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Chile Drops Corporate Tax Rewrite in Favor of Taxing the Rich (1)

Nov. 8, 2019, 2:48 PMUpdated: Nov. 8, 2019, 10:58 PM

The Chilean government reached agreement with opposition lawmakers to raise taxes on the country’s richest individuals and companies in a bid to help quell widespread unrest that has rocked the country.

The deal marks a change of direction for President Sebastian Pinera who had promised to reduce the tax burden on business owners to encourage investment as part of an overhaul of the country’s corporate tax system. But weeks of protests over rising living costs and social inequality have forced the administration to raise taxes to fund welfare spending.

“This agreement gives a signal of unity to the country when we face a particularly complex situation,” said Finance Minister Ignacio Briones Nov. 8 after signing the deal.

Briones previously said the government plans to use the additional revenue to finance higher pensions and a new minimum income worth 350,000 Chilean pesos ($468) a month. The changes will increase government spending by $1 billion in 2020 and $2 billion once fully implemented.

Under the deal, the government will drop plans to integrate business and personal income taxes and rewrite anti-avoidance rules. The Senate was considering a tax overhaul measure that would have allowed business owners and shareholders to deduct 100% of income tax paid by their companies from their individual tax returns, instead of 65% in most cases.

“The original bill has been substantially changed not just in terms of how much it raises, which is four times more, but it has turned from a bill that reduced taxes for Chileans who are doing very well to one that taxes fairly and progressively,” Senator Ricardo Lagos Weber said.

A proposal to extend a value-added tax to digital services provided by companies such as Netflix Inc. and Spotify Technology SA will go ahead as planned.

Smaller businesses will get some tax relief. Companies with annual sales of less than 2.1 billion pesos will pay a lower corporate tax rate of 25%, which can be deducted from the owners’ tax declaration. Some may qualify for a special regime exempting them from all corporate tax payments, according to a summary of the deal.

Taxing the Wealthy

To address income inequality criticisms raised during the protests, the government will introduce a new 40% band of personal income tax for individuals earning more than 15 million pesos a month. an increase from 8 million pesos a month proposed by Pinera last month.

Taxpayers owning property valued by the tax authorities between 400 million and 700 million pesos will have to pay 0.075% surtax on its value annually, increasing to .15% for properties values between 700 and 900 million pescos, and to 0.275% for property worth more than 900 million pesos.

Elderly taxpayers who don’t earn enough to pay income tax, earning less than 660,000 pesos a month, will be exempt from paying property taxes.

Corporate Changes

The bill will also clarify the payment of municipal business taxes by investment companies following a controversial ruling in October by the Supreme Court.

The government will eliminate plans to provide a new window to declare foreign assets. It also abandoned plans for an extension of a credit against value-added tax for new homes. The government also won’t make changes to the extensive list of jurisdictions recognized as tax havens by the Chilean tax authority.

The bill will also modify requirements of private investment funds, establishing that they must have at least eight contributors, none of which may own more than 20% of the fund’s shares. The measure will also include stricter rules for market maker contracts, making it harder for publicly listed shares and funds to qualify for an exemption from capital gains tax.

The government will propose a two-year window during which companies can instantly write down 50% of any new investment in capital goods will be extended until the end of 2021.

“We know it’s not easy and those who have more, including myself, are going to have to pay more,” Briones said Nov. 7.

Under the deal, the Senate Finance Committee promised to approve the tax bill within 15 days of the government presenting amendments to the legislation.

To contact the reporter on this story: Tom Azzopardi in Santiago at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com