On August 23, 2018, the Chilean Executive Power proposed a tax reform bill that includes provisions that would impact many aspects of the Chilean tax system. In general, the bill is profoundly pro-business, and although the corporate tax rate generally remains the same, the bill would eliminate corporate tax credit limitations for shareholders and make significant changes to audit rules and IRS powers. On the revenue raising side, a new excise tax would be levied on digital services provided to individuals by Chilean non-residents, as such services are largely untaxed under current law.

The bill represents the beginning of the process, as Congress has yet to weigh in on this legislation, which they must approve in order for it to become law. It will be important for taxpayers to pay close attention as this proposal makes its way through the legislative process. Major provisions of the bill are highlighted below. A Tax Alert is forthcoming.

Lower taxes for small business

• The corporate tax rate would remain at 27% as the general rule, but small businesses would benefit from a reduced 25% rate.
• Shareholders would pay taxes only upon profit distributions with a full corporate tax credit.
• The reinvestment benefit (a 20-50% deduction of undistributed profits reinvested in the company) available to medium-sized companies would remain but would be reformulated without its current drawbacks (e.g. reversing part of the effect in the future).

A 10% tax on the purchase of digital services

• A specific, indirect 10% tax would be applied to digital services provided by non-residents to Chilean individuals (independent of where servers are located) and would replace any existing liens.
• Types of digital services subject to this tax would include: remunerated digital brokerage services; digital entertainment content (downloadable, streaming, or other technology); advertising services to be used abroad; use of and subscription to platform and technological services; storage services (cloud or software).

Taxpayer rights strengthened / several powers of the Chilean IRS limited

• Statute of limitations rules on carry-forward losses and VAT credit are tightened to avoid audits going back more than three years.
• Changes to IRS interpretation may be applied retroactively if they benefit the taxpayer, even if they give rise to tax refunds.
• An audit maximum duration is established. In cases in which the law does not provide a deadline, the  IRS Director is obliged to set one.
• GAAR rules are clarified in regard to their reach and content.

The definition of deductible expenses is reformulated and expanded in order to better acknowledge and support business operations.

• To be deductible, expenses would have to be:
• Directly or indirectly linked to the development of the taxpayer’s business, including ordinary, extraordinary, customary, exceptional, voluntary, or mandatory (the concept of “necessary to produce taxable income” would be abandoned)
• Reasonable in amount, depending on the circumstances
• Not also deducted as a cost
• Paid or owed during the tax year
• Driven by a lawful cause and not related to unlawful behavior or schemes, and
• Reliably proven before the IRS

Faster cost recovery for capital investments

• Taxpayers would be allowed to immediately depreciate 50% of their capital investments made within 24 months of the bill becoming law.
• Taxpayers with an average income of less than 100.000 UF (4,115,000 USD) for the last three years would be allowed to accelerate depreciation for tax purposes.

Relaxation of thin cap rules for certain investments

• Thin capitalization rules would not apply if funding corresponded to the development, enhancement, or improvement of one or more projects in Chile and is provided, in majority, by non-related parties.

Increased creditability for taxes paid abroad

• Rules for tax credits on taxes paid abroad would be reformulated to agree with countries with and without Double Taxation Agreements.
• Creditable taxes would include withholding taxes and corporate taxes of both the paying entity and its subsidiaries – even if they are a resident in third countries – as long as the countries have an Information Exchange or Double Taxation Agreement with Chile.
• The methodology to calculate the foreign tax credit would be reformulated, establishing a new concept of “Taxable Income of Foreign Source” and new caps (individual and global) to the tax credit.

Accelerated recovery of VAT

• The anticipated VAT refund on fixed asset acquisitions is improved. Taxpayers must accumulate VAT credits for only two months instead of six, and the IRS would release the refund in five days instead of the current 60 days.

New capital repatriation window

• Undisclosed assets or profits may be voluntarily subject to a 10% substitutive tax, generating full amnesty to the taxpayer. This is similar to the 2014 initiative, but this time it also includes real estate.

New substitutive tax on retained taxable profits

• Companies that have a positive balance of retained taxable profits may voluntarily pay a 30% tax on the same, thus granting shareholders a non-taxable dividend distribution (which would have otherwise been subject to a personal tax of up to 35%).