor used
- calculation details of the RAI (taxable profits) registry and tax equity (Capital Propio Tributario)
- amount of the financial equity
- amount of depreciation differences recorded in the DDAN registry, for each asset.
The bill would establish a "digital tax" of 10% on digital services provided by non-residents to Chilean individuals. This type of tax would apply to digital brokering services, digital content entertainment advertising, as well as for the use and subscription to services and storage services.
Electronic payment administrators will become withholding agents. The bill would require the Chilean Internal Revenue Service (IRS) to keep a list of both digital service providers and withholding agents.
Value added tax (VAT)
The bill changes VAT rules and would prohibit taxpayers from mixing taxable and non-taxable services, while requiring the IRS to conduct an analysis of each service.
A newly created VAT regime would be available for small-sized companies whose average annual sales for three years is below UF 2,400. These taxpayers may pay VAT based on a gross margin on net acquisitions.
There are additional intricacies under Chile's new tax reform bill, it is critical for companies to take notice and be aware when running their businesses. There can be consequences for not complying with the law that may cost your business. As soon as this bill is passed and becomes a law, TMF Chile is here to help clients with all their tax needs. Talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.