/ Latin Lawyer news: Chilean tax reform “bittersweet”

May 24, 2012

Latin Lawyer news

Thursday, 24th May 2012

by Marieke Breijer

The tax reform bill currently before Chilean Congress should not hugely affect foreign investors operating in the country say lawyers, though they warn that lack of clarity in some elements of the bill need to be addressed before it is implemented.

The proposed law, which currently includes provisions such as a 1.5 per cent increase in corporate tax to 20 per cent, lower personal tax rates, reduction of stamp duty, new rules for transfer pricing, and new rules to prevent tax evasion, was sent to Congress earlier this month, with the aim of raising an extra US$700 million to US$1 billion a year to fund educational reforms including more scholarships and lower interest rates on government-funded student loans.

While the bill has companies worried about how the changes might affect their businesses, lawyers do not think it will have a dramatic impact. The biggest area of concern for companies is the hike in corporate tax. The government previously increased the corporate tax from 17 per cent to 20 per cent to raise funds to rebuild the country following the devastating earthquake in 2010. Tax rates are currently at 18.5 per cent and were supposed to be brought back down to 17 per cent, although that is now unlikely. But even after the increase, Chile’s corporate tax rate will still remain low compared to the Latin American average of 25.06 per cent, according to a report by tax consultancy KPMG.

“The increase of corporate tax may have a marginal negative effect for companies, although it was more or less expected and reasonable,” says Jaime Carey, partner of Carey y Cía. His opinion is shared by Cristóbal Riffo, head of tax at Alessandri & Compañía, who says that it is good for Chilean society that the state is looking towards alternative sources of income. Like Carey, he doesn’t believe the new bill will significantly alter the rules of the game though he adds it could and should still see significant change once discussed in Congress.

Alberto Maturana of Baker & McKenzie (Chile), however, is more pessimistic about the reforms, and says the new bill will have “both sweet and bitter ingredients for foreign investors”. Though he acknowledges the hike in corporate tax was expected by the market, he notes one unexpected element – the government’s plan to backdate the corporate tax increase to take effect from 1 January 2012.

“If this is approved in Congress, the measure will damage investors and will send a bad signal, as many transactions and deals have already closed within 2012 assuming the current corporate tax rate of 18.5 per cent. This goes against a basic principle whereby tax changes must be phased in gradually and should provide certainty to taxpayers, who should be allowed to make informed business decisions based on taxes that are well known beforehand.”

While the bill also presents measures that could favour individuals and small businesses, such as the decrease in personal tax rates and stamp tax reductions, Maturana and Riffo both admit their clients are slightly unnerved by the new proposals.

“A lot of people ask how the project is progressing, and there is a high interest of business people and executives with regards to how this bill will affect the corporation and personal budgets,” says Riffo, while Maturana says his firm has started to make foreign clients aware of the need to plan ahead against the potentially adverse consequences of some of the measures.

Maturana feels clients’ concerns are justified and thinks some of the measures, including new transfer pricing rules and proposals to tax excess profit distributions (both of which have a significant impact on a company’s expected income), need to be corrected. He hopes this will happen during the congressional discussion.

“If these corrections are not made and Congress adopts the proposals without changes, some measures may be detrimental to the Chilean business community … the new rules may significantly delay the pay-back period of their investments.”

Carey agrees that the provisions on taxing profit distributions aren’t very clear at this stage.

It is not yet certain when the bill will pass Congress and what it will look like exactly, but Riffo says he expects the government to take its time in negotiating the provisions, “as it is important that Chile updates the rules in a correct manner”.