Chile Studies Tax Reform

by Mike Godfrey, Tax-News.com, Washington

08 September 2011

Chilean President Sebastian Pinera has announced that the government is reviewing the country's tax regime to find more money for social spending.

Following months of student protests and falling public support, Pinera said in televised comments on September 3 that the government had begun to review available options to generate extra funding without meanwhile damaging the Chilean tax regime's competitiveness.

The government has been accused of mollycoddling the copper industry amid deep cuts in public spending. One of the government's recent responses, an extra USD4bn in additional education funding, has been rebuffed by student organizations because it is felt that the package doesn't go far enough to improve the education system.

Pinera's review may put at risk recent decisions taken by the government on tax policy, including a package agreed between the Chilean government and mining companies in January to temporarily increase mining taxes.

Royalties of between 4% and 5% were payable under the previous law. The new agreement, however, establishes that companies will now be subject to a rate of between 4% and 9%, depending on a company’s operating margin, extending over the remaining six year period of the tax agreement. The royalty rates will then rise to 5% to 14% from 2018.

Given that the mining companies in neighbouring Peru have agreed to higher taxes, it is thought there is room for further tax increases on the sector in Chile. However, it is considered more likely that Pinera will look to spread the burden and make permanent the previously announced temporary hike to the corporate income tax rate. This was increased by 3% to 20% for 2011, but is due to fall to 18.5% next year before being restored to 17% in 2013.

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