A tax bill (submitted to the Chilean Congress on 1 April 2014) proposes to overhaul the Chilean tax system—and the proposals (if enacted in their current their current form) could affect investors with operations or a presence in Chile. The tax bill may be subject to changes during the legislative process; nevertheless, prudent foreign investors and other taxpayers need to be aware of certain provisions now.
Goal - To increased tax revenue
In general, the proposed tax bill aims to increase tax revenues in order to fund investments in education and to reduce social inequality, among items. The target is to increase tax revenues by 3% of Chile’s GDP (or approximately U.S. $8.3 billion).
To understand the potential implications of these changes, (1) first review of Chile’s integrated tax system and then (2) consider an overview of major tax change proposals—changes that are not specifically aimed at foreign investors, but would also increase the tax burden of Chilean resident individual investors.
Background - Chile’s integrated tax system
Chile’s integrated tax system generally would remain intact, but with several significant modifications.
Chile’s integrated tax system includes: (1) the corporate income tax (also referred to as the “first category tax”) paid by the Chilean entity; and (2) the foreign shareholder tax (also referred to the “additional tax”) paid by the shareholders, so that the two taxes provide for a combined Chilean tax burden of 35%.
Proposed corporate income tax rate increase
The bill proposes to increase the rate of the corporate income tax, gradually from 20% to 25%.
Under the Chile’s integrated system (as currently in place), business income derived by a Chilean entity is first subject to corporate income tax. The bill proposes to phase in the corporate income tax rate increase over a four-year period (according to this schedule)
- 21% in 2014
- 22.5% in 2015
- 24% in 2016
- 25% starting from 2017
Proposal to end deferral of the “foreign shareholder tax”
Under the bill, starting in 2018, with respect to profits earned during calendar year 2017, the “foreign shareholder tax” would be due when the profits are earned (instead of when the profits are actually distributed). Thus, this would end the ability to defer payment of this tax by the foreign shareholder.
Business income that is attributed to the enterprise's foreign owners, accordingly, would be subject to the shareholder tax at the rate of 35—regardless of its distribution.
No tax would be imposed when actual distributions are paid out of profits that previously had been attributed and subject to the foreign shareholder tax. Up to now, the tax was due when distribution was declared and paid. Currently, the “foreign shareholder tax” is collected as a withholding tax imposed on the Chilean company. Foreign shareholders, however, would be allowed to claim as a credit, the amount of corporate income tax paid in computing their personal liability of the “foreign shareholder tax.” In other words, under this integrated system, the net “foreign shareholder tax” is the difference between 35% less the corporate tax paid on those profits.
There are ordering rules that also would need to be addressed, as well as complex transition rules applicable to taxpayers that, by 2017, still have pools of retained taxable earnings determined under the current system.
Changes to tax loss utilization rules have also been introduced in the bill, to conform to the proposed system. Losses would still be carried forward indefinitely, but no carry back would be allowed. Foreign investors with accumulated earnings in Chile would need to address the foreign tax credit implications that this change might create—depending on the international double taxation relief system used by their home jurisdictions.
These proposed changes would effectively result in a corporate income tax increase to 35%--i.e., he direct increase of the corporate tax rate to 25% over the next four years and the 10% mandatory withholding obligations imposed to corporate taxpayers on the account of shareholder taxes.
Read an April 2014 report (Spanish) [PDF 134 KB] prepared by the KPMG member firm in Chile.
For more information, contact a tax professional with KPMG in Chile:
+56 227 981 341