Chile

Sandra Benedetto and Benjamín Barros
PwC
Chile

The effort to reconstruct Chile after the earthquake last year has diverted the government's attention away from any radical tax reform, however, transfer pricing legislation is on the way, explain Sandra Benedetto and Benjamín Barros of PwC

This has not been an easy year for President Piñera and his government. The reconstruction of the country after last year's earthquake, together with the student protest for a substantial reform in the quality of education have captured the attention of all the sectors, leaving almost no room for other issues.

Even so, the country has managed to comply with one of its major goals which were to revive the country's economic growth. World Bank information shows that in 2010 Chile grew by more than 5%, which is the highest in the past five years, and which leaves it as one of the countries with the highest economic growth in Latin America and the OECD.

Legislative advances

The Parliament agenda for this year has been focused mostly on passing social bills, covering sensitive issues such as pension funds, maternity leave and the incorporation of a new Ministry of Social Development.

Regarding tax matters, not much has changed during the year. Some relevant bills that were discussed deeply last year have not yet been sent to the Congress for approval, such as repatriation of capital and the regulation of transfer pricing. On the other hand, the Bill to regulate taxation on derivatives instruments, which was sent to the Congress last year, has already passed the first stage but is still waiting to be discussed and approved in the Chilean Senate.

In the case of transfer pricing regulation, and as a consequence of the recent accession of Chile to the OECD, it is most likely that the Bill that will be tabled before the Congress will introduce the main principles and pricing methodologies established by the OECD Guidelines.

Even though, there is not yet an official draft Bill draft, the Chilean Internal Revenue Service has given some hints regarding the type of provisions that could be included in the new Transfer Pricing Act as already been discussed. It would not be wrong to think that they will be focused in these key aspects:

Taxpayers would have to file an annual TP Sworn Statement;
In case of a transfer pricing tax audit, local taxpayers should be able to support – in a reliable way – a reasonable transaction market value, as well as the compliance with the applicable new transfer pricing regulation;
The transfer pricing Bill might include a detailed description of each method provided and recommended by the OECD in its transfer pricing guidelines;
Penalties that the taxpayer would face in case the IRS determines a price adjustment; and
The Bill would consider advance price agreements (APA) to be signed between the taxpayer and the Chilean IRS to protect future inter-company pricing policies.

Finally, the signature of the double tax conventions between Chile and Australia and the US are still pending for the Congress to pass them, but there is optimism that this process will be finished in the short term. On the same path, taxpayers can now benefit from the entry into force of the double tax conventions with Belgium, Thailand and Switzerland which are in effect for taxes on income obtained and amount paid, credited to an account, put at disposal or accounted as an expense on or after January 1 2011.

Tax system

The Chilean income tax system is based on an integrated system, which is basically composed of two kinds of taxes, a so called First Category Tax at a company's level and Final Taxes (Complementary Global Tax or Additional Tax), being the tax paid at the company's level creditable against Final Taxes.

As a consequence of last year's earthquake, Law No 20,455 was enacted and published on July 31 2010. Among the most relevant changes introduced by this law, a temporary increase in the First Category tax was included from 17% to 20% for income received or accrued during calendar year 2011. The rate will be 18.5% for income received or accrued during calendar year 2012 while income received or accrued during calendar year 2013 and subsequent years will again be subject to a 17% tax.

This law was basically aimed at increasing the revenue collection but it did not affect the final tax burden or our integrated tax system. Indeed, the Chilean tax system has remained stable for decades. However, in recent months some signs can be observed of a new debate being opened to discuss major aspects of our tax system, as a permanent measure to finance social expenditure, particularly education. However, no formal requests or proposals have been issued so far, and the terms of this possible discussion are not clear, meaning that there is no knowledge about what changes could be expected. In other words, the possibility of a new tax reform is still uncertain.

Effects derived from 2010 the tax measures

It is interesting to mention that the Chilean Treasury has collected higher revenues, according to information from the National Budget Agency (Dirección de Presupuestos), mainly for reconstruction purposes.

In this regard, during the first semester of 2011, income tax of about $10.568 million of a total of about $23.390 million was collected by the government. On the other hand, VAT collected was about $10.180 million.

If these figures are compared to those published during the first semester of 2010, the increase in income tax collected was 24.1%; and revenues collected for VAT purposes, went up by 9.3%.

This fact could be explained by Law No 20,455 but also because of the increase in the price of commodities, in particular minerals including copper. However, these figures should be closely monitored as the effect could be reversed in the near future because of the expected decrease in the price of minerals on foreign markets. This is a development which is worth observing.

Another interesting fact observed during this year so far is that according to the government's income tax figures, during the first semester of 2011, income tax represented 45.2% of the total tax revenues in Chile, followed by VAT which represented 42.5%. This is the first time in many years that the percentage of income tax collected has been more than VAT.

Sandra Benedetto (sandra.benedetto@cl.pwc.com) and
Benjamín Barros (benjamin.barros@cl.pwc.com) of PwC, Chile