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Chile: Tax reform is announced, bill expected to be introduced

Chile: Tax reform is announced, bill expected

Chile’s president on 21 August 2018 announced a forthcoming tax reform bill would be presented to the Congress. The bill would be intended to introduce changes to modernize and simplify the Chilean tax system in an effort to promote investment, growth, and employment.

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The announcement only provides certain high-level details of the tax reform provisions and include:

  • A single corporate tax regime to replace the current dual regimes
  • Increased expensing for investments in capital assets
  • Rules regarding taxation of the digital economy
  • Changes to the international tax provisions

More details will be available once the text of the bill is presented to Congress.

Implications for foreign investors

The tax reform would be expected to have implications for foreign non-treaty jurisdiction investors, in that it could reduce the current effective tax rate that can be as high as 44.45% to 35%. 

Specifically, U.S. investors in Chile could be affected by the tax reform measures, given that the Chile-United States income tax treaty has yet to enter into force.

Overview of tax reform

Implications of the proposed tax reform for multinationals and other non-resident investors in Chile include the following:

  • The tax reform legislation would impose a single integrated corporate tax system in which double taxation of business profits (at the entity level and in the hands of the shareholders or owners) would be eliminated under a full imputation credit. Accordingly, taxes paid by the business would be creditable against the tax payable by owners and shareholders.  
    • Although the business income tax rate (27%) and the tax rate (35%) on non-resident owners would remain unchanged under the proposed imputation system, the effective tax rate profits repatriated by a non-resident investor in a non-treaty jurisdiction would be 35%. This reduction in the tax rate could be particularly relevant for U.S. investors in Chile (again, given the fact that the Chile-United States income tax treaty has not entered into force). 
    • U.S. investors are benefiting from a transitory rule until 31 December 2021 (applicable to countries with income tax treaties pending ratification). 
    • Currently, the effective rate can be as high as 44.45% for non-resident investors in non-treaty jurisdictions. Non-resident investors in treaty jurisdictions would not be affected by the proposed changes. 
    • A reduced rate of income tax (25%) would be introduced for small and medium sized enterprises, and would be payable on profits that are not reinvested in the business. 
  • 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 the Chilean geographic region of Araucania.
  • There would be revised rules regarding tax avoidance and tax evasion.
  • The proposal would introduce simplified international tax rules aimed to attract foreign investment to Chile.
  • A flat tax rate of 10% would apply for digital services provided to customers in Chile by non-resident service providers. This tax would be expected to be collected through credit card charges at the time of payment for the services.
  • A repatriation tax (10%) and a tax on undistributed profits (30%) would be imposed as revenue raising provisions so as to maintain the revenue-neutral status of the tax reform measures.

 

Read an August 2018 report (Spanish) [PDF 370 KB] prepared by the KPMG member firm in Chile

 

For more information, contact a tax professional with KPMG’s Latin America Markets Tax practice or with the KPMG member firm in Chile:

Alfonso A-Pallete | +1 (305) 913-2789 | apallete@kpmg.com

Francisco Lyon | +56229971400 | flyon@kpmg.com

Rodrigo Stein | +56229971341 | rodrigostein@kpmg.com

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