Opinión | Reforma tributaria en plena vigencia

Fecha: 15-03-2021
Medio: Chambers and Partners

Tax Reform in Full Force

On 24 February 2020, the latest Chilean tax reform, enacted by Law No 21.210 (the "Tax Reform"), was published in the Official Gazette, concluding an extended process in the Congress, marked by the negotiations performed by the government and the political parties due to the social unrest after October 2019.

The Tax Reform had 1 March 2020 as a date of general entry into force, but it set forth several specific entry-into-force dates on different matters.

The Tax Reform was comprehensive and involved several legislative changes to the Chilean Tax Code, Chilean VAT law and Chilean income tax law, among others. With respect to income tax, the Tax Reform eliminated the duality of income tax regimes and established the Partially Integrated Income Tax system (PIS) as the general income tax regime.

Besides the above, the Tax Reform introduced several changes to corporate taxation that impact Chilean investors as well as foreigners. Considering the broadness and the complexity of some of these changes, the Chilean Internal Revenue Service (the "Chilean IRS") has issued several pronouncements, including circular letters and resolutions, in order to provide guidance to tax officials and taxpayers in navigating the tax and legal changes that are taking place.

Along with the matters that were modified by the Tax Reform, there are other developments in the Chilean tax scene that are worth noting. Firstly, the Chilean IRS has recently issued its 2020 version of the tax schemes catalogue, which includes a series of situations and transactions that are considered to produce tax non-compliance situations. Another relevant development is that the Chilean government entrusted an expert commission to analyse all the special regimes and exemptions that currently exist in Chilean tax law. The referred-to commission recently issued its report containing the analysis and recommendations.

On top of that, the Chilean tax policy discussions have been influenced by the constitutional debate that has surged in Chile since October 2019, and these developments should be closely monitored by investors as it is likely that tax provisions will be included in the new Constitution that is expected to be drafted.

Partially Integrated System as the General Tax Regime

As previously noted, one of the main changes to the Chilean income tax system was the elimination of the Attributed Income Tax system. As a consequence, the Tax Reform established the PIS as the general income tax rule.

The Chilean income tax system is based on an integrated mechanism, according to which, First Category Tax (FCT) paid at the operative company level can be offset against taxes to be paid by final taxpayers (ie, Global Complementary Tax for individuals resident in Chile and Additional Tax for non-residents).

The Attributed Income Tax system aimed to tax, on a yearly basis, income derived at the corporate level irrespective of its effective distribution to final taxpayers by means of attributing such income to them (attributed basis). Under that system, FCT was fully accreditable against final taxes.

On the contrary, under the PIS, final taxes will only be accrued at the moment at which the amounts are effectively distributed to the final taxpayers (cash basis). It is called partially integrated because, as a rule, there is an obligation to reinstate 35% of the Chilean FCT credit. Therefore, only 65% of the Chilean FCT already paid on profits being distributed can be used as credit against final taxes. This results in a total tax to be paid, in the case of foreign residents, of 44.45%, considering both FCT and Additional Tax.

Nevertheless, there are two exceptions where such reinstatement is not required and, thus, the FCT can be fully used as a credit against final taxes. Firstly, for those taxpayers in the small and medium enterprises tax regime. Secondly, in the case of final taxpayers that are resident in a country with which Chile has a double tax treaty (DTT) in force, in which case, the total tax burden remains at 35%.

In this second case, the Tax Reform also provided for a transitory rule that grants full FCT credit until 2026 for taxpayers that are resident in a country with which Chile has a signed (ie, before 1 January 2020), but not yet in force, DTT. Cases that fall under the transitory rule are the DTTs signed by Chile and the USA, as well as Chile and the United Arab Emirates. Thus, dividend distributions made to residents of such countries will bear, broadly speaking, a total tax of 35% up to December 2026.

New Rules on the Provisional Withholding for Remittances Abroad

As a rule, Additional Tax levies the Chilean-source income derived by non-resident taxpayers (and certain foreign-source income) at a general rate of 35%. Additional Tax is applied over the gross amount remitted abroad and works, in most cases, under a withholding mechanism in order to ensure its collection.

Dividend or profit distributions abroad are subject to Additional Tax at a 35% rate. As noted in the previous section, the foreign taxpayer can deduct, either fully or partially, the FCT credit for the First Category Tax paid on those profits at the corporate level.

Before the Tax Reform, the tax characterisation of the amount remitted abroad – pursuant to dividends, remittances, withdrawals and capital returns – was determined, in most cases, at the moment it occurred. This determination was made by applying the tax allocation order to such amount and reviewing to which of the tax records (ie, taxable profits record, exempted profits record, etc) kept by the distributing company the amount being remitted or distributed abroad should be allocated. This is crucial in order to determine effective FCT credit available and Additional Tax to be paid. Indeed, if there were no amounts pending of taxation in such records, the taxpayer could treat such withdrawal as a capital return, being subject to no further taxation.

The Tax Reform changed the legal mechanism described above. Now, the tax characterisation of the remittance and, accordingly, its allocation to the tax records of the company will be determined at the end of the respective fiscal year in which it was made.

The main effect of this change is that any remittance, dividend distribution, withdrawal or even capital reduction abroad will be considered as provisional until the end of the calendar year when it takes place, since only then will its tax characterisation be determined for certain. Hence, no matter what is noted in the tax records of the company that makes the distribution or remittance abroad, a provisional credit should be considered by the entity remitting the funds.

If, as a consequence, it is determined at the end of the calendar year that the provisory credit granted was higher than the actual one, then the Chilean company must pay such difference in its annual Income Tax return, and has the right to request the foreign taxpayer to repay such amount.

On the other hand, if, at the end of the commercial year, it is determined that the provisory credit granted was lower than the actual one, then the foreign shareholder is allowed to request a refund through an administrative procedure before the Chilean IRS, request a refund through its annual income tax return, or increase the accumulated credit ledger of the company.

Considering the latter, all foreign investors should carry out a cash-flow analysis before any dividend distribution, remittance, withdrawal or capital reduction is performed at a Chilean level to mitigate the financial impact derived from it. This recommendation is particularly relevant for those who are resident or domiciled in a country that has no DTT with Chile.

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