OECD Endorses Chilean Tax Reform Proposals

; posted on
March 28th, 2019

On 26 March 2019, the Minister of Finance and the head of the OECD Tax Policy Unit (the OECD) held a meeting where the OECD endorsed the tax reform proposed by the government, which is expected to be discussed in congress in the upcoming weeks, as a strategic way to promote investment and growth.

Single Corporate Tax Regime

The Chilean government laid out these following proposals as series of tax reform:

  1. Migration to a single corporate tax regime replacing the current dual tax regimes
  2. Increased expensing for investments in capital assets
  3. Taxation for the digital economy
  4. Amendments to international tax provisions (i.e. amend permanent establishment definition)

During the meeting, the OECD clearly supported the implementation of the proposals especially with regard to single corporate tax regime. The OECD emphasized the need for unification of the Chilean corporate income tax system, so as to bring it closer to the systems used in OECD countries. Under the current rules introduced by the latest tax reform package, companies must choose between two systems of taxation, with different rates and with full and partial imputation credits (integrated regime) depending on the option chosen.

As a consequence, under the existing regime, partners and shareholders are taxed on their proportional shares of the entity’s accrued profits at a combined rate of 35 percent, while the partially integrated regime requires them to pay tax on the distribution of profits, generally at a combined rate of 44.45 percent. If the partners or shareholders of a Chilean company are residents of a country that has a tax treaty with Chile, they are allowed to take a full tax credit, which could result in a combined 35 percent tax rate

The introduction of this system has allegedly distorted the economy and had a negative impact on business activities. This has led the government to propose the return to a single tax regime with full integration between corporate and individual income taxes. As such, taxes paid at the corporate level would fully serve as a credit against the owner’s final taxes.

Taxation for Digital Economy

At the same meeting, a new proposal for the taxation of the digital economy was announced. Under the original proposal released in 2018, a special indirect 10% tax was proposed for digital services. However, under OECD recommendations it has been increased to 19 percent. The VAT will apply to digital services rendered by platforms such as Netflix and Spotify and as consequences no taxation will be levied at the income tax level.

According to the OECD, the majority of the measures initiated by the government will have a positive impact on growth and employment, therefore the OECD encourages the government and Congress to adopt these measures.

Source: OECD

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