Finance Minister Marcel outlines 27 amendments to the Tax Reform bill

PRESS RELEASE from the Ministry of Finance of Chile

September 13, 2022

This is a machine translation of the original release, issued in Spanish

- At the end of the session, the Minister of Finance valued the good reception of the parliamentarians regarding the set of modifications.

- The indications address various areas such as investment incentives, anti-avoidance and evasion agenda, income tax system, regime for SMEs and wealth tax.

Valparaíso, Tuesday, September 13, 2022.- This afternoon, in the Finance Commission of the Chamber of Deputies, the Minister of Finance, Mario Marcel, announced the first indications of the Tax Reform project, discussed with the technical teams of the parliamentarians of all the benches during the last months in seven meetings.

On the occasion, the authority indicated that they have worked on these proposals in conjunction with the technical table made up of the advisors of the deputies and deputies of the Commission, and the tax advisors of the portfolio headed by the undersecretary Claudia Sanhueza.

In parallel, the minister mentioned, two meetings have been held with representatives of micro, small and medium-sized enterprises, with whom topics related to the incentive to formalization, greater gradualness in the elimination of the transitory regime of the First Category Tax ( IDPC). In addition, five meetings have been held with technical advisors from the Confederation of Production and Commerce (CPC) and representatives of various productive sectors, with whom they worked on items such as improvements to the application procedure of the General Anti-Avoidance Regulation, bank secrecy, appraisal rules, among others; and a specific meeting with the organization's leaders to address investment incentives.

Among the indications is an improvement to the DFL2 lease rule, to the special regimes for SMEs, anti-avoidance rules, adding four measures included in the Plan Invest in Chile, which was presented yesterday with the President of the Republic, Gabriel Boric, in conjunction with the Ministry of Economy, Ministry of Environment and Ministry of Public Works; accompanied by representatives of different unions and representatives of small and medium-sized companies, among others.

The Minister of Finance announced the general indications on 27 topics that address five different items: four points on investment incentives, eight on the anti-avoidance and evasion agenda, eight on the new income tax system, four indications on the regime for small and medium-sized companies, and three on wealth tax.

“Of these 27 indications, there are four of them that correspond to the pro-investment measures that were announced yesterday, including the US$500 million fund of tax credits for investments with a high multiplier effect; there is also the semi-instantaneous depreciation for investments in fixed assets; and then, there are a series of indications related to the Tax Code, with the new income tax system, with the patrimonial tax; I think they were very well received by the parliamentarians”, said Minister Marcel at the end of the session.

Regarding the indications related to the proposal so that the income obtained from DFL2 leases be taxed with Income Tax, the minister affirmed that modifications will be incorporated to favor the elderly. “Several indications were introduced, among them, reducing or applying exemptions to the elderly, applying a credit for presumed expenses for those who are landlords and other minor adjustments, with which -to a large extent much of the discussion that took place in around the DFL2 exemptions are going to be well resolved”, he specified.

Regarding the reception of these indications by the members of the commission, Marcel said: “it helped a lot to have a joint vision of the modifications that are going to be introduced through indications. Tomorrow we are going to continue making presentations that were requested by the parliamentarians themselves in previous meetings and it seems to us that it is important to maintain an overall vision, since there are many interrelated parts”.

This Wednesday, September 14, Minister Mario Marcel will present more details about the indications and studies that support these proposals, in addition to updating the collection figures.

The objectives of the Tax Reform of the Government of President Boric respond to explicit objectives of collection, tax justice, collection legitimacy, tax modernization and efficiency.

Also, as detailed by Minister Marcel in the Commission, during these weeks socialization spaces have been held for the Tax Reform proposal with other organizations such as Banchile Inversiones, Scotiabank, Chile Transparent, Chilean Institute of Tax Law, delegation of companies Chinese, University of Santiago and Regional College of Accountants, French Chamber of Commerce, to name a few. Some of the indications that are still under discussion and drafting are those related to investment funds, term of business and VAT on real estate. Meanwhile, he commented that the Senate is working on indications to the Mining Royalty.

Detail of the indications Investment incentives

1. Law for investment projects with multiplier and green effect. A credit fund attributable to IDPC is created for US$500 million, which will be assigned to investment projects that have a high multiplier effect.

2. Semi-instantaneous depreciation. The norm approved in Law 21,210 is taken as a basis, with a special benefit during 2023.

3. Leasing contracts. The modification approved in January (law 21,420) is eliminated, therefore the leasing contracts will maintain their tax regime.

4. Tax losses. the gradual use of tax losses as an expense for the year is extended.  80% in 2025  65% in 2026  50% in 2027

Anti-avoidance and evasion agenda

1. General anti-avoidance rule. A special procedure is established for the administrative qualification with measures such as the examination procedure will always be with a hearing of the taxpayer; the decision will be made by a collegiate body (deputy directors) that must resolve unanimously, etc.

2. Tax Responsibility. There will be a public registry where companies that have a certification by a third party will enter indicating that their operations and fiscal strategies comply with the concept of fiscal sustainability.

3. Bank Secrecy. the procedure that allows collecting information from customer accounts is improved.

4. Control standard. Specifications are made on the conditions under which the taxpayer is guaranteed not to be audited again for operations already reviewed by the SII.

5. Appraisal rule. It is specified that both national and international reorganizations enjoy tax neutrality as long as they meet legal requirements.

6. Control of informality through procedures so that the physical clearance guides (forestry sector) are replaced by digital ones, and greater control on the road, among others.

7. Anonymous whistleblower. Improved wording and procedure.

8. Extraordinary prescription. The wording is improved in the sense of limiting the scope to taxpayers who intend to hide information from the SII.

New income tax system

1. Tribute to personal tax deferral. The tax base will be 22% of the accumulated profits with pending personal taxes, provided that they are registered in passive companies, with a rate of 2.5%.

2. Dividends between companies. It is clarified that only when a company in the general regime receives a dividend from an SME, it must enter it into its taxable net income in order to make both regimes compatible. This allows the use of the credit that comes with the dividend and avoids double taxation.

3. Credits for taxes paid abroad, provided that the taxpayer can prove traceability. Payments to tax havens. A control rule is incorporated that establishes that expenses destined for services provided from a country that qualifies with a preferential regime will not be deductible.

4. Presumed rental expense. People who declare rental income will have the right to deduct as an expense the equivalent of 10% of the declared income.

5. DFL-2.: Older adults whose income (excluding rents) was in the exempt bracket or in the second bracket of personal taxes, will consider as non-income income those that come from DFL-2, with a limit of 1 million pesos.

6. Free Zone. Reviews and adjustments will be made to these preferential regimes.

SME regime

1. A gradual term is established in the term of the temporary reduced rate benefit due to the pandemic.  15% for the year 2023  20% for the year 2024  25% for the year 2025

2. Presumptive income. Improvements to the transit mechanism are established for those who abandon the presumed income regime and pass the transparent regime.

3. Payment of debts. The prompt payment benefit is extended, noting that the agreements with forgiveness of fines and interest will have a maximum of 5% of the debt (it may be less) and a duration of up to 18 months (The PdL considers 12 months).

4. Incentive to formalization. This incentive is extended, allowing support for new ventures and encouraging formalization.

Wealth tax

1.Exit Tax. It is agreed to eliminate the 5% departure tax for those taxpayers who lose residence.

2. Asset valuation. The wording will be revised to establish simpler rules without losing the correct determination of wealth.

3. Tax burden limit. Following the experience of other jurisdictions, a limit to the tax burden on income will be proposed that considers the effective rates of income tax and wealth tax.