Global

Details

  • Service: Tax, International Executive Services, International Tax
  • Type: Regulatory update
  • Date: 5/15/2014

Chile - Update on tax reform proposals 

May 15:  A package of tax reform measures, that would overhaul the Chilean tax system, was approved by the lower house of the Chilean Congress earlier this week.

The tax reform bill was presented to the Chilean Congress in early April 2014. Among other items, the legislation would repeal a mechanism that allows for the deferral of taxation on reinvested profits of foreign shareholders (described below).


Read also TaxNewsFlash-Americas: Chile - Proposed tax changes affecting multinationals, shareholders

Background

Chile's current tax system includes a “taxable profits fund” mechanism (Fondo de Utilidades Tributables or FUT). The FUT is a mechanism that is intended to encourage the reinvestment of profits in Chile, by deferring shareholder-level taxation (effectively 15% to 18%) when the profits are reinvested in Chile—rather than being distributed to shareholders.


Under the current system, a company's taxable profits are subject to corporate income tax at 20% (17% for years prior to 2011). When profits are distributed, shareholders pay tax at 35% on the distribution, subject to a credit for underlying corporate taxes.


Thus, shareholders are generally only be subject to tax at an effective rate of 15% or 18%, depending on whether the underlying profits were subject to tax at 20% or 17%. None of the income tax treaties in Chile’s treaty network allows a reduction of the shareholder-level tax.


The FUT is a “special ledger” that tracks retained profits and the corresponding tax credit.

Proposal to repeal FUT

The FUT regime would be repealed under the proposed tax reforms. Thus, all profits would be immediately taxable at 35% effective 2017.


This proposal, therefore, would reduce the incentive for international groups to make reinvestments of profits in Chile.


It is expected that the elimination of the FUT mechanism, together with the proposed reforms set out below, could affect Chilean companies in one or more of the following ways—decreased cash flow and profitability; heightened pressure on dividend policies; increased working capital needs; potential weakening of debt structure; rising borrowing costs; and discouraging investments in projects.


Read a May 2014 report prepared by the KPMG member firm in Canada: Major Tax Reform Bill in Chile Affects Foreign Investment


Read a 2014 report (Spanish) prepared by the KPMG member firm in Chile on tax reform proposals to repeal the FUT: Eliminación FUT




©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

 

Share this

Share this

Subscribe

Subscribe to receive the latest TaxNewsFlash email alerts (you must select the option for TaxNewsFlash)


Already a Subscriber? Login


Not a member? Subscribe now