Analysis: Foreign Direct Investment in Chile – On the OECD path
In response to the changes underway in Chile, and the subsequent need for improved tools and skills for attracting foreign capital, on 16 June President Michelle Bachelet enacted the new Framework Act for Foreign Direct Investment, thereby replacing the previous legal instrument, Decree Law 600, dating from 1974.
Chile is an attractive country for investors, as shown by the growth in Foreign Direct Investment (FDI) over the last ten years.
During this period, FDI has risen from US$7.2 billion in 2004 to more than US$22 billion in 2014. This figure, according to the United Nations, means that Chile now ranks among the 20 biggest recipients of foreign investment. FDI in Chile is primarily the result of the country’s large amounts of natural and human resources, as well as its institutional stability and dynamic private sector.
Until recently, FDI was driven by Decree Law 600 (DL 600), enacted in 1974, and which was responsible for attracting almost one third of all foreign capital to the country. However, with a view to updating this legislation in response to the changes currently underway in Chile and to position the economy in line with international levels, on 16 June, President Bachelet signed the new Legal Framework for Foreign Direct Investment into law. This legislation was drawn up under parameters devised by the Organisation for Economic Cooperation and Development (OECD), of which Chile became an official member in 2010.
During the enactment of the law, President Bachelet stated, “The positioning of Chile as a serious economy, open to the world, managed responsibly and acting as a nexus between the Pacific Rim and Latin America, provides us with advantages that are difficult to overcome in ensuring foreign companies decide to do business in our country”. The President noted how the new legislation had incorporated proposals made by the Presidential Advisory Committee dedicated to this issue (devised under the framework of commitments made by the Government during the passage of the tax reform). She also explained that it conformed to measure No. 46 of the Productivity, Innovation and Growth Agenda.
Like the DL 600, the new law seeks to provide certain guarantees for foreign investors, ensuring them a framework of
stability for their investment in Chile. As such, among its main points is a definition of “foreign investor” and “foreign direct investment”, as well as outlining a set of rules applicable to each investment, which may amount to US$5 million in foreign currency received by companies of any size.
Furthermore, it guarantees the following: access to the formal foreign exchange market for settling foreign exchange when investments are agreed, such as for the remittance of profit and the repatriation of capital; not to be subject to arbitrary or discriminatory measures (i.e. treating investors in the same way as Chilean companies); and the exemption of sales and services tax on the import of capital goods, in accordance with the provisions of article 12, section B, number 10 of Decree Law 825, dating from 1974. The latter provisions stipulate that any party to a foreign investment project formally agreed to with the State in accordance with the provisions of DL 600, or one which fails to take place in Chile insufficient quality and quantity, and forms part of a similar national investment project, is considered of national interest to the country and subject to approval by the Ministries of Economy and Finance.
In addition, the new law regulates the purpose of the contracts entered into during the term of DL 600, ensuring the full applicability of the rights and duties acquired by foreign investors under this set of legal rules. It also establishes an exceptional right which stipulates that, within a maximum period of four years, foreign investors may request foreign investment authorization under the terms of article 3 of DL 600, in line with the rights and duties therein established, but with tax invariability for a total rate of 44.45%.
Furthermore, the law establishes a Committee of Ministers for the Development and Promotion of Foreign Investment (composed of the Economy and Finance Ministers, as well as Presidential appointees). The Committee will directly advise the President of the Republic on setting national policy on this area, as well as ensuring the creation of a specialized agency to replace the current Foreign Investment Committee (CIE), while also overseeing the fulfillment of these distinct processes.
Jorge Pizarro Cristi, who until 1 July was Vice President of the CIE, and one of the main advocates of the new law, states that, “This way, for the first time in its history, Chile will have a national policy on foreign investment, which will be integrated as a relevant element into the country’s productive development programs”.
Attracting greater investment The Minister of Economy, Development and Tourism, Luis Felipe Céspedes, believes that the measures set out under the new law will incentivize increasing numbers of foreigners investing in Chile, “to bring their knowhow and to develop their investments”. This is because the new regulations help to ensure serious institutions, with long term outlooks and which are in line with other OECD nations. In turn, this scenario will guarantee that services are provided according to international standards and that the necessary conditions will be generated to ensure investments take place, “quickly, transparently and effectively” in the regions and sectors in need of development, including mining, energy,services and infrastructure.
Minister Céspedes stresses that, “We want to have more and better foreign investment, which is why we are moving beyond a
reactive policy of receiving investment, to a proactive one of attracting foreign capital”. He also notes that the new legislation
does not only provide guarantees confirming that FDI is welcome in Chile, but that it also recognizes its importance in the
current and future economic development of the country.
Accordingly, Kathleen Barclay, President of the Chilean American Chamber of Commerce, AmCham Chile, believes that by
attracting greater investment, certain factors particularly valued by foreign investors should be taken into account. Among these,
for example, are: a robust democracy and macroeconomic stability; solid and sustained rates of GDP growth (including high rates
of domestic investment); strong institutions operating under a national Constitution that protects private property and ensures
non discriminatory measures against foreign investors; access to the formal foreign exchange market for the distribution of
dividends and repatriation of capital; and free trade policies regarding openness to foreign trade and the promotion of imports
and exports. Furthermore, as the President of AmCham notes, regulations are required which favour competition for investors,
such as tax stability, and employment laws and regulations for key sectors, such as finance, energy and mining.
Kathleen Barclay notes that, “As a bi national chamber, we don’t believe that the relative degree of development of a country is,
in itself, an important measure for evaluating the mechanisms of required investment. Rather, competitiveness in the global
foreign investment sphere should be assessed, in conjunction with the growth performance of the country, as well its economic,
social and institutional stability”. She also highlights that AmCham Chile is increasingly promoting the double taxation avoidance
agreement with the United States and encouraging greater investment flows to Chile.
The new agency According to the new law, the Foreign Investment Promotion Agency will be responsible for coordinating and implementing the State policy on FDI, as established by the Committee of Ministers. Its aim will be to attract all types of fo
reign capital and investment to Chile. It will have offices abroad and be subject to regional coordination, as well as holding activities to promote investment, both locally and internationally. The Director will be selected via the Senior Public Sector Management system and if no appointment is made in time for its launch, one will be made as soon as possible.
Jorge Pizarro Cristi explains that, “We are talking about a highly professional body that will be guided by best international
practices, and which will provide services throughout all stages of the investment cycle: from the first contact being made with a
potential investor seeking to invest in the continent, to when they are already in place in the country and thinking about
reinvestment”. Pizarro points out that this definition stems from an evaluation conducted by the OECD specifically for Chile, in
addition to research into best international practices in this field. He also stresses that the continuity of the powers of the agency
are safeguarded by the new law. Furthermore, he explains the importance of the work of the agency being guided by both the
strategy proposed by the Committee of Ministers, as well as a Consultative Advisory Council, composed of individuals from the
public and privates sectors.
The President of AmCham Chile states that, “It is extremely beneficial that this agency has considered the establishment of a
public private Consultative Advisory Council, which must be an immediate and genuine space for dialogue (and) that will
doubtlessly help to ensure that the policies it implements are in tune with private sector needs”. She also points out that an
important aspect in need of clarification is how the agency will concretely contribute to maintaining a favorable climate for
foreign investors and how to increase the competitiveness of the country in this sphere.
Around the world there are more than 170 agencies focusing on attracting investment, all competing to attract foreign capital
to their countries. As such, the Minister of Economy says that despite Chile being highly attractive to investors, “It is unfeasible to
just sit around waiting for capital to arrive using this line of argument, especially in an environment in which the continent has
progressed significantly in terms of offering attractive investment opportunities”.
The idea is that the arrival of international actors to the economy will make markets more dynamic, enabling new partnerships
to be forged between foreign and national companies. The goal is also to attract new technology to the country, as well as good
practices, and to develop secondary industries. All of this is beneficial to the national business ecosystem, for example by
increasing employment and diversifying products and services.
Less than DL 600 Nevertheless, not all actors agree on the benefits of the new law. One example is Bárbara Vidaurre, Director of the Legislative Program at the think tank Libertad y Desarrollo (LyD), who argues that, “unfortunately it doesn’t improve on DL600, which has worked very well”.
This is because foreign exchange, tax and legal guarantees (which used to be included in a contract) drove almost one third of total foreign investment. Vidaurre believes that this gave Chile a competitive advantage, albeit not the only one, in attracting foreign investment. “Some of the guarantees in place under DL 600, such as the ability of foreign investors to choose tax invariability, benefits relating to invariability in terms of large mining projects, and the signing of a legal contract between the State and the foreign investor, all disappear under the new regulations”, says Vidaurre. However, she adds that the provisional article will allow the signing of a contract for the first four years with limited tax invariability. She claims that while the OECD standard seeks to provide a guarantee of seriousness and stability to incentivize the arrival of foreign capital, the maximum guarantee was previously provided for by the legal contract, which now disappears. It should be noted, however, that all current contracts will remain in force.
According to Vidaurre, the design of promotion strategies by governmental bodies always entails an element of uncertainty, as
it is impossible to know in advance what decisions the President and the Committee of Ministers will take regarding investment
promotion. “This will be difficult for investors who have already accepted DL 600 and who are used to the benefits previously
established by law (which will be maintained while their respective contracts remain in force), and it’s very difficult to predict the
content of the new strategy, as it could be aimed at promoting clusters, mining activity, infrastructure… there’s no way of
knowing”, she points out.
She believes that the repeal of DL 600 in place of a “weaker” law sends a negative signal to investors, in addition to the uncertainty generated by the tax reform of last year and the general economic slowdown.
Unfortunate recent events have called into question precisely those elements that are evaluated by potential foreign investors.
Until now, we have had great success as a country in attracting investment because we are a nation characterized by
seriousness and stability, which is why we hope that this crisis is temporary and that we soon regain trust”, she notes.
Accordingly, and as mentioned by the President of AmCham Chile, Kathleen Barclay, it is crucial just how the new law determines
the policies to be implemented for maintaining a favorable climate for foreign investors. Within this climate, coordination and
opportunities for dialogue will be fundamental in ensuring an environment conducive to doing business in Chile.
FDI in Chile and across the region
According to the annual report Foreign Direct Investment in Latin America and the Caribbean 2015, compiled by the Economic
Commission for Latin America and the Caribbean (ECLAC), Chile was the third biggest recipient of Foreign Direct Investment(FDI) in the region in 2014, recording US$22.002 billion of investment, which is a 14.2% increase on 2013. This scenario is despite the economic slowdown experienced across the region and the lower prices of basic export products. Indeed, in 2014, FDI in Latin America and the Caribbean fell by 16%, totalling US$158.803 billion. This figure represents 13% of global investment flow.
This is why Chile has been ranked as one of the 20 biggest recipients of foreign investment in 2014, according to figures fro
m the United Nations. The United States is the biggest investor in Chile, accounting for 16.7% of all investments since 2009, totaling US$16.878 billion.
(This article was written by Alejandra Maturanaand was published in the July edition of BUSinessChile, the monthly magazine of AMCHAM Chile www.amchamchile.cl)