Tax Reform proposal 2022 issued by Chilean government.

The Ministry of Finance, Mario Marcel described the general guidelines of the new tax reform proposal, jointly with President Gabriel Boric.

Below we point out the general guidelines of this new Tax Reform proposal:

Corporate Income tax (First Category Tax) and Individual Income tax for large companies.

• Replacement of the previous integrated income tax system for large companies, with the new Tax Reform, taxation of large companies would be separated from the taxation of their owners.

Previously our tax law integrated the taxation of large companies with the taxation of their shareholders or quota holders, where the Corporate Income tax paid by the companies when distributing dividends to shareholders is to be allocated as a credit in relation to their shareholders individual taxes.

It’s important to note that this will not be applicable  for foreign investors domiciled in countries with avoidance of double taxation treaties with Chile or for small and medium size companies,  as the  integrated tax system or credit system will still apply for these taxpayers.

• Specific tax on dividends distributed to individuals at a rate of 22%. Individuals resident in Chile, may re allocate this tax adding the dividend to the tax basis of their personal income tax.
• The corporate income tax rate is reduced from 27% to 25%
• A new tax called “Development Tax”  is created with a tax rate of 2%, which could be paid by crediting expenditures aimed at improving the company and economy productivity, such as R+D or high technology equipment.
• New capital gain tax at a 22% tax rate.
•  New limit for the use of tax loss “carryforward”, 50% of the net taxable income  yearly.

Income Tax: specific cases.

• A 1.8% annual rate applicable to retained earnings in investment companies  that receive more than 50% of  their income from passive income.
• Capital Gains of purchase of  stock market instruments: Same tax treatment of dividends.
• Eliminates DFL 2, benefit for the rent of 140m2 properties.
• Limits to presumptive income regime to micro enterprises with income up to 2.400UF/US$ 85,000 approx.

Individual taxes.

Modification of the brackets and rates of the  individual taxes, starting to apply changes for those with monthly income over US$ 4,100, approx/CLP$4.030.000, now with a marginal tax rate of 26%, continuing to be a progressive income tax.

The new maximum marginal rate would be 43%,  applicable for monthly income higher than US$ 8,200/CLP$8.057.000, approx.

Benefits to middle class on individual taxes.

Housing rental: individuals may deduct from the tax base of the personal tax on rental expenses, with a cap of 8 UTA approx. ($CLP450,000 or USD490 per month).

Family care: individuals may deduct from their tax base the expense associated with the care of children under 2 years of age and people with severe dependency, capped at 10 UTA approx. ($550,000 per month/USD 600).

Wealth tax

In order to levy the wealthiest individuals domiciled or resident in Chile.

Progressive and marginal rates with three brackets; (i) assets valued up to US$ 4,9 million- exempt from the tax; (ii) assets valued between US$ 5 and 15 million would be subject to a 1% rate; and (iii)  assets exceeding US$ 15 million would be subject to a 1.8% rate.

Mining royalty

For mining companies with a production exceeding 50,000 metric tons of fine copper per year.

Two categories were set forth:

(i) ad valorem,  a rate would be applied on sales for 50.000-200.000 metric tons tax rates ranging from 1% marginal tax rate up to 2%, and on sales for more than 200.000,  marginal tax rates ranging from 1% to 7%, depending both on the price of copper and the quantity; and

(ii) profitability margins, rates from 2% to 32% of the companies’ operating income, depending on the price of copper.

Other measures to enhance compliance.

• Create a registry of beneficial owners by which all companies must inform the Chilean SII about the entities/individuals that directly or indirectly  have a participation equal or greater than 10% in their ownership.
• Modification of the general anti-avoidance rule (GAAR) to allow its administrative application by the Chilean SII.
• Creation of the anonymous whistleblower in tax matters, with a right to obtain 10% of the sanction obtained.
• Higher sanctions for tax crimes.

Please for further information contact CFA professionals.

On January 1, 2020, most of the provisions of Law No. 21,210 on Tax Modernization come into force. This regulation mainly brings changes in the tax regimes, eliminating the Regime of Article 14 Letter A of Attributed Income, setting forth the General Regime of article 14 D Nº3 for Medium and Small Business (“ProPyme”) and the Transparent Regime of article 14 D Nº8.

Pro Pyme General Tax Regime.

Tax Regime focused on micro, small and medium taxpayers (SMEs), which determines their tax result, as a general rule, based on income received and expenses paid, being obliged to keep complete accounting with the possibility of opting for a simplified one. They are subject to the First Category Tax (IDPC) with a 25% rate and their owners will be taxed based on withdrawals, remittances or effective distributions, with full imputation of the credit for First Category Tax in the final taxes that affect them, except for those owners who are IDPC contributors and are not covered by the Pro Pyme regime. ”

Entry requirements.

The average gross income in the last three years cannot exceed 75,000 UF, which may be exceeded once, and, in no case, in any one year the income may exceed 85,000 UF. This average includes income from your related parties.

At the time of commencement of activities, its effective capital must not exceed 85,000 UF.

It is capped at 35% of income from certain rents:

Income of N ° 1 and 2 of art. 20 LIR (except Agricultural Real Estate).
Participation account contracts
Social rights, shares or investment fund quotas.
Benefits.

1. Proposal for the declaration of the SII to the company, based on information from the Purchase and Sales Registry (RCV) supplemented by the taxpayer.
2. No monetary correction applies.
3. Your existing stocks or supplies at the end of the year are recognized as an expense.
4. Applies instant depreciation of your fixed assets.
5. Determines the simplified tax base, according to income received and expenses paid (except in the case of operations with related companies).
6. It is released from maintaining business income records (RRE), provided that it does not generate or receive income to be controlled in the REX registry.
7. In the event of generating or receiving income to be controlled in the REX registry. And continue with the release of carrying the RRE, you can issue Electronic Tax Documents that account for asset movements.
8. There is no imputation order for withdrawals, remittances or profit distributions to their owners, to the extent that it does not generate or receive income to be controlled in the REX registry.
9. Applies the exercise rate to assign the credit by IDPC.
10. Determine a simplified Tax Equity.
11. Use fixed PPM rates.
12. You can access a tax status report that will allow you to access the banking system to obtain financing.
13. A reduction is applied to the IDPC tax base for investment incentives (50% of the RLI with a ceiling of UF 5,000).
14. Against the IDPC determined by the company, all credits contained in the LIR and other laws apply.
15. Tax status of withdrawals, remittances and distributions is determined at the end of the fiscal year.
First Category Tax Rate.

From 25%, with a temporary reduction to 10% due to a health crisis in the coming years. The First Category rate and Monthly Provisional Payments were reduced to 10% for all companies under the Pro Pyme Regime during the years 2020, 2021 and 2022, that is, until tax year 2023.

Monthly Provisional Payments.

In the starting year of 0.25%.
If the gross income from the previous year’s business does not exceed 50,000 UF, it is 0.25%.
If the gross income from the previous year’s business exceeds 50,000 UF, it is 0.5%.
Business Income Registries.
A record of business income is required to the extent that they possess or receive income that must be entered in the register of Exempt Income and income not constituting income (REX) and that do not take advantage of the Electronic Tax Document (DTE) where they must report their equity movements.

Corporate Tax (First Category Tax “FCT”) for Large Companies.

The partially integrated system is established as the only tax regime for large companies, with a rate of 27%. The right to use only 65% ​​of the FCT paid as a credit against the final taxes is the rule now, however there is a exception to residents in a country with which Chile has a treaty in force to avoid double taxation, in which case they have the right to use 100% of the FCT as credit. Regarding the order of allocation of withdrawals, remittances or  dividends distributions of profits

Imputation order and its tax effects.
In the chronological order in which withdrawals, remittances or distributions are made, until the positive balance of the RAI, DDAN and REX records is exhausted, in the order and with the effects listed below:

(i) Firstly, to the income or amounts recorded in the RAI registry, affecting the corresponding final tax.
(ii) Secondly, to the income or amounts recorded in the DDAN register, affecting the corresponding final tax.
(iii) Thirdly, to income with tax compliance, then to exempt income and then to income not constituting income, recorded in the REX registry, which will not be affected by any tax, considering in any case those made charged to income exempt from the complementary global tax for the purposes of progressivity established in article 54. In the event that the income is only exempt from the complementary global tax, and not from the additional tax, the tax will correspond to the latter.
(iv) Once the amounts indicated above have been exhausted, the allocation will be made to the balance sheet profits retained in excess of the taxable ones, as reflected in the balance sheet of the company at the end of the commercial year, affecting the corresponding final tax.
(v) Subsequently, after exhausting the retained balance profits in excess of the taxable ones, the allocation will be made to the capital and its adjustments, until the concurrence of the participation that corresponds to the owner in the capital. When the withdrawals, remittances or distributions are imputed to the capital and its readjustments, they will not be affected with any tax, according to article 17 number 7 .-, to the extent that the withdrawals, remittances or distributions imputed to the capital are formalized as decreases of capital according to the type of company in question. For this purpose, the capital decrease must be formalized no later than February of the year following the year of withdrawal, remittance or distribution. In the case of the individual entrepreneur, to make use of this imputation, the decrease in capital must be reported to the Service within the same period.
(vi) Finally, any withdrawal, remittance, or distribution that exceeds the amounts indicated above, will be affected with the corresponding final tax.

Provisional Payments for Absorbed Profits (“PPUA”)
The PPUA refund is gradually eliminated for the profits received from other companies that are absorbed by the losses of the receiving company, according to the following detail:

Year 2020: 90%
Year 2021: 80%
Year 2022: 70%
Year 2023: 50%
Year 2024 and following: 0%

Three important Affidavits are to be filed to the Chilean Servicio de Impuestos Internos before July 1, 2019: 1907, 1929 and 1946.

-Sworn Statement No. 1907 on Transfer Pricing: Corresponds to taxpayers who, during the 2018 business year, have carried out transactions with related parties from abroad, in accordance with the rules established in article 41 E of the Chilean Income Tax Law (ITL).

-Sworn Statement No. 1946: Corresponds, among others, to: (i) Taxpayers with residence in Chile who make payments abroad from operations that a person without residence in Chile performed in the country or abroad; (ii) management companies of public or private investment funds and mutual funds that make payments to a person without residence in Chile; (iii) taxpayers with residence in Chile who have determined amounts indicated in subsection third, of article 21 of the ITL (rejected expenses attributed to a partner/shareholder); (iv) Withholders of Additional Tax.

-Sworn Statement No 1929: Corresponds to (i) taxpayers domiciled in Chile who on a perceived or accrual basis produce income abroad; (ii) taxpayers to which the CFC rules apply, among others. Contact us if you need our assistance for tax compliance with the Chilean SII.

If any queries don’t doubt to contact CFA.

Photo: Santiago from Bicentenario Park.

The Tax Year 2018, which considers the income obtained by taxpayers in the 2017 business year, represents a great challenge for companies, since it is the first year in which the Tax Reform introduced in Chile through laws 20,780 and 20,899, applies fully.

Thus, for each Tax Regime – Partially Integrated of Article 14 B or of the Attributed Rent of Article 14 A – to which the company is hosted, various tax obligations will be generated for purposes of consolidating the AT 2018 Income Tax Operation and complying with the legislation.

It is in this sense that CFA is committed to providing full and complete advice for the Income Tax Declaration process AT 2018 (F. 22), which will be essential with the full introduction of the Tax Reform, taking into consideration that the Internal Revenue Service has issued multiple Resolutions and Affidavits related to the New Tax Regimes that must be considered by taxpayers.

Find here the Supplement of Affidavits issued by the Chilean IRS (SII) : https://lnkd.in/djfxstY

Chilean IRS decided to publish the list for estimating that it is important information to facilitate the correct voluntary tax compliance of taxpayers, since the rating is relevant for the application of a series of rules of the Income Tax Law.

The list includes the Bahamas, Bermuda, Puerto Rico, Cuba, Qatar, Honduras, the Arab Emirates, Thailand, Taiwan, the Virgin Islands, the Cayman Islands and Hong Kong, among other territories.

The Chilean Internal Revenue Service published a preliminary list of 150 countries and jurisdictions that are considered to have a preferential tax regime or zero or low taxation, a rating that is relevant for the application of a series of rules included in the Income Tax Law (LIR)

The list was built after a rigorous analysis by the specialized teams of the agency that have participated in various international instances that analyze the tax issue and will be updated at least once a year to collect changes that may occur in the behavior of countries.

Its publication aims to provide certainty and facilitate the correct voluntary tax compliance of taxpayers, contemplating additionally the possibility of knowing and receiving the doubts, observations and recommendations of the different stakeholders.

The effect of considering that a territory or jurisdiction has a preferential tax regime is relevant to the practical application of different rules of the ITL, such as Article 14 letter E), No. 1, letter a), which establishes certain reporting obligations investments abroad; Article 41 F on excess of indebtedness; Article 41 G on controlled foreign entities that obtain passive income; and article 59 regarding a reduced rate of the Additional Tax for royalties and remunerations.

As an example, those who pay income or amounts consisting of royalties or remunerations for professional or technical work or services to people living in countries with preferential tax regime, should withhold the Additional Tax with a 30% rate, in the case of royalties, and of 20% for the remunerations, without it being appropriate to use the reduced rates contemplated in article 59.

The law prescribes that a territory or jurisdiction has a preferential tax regime, when it verifies the concurrence of at least two of a total of six requirements expressly stated, provided that they are not member countries of the Organization for Economic Cooperation and Development (OECD).

This allows maintaining a dynamic list that adjusts to the behavior of those jurisdictions over time, as it verifies the commitment assumed to comply with international standards in matters of transparency and exchange of information, as well as the clarifications requested by taxpayers for changes in the jurisdictions that are part of the preliminary list, among other elements that must necessarily be taken into consideration.

A good example of this is Liechtenstein, country included in the year 2003 in the list of countries or territories considered “tax havens”, by Decree No. 628 of the Ministry of Finance, a condition that remained in force without modifications until its current repeal .

The new list, however, takes into consideration for its classification that Liechtenstein signed the Multilateral Convention on Administrative Assistance (MAAT), which allows Chile to exchange information for tax purposes with that country; the rating of “substantially compliant” of the internationally accepted standards on transparency and exchange of information for fiscal purposes by the OECD, as well as that its legislation does not maintain a preferential regime for tax purposes, in accordance with the rating issued by this Same Organization.

The SII recalled that it carries out its processes of tax compliance analysis and case selection based on methodologies and technical disciplines of risk management of general acceptance, a framework in which transactions or transactions entered into with territories or jurisdictions with zero or low taxation receive a greater weight of risk and prioritization for the purposes of its treatment and remediation, which is in accordance with the standards that have been developed at the domestic and international levels.

Finally, it pointed out that taxpayers can consult the Service for compliance with the requirements established by the regulation, both with respect to the countries included in the list and those that are not included in the list, providing the necessary information so that the agency can pronounce in particular cases.

In october 2014 the law N°20:720 was enacted “replacing the actual concursal system by a new law of reorganization and liquidation of companies and persons assets , improving the role of the institution that oversights the process, Superintendency of Insolvency and re-entrepreneurship , Superintendencia de Insolvencia y Reemprendimiento.

This law puts emphasis in the reorganization of viable companies , creating procedures for reestructuring  their debts, keeping the company as a productive unit and job generator. One of the great novelties that incorporates this law is the possibility to renegotiate  the natural persons or not comercial debtors debts, and to give them a fast execution of their goods. Also the creation of the Superintendencia of insolvency and re-entrepreneurship , Superintendencia de Insolvencia y Reemprendimiento, with presence all over the country and it’s regions, that replaces the Bankruptcy Superintendence.

The current bankruptcies in court , arrangements and assignments of property that are being processed and the ones that start before the validity of the law will be ruled by the dispositions of the Commerce Code, Book IV, Libro IV del Código de Comercio.

Scope of Application of the new Bankruptcy Law

It will be applied to the concursal proceedures meant to reorganize and liquidate the assets and liabilities of a debtor company, and to renegotiate the assets and liabilities of a debter natural person.

New Authorities 

The new law of insolvency and re-entrepreneurship changes the main characteristics of the former law. Also, it includes new authorities and actors:

1.- Veedor, Viewer: Natural person under the supervision of the Superintendence of Insolvency and re-entrepreneurship, which mission is to reach the agreements between the debtor and his creditors, to supply the propositions of Agreements of Judicial Reorganization and to keep the interests of the creditors, requiring the precautionary measures and conservation of the debtor’s assets, according to what is said in the law.

Their faculties  are similar as the ones the Receiver or  Síndico had with the former law in the agreemente that tried to avoid or put an end to the bankruptcy. Now the main objective of the Concursal Proceedure of Reorganizaion is to restructure the liabilities and the assets of a debtor company, in which the liquidation of their assets has not been done.

2.- Liquidador/Liquidator: Natural person under the supervision of the Superintendence of Insolvency and re-entrepreneurship, which main mission is to realise the assets of the Debtor and try to do the payment to the creditors. This new actor, the Liquidator, will replace the functions of the former Receiver of Bankruptcy or Síndico de Quiebras.

3.- Martillero Concursal /Concursal Auctioneer : Public Auctioneer that voluntarily subjects to the supervision of the Superintendence of Insolvency and re-entrepreneurship, which main mission is to realise the assets of the Debtor, according to what is agreed by the Creditors Commitee and this law.

4.- Deudor/Debtor: In order to avoid the stigmatizacion that the baknruptcy process leads, the new law no longer applies the concept of Failed , being replace by  Debtor, this includes every Debtor Company or Natural person, depending on the concursal proceedure that is being done .

5.- Empresa Deudora/ Debtor Company: Every private legal person , for-profit or non-profit , and every natural person that pays the First Category Tax ,Impuesto de Primera Categoría or the ones that are in the number 2 of the article 42 of the decree law N° 824, of the Ministry of Finance, from 1974, that aprooves the income tax law.

6.- Persona Natural Deudora/ Natural Person Debtor: Every natural person not comprehended in the definition of Debtor Company