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Chilean Income Tax Return TY 2018

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

SII published a list of 150 countries and jurisdictions that have a preferential tax regime

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.

Tax Reform. Income Tax, Taxation Regimes and rates for commercial year 2017.

Tax reform
Income Tax: Taxation Regimes and commercial year rates 2017.

Attributed Income System Letter A) of Article 14

As of January 1, 2017, the regime set forth in letter A) of article 14 of the Income Tax Law, which consists of a system in which the income obtained by the company, is attributed for the taxation of owners , members, partners or shareholders from the companies in which they participate, in the same year in which said income was generated by the company.

At the company level, year by year it determines its taxable net income, income to which will be applied a rate of First Category Tax (Impuesto de Primera Categoría,IDPC) of 25% for their incomes of business year 2017 and the same rate for their Income for the years 2018 and following.
Regarding the integration, under this regime the IDPC paid by the companies is 100% integrated with the final taxes to be paid by its owners, since the credit granted by the IDPC paid by the companies is 100% of said tax when Impute to final taxes to be paid by their owners, Global Supplemental Tax (natural person income tax) or Additional Tax (non residents withholding tax). However, unlike the partially integrated regime, the owners will be taxed for the income attributed to them by the company in which they participate in the same year in which the company generates the income, completing the taxation of the company and its owners in a same period, regardless of whether the owners received said income by making a withdrawal or receiving a dividend.

Partially Integrated Regime of Letter B) of Article 14.

As of January 1, 2017, the regime established in letter B) of article 14 of the Law on Income Tax, which consists of a system that obligates the taxation of owners, community members, Partners or shareholders from the companies in which they participate, only to the extent that they withdraw profits or distribute dividends.
At the company level, year by year it determines its taxable net income, income to which will be applied a rate of First Category Tax (IDPC) of 25.5% for their incomes of business year 2017 and 27% for their income for the years 2018 and following.

Regarding the partial integration, under this regime the IDPC paid by the companies is not integrated with the final taxes to be paid by their owners, since the credit granted by the IDPC paid by the companies is only 65% of said tax when to be imputed to the final taxes to be paid by their owners, Global Supplemental Tax or Additional Tax. Notwithstanding this, the credit may be used 100% if the owners of the company are resident in countries with which Chile has signed an agreement to avoid double taxation.

In CFA we determine the net taxable income of the companies and we review the corresponding taxation year by year to our Clients, together with a complete and accurate tax advice.

Law 20.720 of Insolvency and Re-entrepreneurship, replacing the Bankruptcy Law.

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

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 .