Compliance, VAT Top Chile’s List of Priorities in New Tax Bill

At first glance, Chile’s new tax compliance bill looks mild enough to secure support across the aisle. But much more is happening behind the scenes of this legislation, sent to Congress on Jan. 29 by President Gabriel Boric.

A year ago, Boric’s tax bill covering issues such as tax compliance, income tax, and value-added tax was deemed too radical for discussion in Congress. Today, his pension reform has lost its core financing based on a 6% additional mandatory contribution.

Further, an increased perception of corruption has shadowed Boric’s administration, and his decision to grant lifetime pensions to convicted felons has put into question how wisely public money is spent. Finally, the government hasn’t been able to avert a recession, with the ripple effect of lower tax collection due to lower consumption and incomes.

With such a mix, the government hopes revamped tax compliance will produce a projected source of financing equal to 1.47% of Chile’s GDP that isn’t tied to growth, and effectively target a common enemy of policymakers: tax planners.

In that regard, the government produced, with help of the former head of the Chilean tax authority under Michelle Bachelet’s administration, a report outlining that our corporate income tax leakage is around 51.4%, whereas the VAT leakage amounts to 18.4%. The report concludes that due to lack of tax compliance, Chile lost 6.5% of its GDP between 2018 and 2020 on average.

While academics, practitioners, industry, and the Chilean Accountants Association heavily criticized the report’s general takeaways, it’s the backdrop against which the government is designing its tax compliance measures. As one can imagine, if the claim is that half of our income tax isn’t getting paid, the excuse to expand the government’s powers on tax compliance seems too perfect to pass up (or to be true).

These measures are at the core of this bill:

• Move the execution of our general anti-avoidance rule from the tax courts to the Chilean IRS in what is perceived as a move that might weaken taxpayer’s fundamental rights.
• Bank secrecy is treated not as a right that the Chilean IRS must respect but as a privilege the taxpayer must justify if it intends to maintain it in the context of an audit.
• Tax-neutral business reorganization is further restricted, albeit under objective criteria.
• A new tax whistleblower resembling more of a bounty hunter than a good citizen.
• The possibility of obtaining a certification for tax sustainability.
• In the transfer pricing arena, adjustments will be allowed only when they result in additional taxes being paid, and use of the interquartile range will be limited. Non-compliant e-commerce to be sanctioned even with the ban of the site being used to trade.
• In terms of VAT, marketplaces, and payment processing entities would be liable for taxes on the transactions they intermediate. A 12% amnesty tax on undeclared assets or income held abroad—the third one in 10 years.

While the bill just started its legislative process and negotiations still need to happen, opposition has already stated that no support will be given to increasing taxation or weakening taxpayers’ rights.

Complicating things further, Chile is experiencing a weak moment for tax morale, driven by distrust in government, lower support for taxes as a tool for redistribution of wealth, and the fact very few people pay income taxes in Chile—something the current government has said isn’t likely to change.

What can we take away from this political momentum then?

Keep in mind the government isn’t getting the money it needs from growth, so tax compliance pressure is peaking, and criminal prosecution is growing. If the government succeeds with this current effort, tax planning, in whatever form, will entail a much higher risk, regardless if it’s deemed aggressive or not.

Authorities will likely prioritize corporate tax sustainability more than before, and more importantly, so will employees and stakeholders. In this climate, one never knows where whistleblowing might come from, especially when there is a prize involved.

International reorganizations and transfer pricing compliance will be closely audited but with more explicit objective criteria.

Online platforms, either regular marketplaces or payment processing companies, would again be put into the difficult position of taking responsibility for the transactions intermediated through them, which might as well be treated as a reality regardless of whether this bill of law succeeds.

Chile’s obsession with tax planning isn’t new, but public policy disregard for legal certainty, understood as a clear framework under which taxpayers can operate without fearing the tax man, certainly is.

If only one of every four Chileans is effectively an income taxpayer, how can taxpayer rights capture the attention of both voters and politicians?

In that scenario, corporate boards’ typical disregard for tax compliance and strategy must be reconsidered, at least when investing in Chile. Greater tax enforcement in Chile has made clear that corporate tax sustainability isn’t just a good practice, but a requirement to survive governments in dire need of fresh cash.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ignacio Gepp is partner with Puente Sur in Chile.

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