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August 8, 2023
2023-1377

Chilean Government announces content of 'Fiscal Pact'

  • Chile has announced a new tax-reform plan that will be proposed in two separate bills focusing on combating tax evasion and making tax changes that would increase revenue.
  • This Alert highlights the anticipated proposals, as described by the Ministry of Finance.

In a national broadcast on the morning of 1 August, President Gabriel Boric revealed the main guidelines that will be part of the so-called "Fiscal Pact," which the government seeks to promote after Congress unexpectedly rejected the tax-reform project in March 2023.

As previously reported, the government will not move forward in the Senate (requiring the high quorum of two-thirds to continue the legislative debate) and will instead present the initiative in separate bills: one related to combating tax evasion and avoidance, and the second focused on tax reforms aimed at increasing revenue.

More details were provided in a memorandum from the Ministry of Finance (in Spanish), from which we can extract the following points:

1. Components of the Fiscal Pact

The government announced that the Fiscal Pact will contain six components:

  • Principles for a modern tax system in Chile
  • Needs and public spending priorities for the country's inhabitants
  • Commitments to reforms aimed at strengthening transparency, efficiency, and service quality in government
  • Promotion of growth through investment, productivity, and formalization of the economy
  • Enforcement of tax compliance and income tax reform
  • Institutional mechanisms for monitoring and evaluating the Fiscal Pact

The government will rely on two committees of experts to identify "the fiscal space available from growth and efficiency surpluses," whereby the difference between the fiscal cost of identified spending priorities and the mentioned surpluses will be financed through tax reform, focusing both on better tax-compliance enforcement and increased taxes and tax benefits. The first panel will consist of local experts from various backgrounds, and the second will be composed of professionals from the Organisation for Economic Co-operation and Development (OECD).

2. Proposals for each component

Although details on the specifics of each proposal are not yet available, the main tax amendments can be found in the following components:

2.1 Promoting growth (investment, productivity, and formalization of the economy: Growth Surplus)

The government announces 38 initiatives distributed in three areas. Some of these measures were already included in the original tax reform project rejected in March:

  • Public and private investment
    • Regulatory streamlining for investments
    • Semi-instantaneous depreciation
    • Tax Credit Fund for investments with a multiplier effect
    • Temporary reduction of the stamp tax
    • Incentives for investment in Small and Medium Enterprises (SMEs)
    • Long-term strategic vision for infrastructure
    • Expansion and streamlining of concession programs
    • Logistical efficiency in cargo transport
    • Special reactivation plan for the construction sector
    • Investment plan in infrastructure and water management
  • Productivity and human capital
    • Additional "development" corporate tax rate (the original project set it at 2%)
    • Tax benefits for private research and development
    • Creation of the Productivity and Development Fund
    • Strengthening care systems to increase female participation in paid jobs
    • Financing venture capital and developing the venture capital industry
    • Targeting, coordination, and effectiveness of programs for smaller companies
    • Clean and competitive mining
    • Lithium policy
    • Renewable energies
    • Green hydrogen
    • Digital economy
  • Formalization of economic activity
    • Traceability of operations
    • Appraisal of the VAT taxable base
    • Sanctions against irregular digital commerce
    • Other measures

Additionally, the government identifies five priority areas for product diversification: (1) clean and competitive mining, (2) Lithium, (3) renewable energies, (4) green hydrogen, and (5) the digital economy, enunciating a series of measures for each area. Among them:

  • Mining
    • Achieving fiscal stability after the approval of the mining royalty
    • Achieving a 30% reduction in the processing time for mining projects
    • Applying tax credits (through a tax credits law) to emission reduction and hydraulic efficiency projects
  • Lithium
    • Applying tax credits (tax credits law) to projects with direct extraction technologies and value chain extension
  • Renewable energies
    • Applying tax credits to new projects
  • Green hydrogen
    • Streamlining environmental impact assessments
    • Applying tax credits to innovative projects with a multiplier effect
  • Digital economy
    • Increasing investment in science and technology to 1% of gross domestic product (GDP)
    • Increasing public investment in connectivity in excluded areas.

2.2 Enforcement of tax compliance obligations and income tax reform

The government reaffirms the goal of obtaining an additional 1.5% of GDP in revenue by improving tax compliance enforcement. Regarding the modifications to income tax, it is worth noting that the government considers tax incentive proposals to imply a higher fiscal cost of 0.5% of GDP (which would have to be offset by additional revenue resulting from higher taxes). Several of these measures were also included in the original tax reform project.

The announced measures in this regard are:

  • Tax compliance enforcement
    • Modernization of the tax administration
    • Transparency
    • Tax justice and equity
      • Measures against tax evasion
      • Prevention and control of the use of legal loopholes to evade tax obligations
  • Income tax reform
    • Tax benefits
      • Entrepreneurship route for micro, small and medium enterprises
      • Tax incentives for investment in productivity
      • Benefits for the middle class
    • Higher taxes
      • General income tax regime (including the introduction of a "monotributo" for newly formalized companies with income below 1,800 Chilean Unit of Account (1,800 UF), raising the income threshold from 75,000 to 100,000 UF for entry into the ProPyme regime, incentives for joining the transparency tax system, and a more-gradual transition from the ProPyme to the general regime)
    • Personal taxes
    • Reduced tax exemptions
  • Incorporation of OECD rules on minimum global taxation of multinational groups (Pillar 2 BEPS 2.0).
  • It is notable that, until now, Chile had not signaled a desire to adopt Pillar Two of the OECD's Base Erosion and Profit Shifting (BEPS) 2.0 initiative, as it introduces a large, complex normative body and paradigm shift in international taxation.

2.3 Institutional mechanisms for monitoring, tracking, and evaluating the Fiscal Pact

Finally, the creation of a Monitoring Commission has been announced to monitor, track and evaluate the implemented measures and safeguard compliance with the commitments made. Additionally, every three years, the National Council for Evaluation and Productivity will evaluate the implementation of the Fiscal Pact, identifying the degree of compliance and results achieved.

3. Next steps

Through the press, the government announced that the new measures would not be presented to the Senate, due to the high threshold required for passage. Specifically, due to the high (two-thirds) quorum required to continue the legislative debate in the Senate, the bill referring to matters included in the tax reform project that was rejected in March 2023 will likely not be presented until March 2024.

In this context, the government announced that there will be a bill dedicated to tax compliance enforcement and another one for tax benefits and changes in income tax. However, the specific content of each bill has not been specified.

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For additional information with respect to this Alert, please contact the following:

EY Chile, Santiago

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 

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