Kast’s Chile Tax Overhaul Wins Backing Beyond Ruling Coalition

The election of José Antonio Kast as President of Chile was based on the premise that the country was in crisis, represented by a decaying economy, uncontrolled immigration, and skyrocketing crime. A business-friendly tax boost was needed and was accordingly announced on April 22.

The tax package has managed to garner support outside the government coalition, with declared support from the People’s Party and their key swing members in Congress, where Kast doesn’t hold a clear majority.

In further support of Kast’s proposals, the biggest economic associations in the country, including the Chilean Industrial Development Association, Sofofa, have expressed their approval, asserting that if such a package is approved, they would expect to see an immediate effect in public works on bridges and roads, and significant middle and long-term effects in commerce and traditional industry.

While the legislative process started recently, it has already passed the first challenge after it was approved May 20, with minimal changes by the Chamber of Deputies.

The tax package includes an array of measures.

Acknowledging that corporate income taxation is above OECD levels, it’s been proposed to bring down the corporate income tax rate from 27% in 2027 to 23% in 2029, with an average cost of 0.44% of Chile’s gross domestic product per year.

Former President Michelle Bachelet campaigned on making capital income taxed at higher rates than employment income, and she succeeded in changing the law, albeit failing to generate either economic growth or substantial tax revenue. Kast joined those denouncing Bachelet’s failure and is promising to go back to a system where all shareholders can claim the corporate income tax paid by their companies as a credit against taxes on dividends, which would reduce the tax burden of non-treaty country shareholders such as Germany and of Chilean investors, from 44.45% to 35%.

To further promote the hiring of labor through formal channels, Kast proposes creating a corporate income tax credit for low monthly wages ranging from $550 to $950, equal to 14% of the wage, with a decreasing scale, but that can very upwards or downwards depending on whether the employee is a man or a woman, or if the worker is younger than 25 years old.

Capital gains arising from listed shares were once favorably treated as non-taxable income until former President Sebastián Piñera decided to eliminate such exemption to increase tax collection with a 10% tax. Kast again wants to undo certain of his predecessors’ policies and, with the intention of injecting dynamism into Chile’s small yet steady capital market, has proposed returning to the treatment of capital gains from the sale of listed shares as non-taxable.

Further proposals are:

• An expansion of tax exemptions applicable to affordable properties and limited currently to two properties, which Kast intends to expand to three, aiming to boost the development of real estate and further revamp the Chilean construction sector, leading to new jobs, credit, and investment.
• A 12-month value-added tax exemption on the sale of housing, enabling the release of some of the unsold stock arising from higher prices on property.
• A 50% write-off on gift tax arising from a taxable transfer executed within 12 months, to encourage an early transfer of wealth between generations and with it an anticipated collection of gift and estate taxes.
• A 10% tax on undeclared foreign income or assets, with a further reduced rate of 7% if such are repatriated to Chile and kept in the country for at least five years.
• A 10% tax on certain accumulated profits pending taxation at the shareholder level, releasing such profits from any further taxation provided that the tax is paid within eight months from the enactment of the law.
• 25 years of tax stability, promising an overall tax burden of 35% (excluding mining royalties) for investments of at least $50 million made both by foreign and local investors.

As Kast and his government are fundamentally opposed to wealth taxation, they are also proposing to release from property taxes all primary residences owned by people aged 65 or older.

Questions

The obvious question about this package is how to read it; it certainly contains some temporary revenue measures such as a reduced gift tax. But it also introduces substantial changes to the Chilean corporate income tax system by going back to the system that stood between 1984 and 2014, whereby capital income and employment income were taxed in the same way, something that sits close to the heart of the current government.

With Kast leading the most economically liberal government since 1990, it remains to be seen how it will communicate that it is legislating in favor of revamping the economy, not just creating tax breaks for the wealthy; even though effective in generating substantive and immediate tax revenue, this can be perceived as socially unfair.

Not everyone is feeling positive about Kast and his economic ideas. Some economists with a left-leaning perspective, such as Manuel Marfán and Andrea Reppeto, have been skeptical about the effectiveness of a tax stability regime. They argue that it constrains the options for future governments to tailor the country’s tax policy, and that it isn’t a measure that can be justified for projects with a low investment amount such as $50 million, as proposed by Kast.

With the recent approval by the Chamber of Deputies as a starting point, it’s undeniable that the most-voted-for president since the return of democracy in 1990 seems confident and bold about his ideas and his mission to address the crisis that he claims the country is suffering.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ignacio Gepp is a partner with Puente Sur in Chile.

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