August 8, 2023
Chilean Government announces content of 'Fiscal Pact'
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:
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:
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:
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:
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.
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