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Friday, August 24 de 2018

Minister of Finance: "We want to focus on the challenges that the Chilean tax system will face in the 21st century"

Minister Felipe Larraín announced the main guidelines of the Tax Modernization bill this morning. The presentation may be viewed here.

The Minister of Finance, Felipe Larraín, presented today the main guidelines of the Tax Modernization bill, presented yesterday on national television by President Sebastián Piñera.

The Minister of Finance emphasized that the initiative is based on seven principles, which are:

1. Encourage growth, entrepreneurship, investment, savings, and employment
2. Make the road easier for SMEs and entrepreneurs
3. Respect vertical equity and restore horizontal equity
4. Grant legal certainty and predictability for all taxpayers
5. Incorporate the new digital economy
6. Modernize the taxpayer's relationship with the Tax Administration
7. Safeguard fiscal balances

"This is a project that looks to the future. We are not looking at the past. We want to focus on the challenges facing the Chilean tax system for the twenty-first century and that is why, for example, we incorporate issues related to the digital economy," said Minister Larraín, who commended the work by the teams at the Ministry of Finance and the Tax Administration.

Within the simplification, the project creates a single general tax system for all companies, the Total Integrated System (TIS), which does not alter the current special regime of presumed income. Under the general taxation scheme proposed by the project, there will be a total integration of the corporate tax, 100% attributable against the final taxes. With this, it will be taxed with final taxes based on effective withdrawals, not based on attributed income. In addition, the First Category Tax rate is maintained at 27% for taxpayers in the total integrated system, and 25% for taxpayers who meet the requirements of the "SME Clause".

Minister Felipe Larraín explained that the project simplifies tax records, so if a company does not generate income tax-exempt, it should not keep records.

Pro-investment measures

The initiative also establishes a transitional regime for two years of instantaneous depreciation of 50% of new investment in fixed assets, and in an accelerated way, which is the regime to which companies now have access, for the remaining 50%, available for all taxpayers.

For the Araucanía region, the regime will be more favorable. In fact, for any investment in that region there will be 100% instant depreciation for investment in fixed assets. The measure is temporary, for two years after the approval of the law.

Another pro-investment measure of the project is related to the reduction in the period currently to recover VAT for investments of fixed assets which falls from 6 to 2 months, and the response time of the Tax Administration for the VAT refund request also falls from 60 to 5 days, subject to subsequent inspection.

In addition, the initiative contemplates extending a benefit to the middle class: the reduction of VAT tax credit in construction. This franchise now exists for homes of up to two thousand UF, equivalent to 65% of the value of that VAT. The Tax Modernization plan allows households whose value is greater than two thousand UF, but less than four thousand UF, can also take advantage of the benefit, but for an amount equivalent to 45% of VAT.

Digital economy

The project establishes a digital tax, which is levied at a rate of 10% on digital services provided by foreign platforms and used by natural persons in Chile.

This tax distinguishes companies that provide digital services from those that carry out digital commerce operations, since the latter offer the sale of goods that enter through Chilean borders.

On digital commerce, Minister Larraín added that control measures will be strengthened in Customs to pay customs duties when appropriate, and for that import to pay the VAT associated with the sale.

They qualify, for example, as Netflix digital services, mobile games and Spotify, among others. It should be noted that in the case of applications that provide transport services, as in the case of Cabify and Uber, the draft Law "Uber" establishes that they must be constituted in Chile, and consequently their profits will be taxed with the income tax, in terms similar to what happens with any other Chilean company.

The Tax Modernization also digitizes the taxpayer's relationship with the Tax Administration and creates an electronic folder, where all the procedures of the taxpayer's life cycle can be carried out. "Each RUT will have an electronic folder to which it will be able to access," explained the Minister.

Advocacy for all taxpayers

The project creates the Taxpayer Advocacy Service, to ensure respect and observance of the rights of the taxpayer in relation to the Tax Administration. "We have decided to create a new body, which will be in charge of defending the rights of taxpayers who feel their rights are violated; entity that, without having jurisdictional powers, will have a relevant role in mediating conflicts with the Tax Administration, receiving complaints from taxpayers and being able to propose good measures in pursuit of a better public policy, "said the Finance Minister.

This Ombudsman will operate for the first two years in Santiago, receiving the regional requirements through a specially prepared Regional Unit. After that period, its more direct presence in other cities of the country will be evaluated.

In addition, the initiative modernizes the rules of the Tax Code, the Income Law, and others, with the aim of granting legal certainty in tax matters, predictability of the law, and unrestricted application of the principle of legality by taxpayers and authorities.

The Minister explained that the positive silence in favor of the taxpayer is also established as a general rule. This implies that, after the response period established in the regulations, the taxpayer can interpret that the answer is in his favor.

Safeguarding fiscal balances

The Minister guaranteed that the project has measures that reduce tax collection, but there are also others that increase revenues. "In net terms, the tax burden is not reduced," said the Minister of Finance.

The measures that reduce the tax collection are the integration, the extension of the instantaneous depreciation and the extension of the VAT credit for housing.

On the other hand, collection increases with: the mandatory use of electronic receipts, which will allow for a reduction in evasion; the tax on the digital economy, the greater taxation on cross-border trade, the substitute tax on the FUT and the registration of assets abroad at a rate of 10%.

"When you add all this, you realize that there is no negative collection effect, in fact, making the sum of the years, the effect is slightly positive," the authority said.

The Minister made a strong call to the Legislature for an open dialogue and for an understanding on the legal initiative along its different dimensions. "We expect a project of this magnitude to have an in-depth view. I appeal to the following: we have an open approach to listening to the contributions and criticisms that may arise. I ask the same, willingness to listen to this project, "said Minister Larraín.

Discussion in Congress

During the afternoon, in the National Congress, Minister Felipe Larraín explained the details of the Tax Modernization project to the leaders of the ruling political parties, as well as senators and deputies of the ruling coalition.

Among others, UDI President Jacqueline van Rysselberghe, Senator Juan Antonio Coloma, Senator Alejandro García Huidobro, Deputy Javier Macaya, Deputy Patricio Melero, Deputy Guillermo Ramírez and Deputy Luciano Cruz Coke participated.

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