/ Tax Modifications in the Short Pension Law BillSeptember 23, 2021
Partner Alessandri Abogados
By means of message No. 181-369 of September 20, 2021, the President of the Republic signed a bill that “broadens and strengthens the solidarity pillar of Law No. 20,255 and reduces or eliminates tax exemptions to obtain resources for its financing”. The following is an analysis of the main tax modifications proposed.
1. Modification to capital gains from the higher value of shares of publicly-held corporations, investment funds or mutual funds shares with stock exchange presence.
a. Currently, Article 107 of the Income Tax Law establishes that the gain obtained on the sale of shares of publicly-held corporations, mutual funds or investment fund shares and other financial instruments with stock market presence, carried out on the stock exchange or in a public offering, do not constitute income for tax purposes.
b. The bill proposes to tax such gain with a single tax at a rate of 5%, to be applied on the profit obtained.
c. Notwithstanding the foregoing, transactions carried out by institutional investors domiciled in Chile or abroad (banks and financial institutions, insurance companies, pension fund managers and certain fund managers) will continue to be considered as non-taxable income.
d. Although it is true that this rule is an exemption that has been in the tax policy debate, it is not fully understood that it has been maintained for institutional investors, since those who will bear a greater tax burden would be individuals and SMEs that see the stock market as a savings and investment alternative.
2. Elimination of the special VAT credit for construction companies.
a. According to current regulations, construction companies are entitled to a credit of 65% of the VAT debit determined in the sale of real estate for housing, whose value does not exceed UF 2,000, with a ceiling of up to UF 225 per house.
b. The bill eliminates the special credit referred to as from January 1, 2024, and temporarily reduces it for transactions entered into as from January 1, 2022.
c. It is likely that the effect of the elimination of this rule will result in an increase in the price of affordable housing, since the elimination of this benefit will be passed on to the consumers of these properties.
3. Application of limits for DFL 2 homes to those acquired before 2010.
a. Currently, only individuals and up to a limit of two properties are eligible for the tax benefits of DFL 2 homes, as a result of a tax modification, which maintained the possibility of applying without this limit and also for legal entities, with respect to homes acquired before 2010.
b. The bill proposes that as of January 1, 2022, the benefit will only be applicable to individuals up to a maximum of two houses, regardless of the date of acquisition.
c. This regulation implies giving a retroactive effect to a previous legal modification, which affects rights acquired by taxpayers, for which reason questions have already arisen as to its appropriateness and constitutionality.
4. Taxation of provision of services with VAT.
a. According to our current legislation, DL 825, Value Added Tax Law, levies Value Added Tax on those services that come from the activities indicated in numbers 3 and 4 of Article 20 of the Income Tax Law, which correspond to activities related to industry, commerce, and in general activities of first category, in which the use of capital assets predominates over personal work, which have never been taxed with VAT.
b. The bill extends the VAT taxable event to all services rendered, unless they are expressly exempted. Consequently, it is not eliminating an exemption, but extending the VAT taxable event to activities that never enjoyed any exemption.
c. This point does not constitute the elimination of an exemption, but the application of VAT on operations that were never taxed, such as professional services, advisory, consulting and other similar services.
d. It is stated in the bill that services rendered exclusively by individuals, health services, education and passenger transportation will be exempted from VAT.
e. The bill does not eliminate the exemption contained in number 8) of paragraph E of Article 12 of DL 825, which exempts from VAT the income mentioned in Articles 42 and 48 of the Income Tax Law. Among the taxpayers of Article 42 are the professional partnerships, which are those that exclusively render professional services through their partners or associates or dependents that collaborate in the rendering of these services. Now, in the case that this type of companies has exercised the option to pay corporate tax (Impuesto de Primera Categoría), it will be necessary to confirm if they will be considered in the exemption. In our opinion the answer is affirmative, since the same Service in Circular Letter No. 63 of 2010 interpreted that even in this case, their income is that of Article 42. The above can produce the effect that being or not taxed with VAT will depend on the legal nature of the taxpayer, which will allow taxpayers to arbitrate between taxable and exempt services.
f. Now, this modification will have relevant economic effects, since services from labor are not part of the VAT chain, their costs and expenses are mainly remunerations and they will not have a tax credit to be allocated to a debit, unlike taxpayers who produce or market products, which could be considered as an unequal and detrimental tax treatment for this sector. Although in other OECD countries this type of services are taxed with taxes equivalent to VAT, the rates are differentiated and never reach 19%, having another way of determining their expenses. Likewise, it is false to argue that VAT is simply borne by the end customer, since prices are governed by supply and demand, and a large number of customers of these companies are not VAT taxpayers and therefore cannot take advantage of it.
5. Life Insurance.
a. Pursuant to current legislation, amounts received by beneficiaries in compliance with life insurance contracts are considered as non-taxable income.
b. The bill affects with inheritance and donation tax, all benefits obtained under life insurance contracts entered into since the publication of the law.
c. In this case we would not be in the presence of the elimination of an exemption either. The sums paid for life insurance constitute an uncertain indemnity, and not an estate owned by the deceased.
6. Duty to report non-taxable income.
a. Since non-taxable income is outside the scope of application of the law as it is not considered within the taxable event, it is currently not declared or reported to the Internal Revenue Service.
b. The bill establishes a power for the Internal Revenue Service to request from all taxpayers the information of non-taxable income that is received or accrued in their favor.
This bill may be subject to various indications and modifications throughout its processing, since as of its announcement, several criticisms have arisen, such as the impact on SMEs that the VAT on services would produce, the omission of exemptions currently in force such as the presumptive income system or diesel tax, or that the tax on capital gains of Article 107 may be considered comparatively low. It is to be expected that improvements will be made to the bill, since a possible negative impact on SMEs and the middle class appears less and less debatable.