Chile – Brutal Tax proposals impacting multinational entities

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On 8 November 2019, the Chilean government reached an agreement with the Senate’s Finance Commission to strengthen the government’s social agenda. The three principles of such agreement are:
1. To increase tax revenues to fund the Government’s social agenda. 
2. To assist the aged population 
3. To support SMEs from a tax perspective. 

This agreement will probably also result in amendments to the original Tax Modernisation Bill submitted by the Government months ago, while other measures will be subject to a long-term plan, which could include a review of tax exemptions. 

Some of the proposed changes would include:

1) The proposed full integration of Corporate-level tax and final taxes (included in the 2018 Modernisation Tax Bill for all companies) will be limited only to SMEs whose sales do not exceed circa A$4M per year. The Partially Integrated method would remain for companies exceeding such thresholds.

2) New Real Estate Tax: A new real estate tax with progressive rates (capped at 0,275%) would apply to properties which fiscal value exceeding circa AUD950k. The tax would be a surcharge to the current Real Estate Contributions. SMEs would, however, be exempt from this real estate tax.

3) In a Chile-to-Chile profit distribution, the distribution usually has CIT credit attached (similar to the Australian franking credit). When the recipient entity is in a tax loss position, the profit dividend received is offset against the existing losses. In that scenario, the recipient entity is entitled to claim the refund of the CIT credit attached to the profit absorbed (PPUA).

The agreement introduces a progressive repeal of PPUA from 2020 (90%), 2021 (80%), 2022(70%) and 2023 (50%). From 2024 onwards, the PPUA would be completely repealed.  Therefore, should the proposed reform become law, Chilean holding companies may not be able to request a tax refund from the Chilean National Treasury for the taxes paid by its subsidiaries domiciled in Chile in the event the holding company is in a tax loss position. 

4) For individuals, there would be an increase on the top income tax rate (from 35% to 40%)

5) Other expected amendments are: 
a) Investment companies would be subject to municipal license. 
b) DFL-2 Real Estate Tax benefit would be limited. 
c) The flexibility regarding tax havens introduced by the 2018 Modernisation Tax Bill would be repealed.

Source: Nicolas Soza (Senior Manager – PwC Australia & ALABC Board Director)

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