Tax law reform.
Chilean Tax Reform was presented on April 1 of the present year 2014 to the legislators by the new Michelle Bachelet’s government (pending approval).
The motivations of the government are to improve Chilean education system and other measures in order to become a developed country.
The main changes to the Chilean tax law are to the Income Tax. Briefly, the rise of the First Category tax (Impuesto de Primera Categoría) rate, tax that as a general rule the companies have to pay. Also, there is a modification of the time in which the owners of the companies pay their personal taxes, which is now when the income is earned by the companies. This is a modification to the FUT system (Fondo de Utilidades Tributables) or Taxable Income Register. The former system allowed the owners to pay the personal taxes on a different time, not when the income was earned by the company. Another very important objective of this reform is to reduce tax evasion and elusion.
Therefore this reform seeks to increase taxation through changes to income tax, among other measures. The main changes specifically are:
1 – . Increased First Category Tax rate.
First, it rises, gradually, the rate of corporate tax from the current 20 % to 25% (21.0 % in 2014 , 22.5 % in 2015 , 24% by 2016, and 25 % from 2017) . This tax will continue to operate as an advance payment of personal taxes, thus keeping tax integration between companies and owners. This means that the First Category Tax paid will be a credit to the global tax to be paid by business owners.
2 – . Taxation on an accrual basis and term Taxable Income Fund.
On 2018 Income Tax Operation and declaration, the owners of the companies will have to pay taxes for all their companies incomes and not only for the incomes that they withdraw. The system will be changed because now the owners will have to pay immediately the personal taxes. This is the end of the FUT system.
The FUT or the different moment of paying personal taxes was originated in a particular economic situation. 1984 Chilean companies had no ability to finance their investments.
It states: “The situation in Chile today is completely different. The Chilean banking system is similar in many developed countries, depth, and has shown its strength in the last global financial crisis. The capital market has had a great development in the last decades allowing large companies can be financed by issuing bonds and stocks. Finally , firms can obtain financing abroad at reduced interest rates , thanks to the low country risk presented today Chile ” .
To move to this new system of income taxation on an accrual basis , consider the following rules in time :
Steady state : that is regulated in detail in the amendments to the Law on Income Tax contained in Article 1 of the project , which comes into force in the business year 2017, to engage in property during the tax year 2018.
Transition to December 31, 2016 : whose rules are contained in the second and fourth transitory articles .
. 3 – personal tax rate decreased from 40 to 35 %.
This adjustment seeks to address more equitable labor income , in relation to capital gains manner. To contribute to greater horizontal tax equity , the maximum personal tax rate from 40 % today to 35% , is reduced from 2017 calendar goes into effect when the new system on an accrual basis .
4.- Adjustments to taxation on capital gains
There are a number of changes to the project , including:
a) Any capital gains should be taxed at the income tax , no income except capital gains of share funds with bond market presence and revenue specified by law .