Global Tax Alert News from Americas Tax Center Chile s Ministry of Finance presents amendments to tax reform

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1 20 August 2014 Global Tax Alert News from Americas Tax Center EY Americas Tax Center The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Services/Tax/Americas-Tax- Center---borderless-clientservice Chile s Ministry of Finance presents amendments to tax reform On 9 August 2014, Chile s Ministry of Finance presented to the Senate amendments to the tax reform bill submitted in April to Congress. The amendments are the result of a protocol signed by Finance Minister Alberto Arenas and the members of the Senate finance committee in July. The resulting law could be subject to changes due to the legislative process. Income tax regime (effective 1 January 2017 for taxes payable in 2018) Generally, under the amendments, the corporate tax rate will increase to 21% (2014), 22.5% (2015), 24% (2016), 25% or 25.5% (2017) and 27% (2018-only for distributed income). The amendments provide for an alternative to distribute the accumulated tax profits existing in the FUT (Fondo de Utilidades Tributables or Accumulated Tax Profit Fund) at a 32% rate with a credit for the corporate tax paid, with no right to obtain refunds. The option has several limitations and it will only be available during year The Chilean IRS (Servicio de Impuestos Internos or SII) will regulate this option. The amendments maintain the elimination of the carryback of losses. With respect to the carryforward, the amendments confirm the right to offset existing tax losses against future profits and also the right to obtain a tax refund for losses offset with profits distributed from other Chilean companies. The amendments also eliminate the 10% income withholding tax and retain the attributed income regime (Article 14 A). The amendments also create an alternative distributed (or semi-integrated) income regime (Article 14 B). Taxpayers must select a regime upon starting their business activities or during the three-month period before the close of the tax year. The selected regime will apply for a five-year period. If no regime is selected, taxpayers will be subject to the attributed income regime for partnerships (provided that partners are only individuals) and to the distributed income regime in all other cases.

2 Under both regimes, taxpayers must create a series of control logs, especially when both regimes coexist at the same company or group. Detailed information must also be submitted to the Chilean IRS. Article 14 A: Attributed income regime Under the attributed income regime, the corporate tax rate will be 25% beginning in year Income generated by the taxpayer and income attributed or distributed by its subsidiaries will be attributed to the final shareholders, be they Chilean individuals or foreign residents (taxpayers subject to the Global Aggregate Tax or Withholding Tax). The final shareholders will pay income taxes the same year the company attributes its results, with a Corporate Tax credit. Article 14 B: Distributed income with partial credit deduction regime A corporate tax rate of 25.5% will apply to income generated in year 2017 and 27% from 2018 thereafter under the distributed income regime. In this case final taxes (income taxes applicable to Chilean individuals or foreign shareholders) will apply only on the amounts withdrawn or distributed to the partners or these shareholders. Companies under this regime that have interests in companies under the attributed income regime must attribute to its owners, partners or shareholders the income subject to final taxes that was under the attributed income regime with the appropriate credit rights. For income subject to the distributed income regime, the shareholder will have the right to deduct as a credit 65% of the corporate tax applied on the company s profits, unless the shareholder is resident in a Treaty country, in which case a full credit for the corporate tax will be granted. Article 14 D: Tax regime harmonization rules Should taxpayers under the attributed income regime shift to the distributed income regime, they must keep their prior records and control logs. If the regime changes from distributed to attributed income, a sole 35% tax rate is to be paid as stated in Article 38 bis, similar to liquidation. In the case of spin-offs, the regime should also be completed by both the existing and the new entities. In the case of mergers, the absorbed entity will be subject to the treatment of the change of regime. Powers of the Internal Revenue Service (IRS) Article 4 bis of the Tax Code (TC) now includes the principle of good faith of the taxpayers, which means the IRS must acknowledge the effects triggered by the acts or business activities carried out by them. However, good faith does not apply when there is simulation or abuse (the burden of proof is on the taxing authority). Abuse would be deemed to exist (Article 4 ter) when a taxable event is totally or partially prevented from occurring, the taxable base is reduced, or the generation of the tax obligation is delayed by means of legal acts or businesses that, either individually or together, cause no relevant effects of a legal or economic nature beyond exclusive tax effects. According to the amendments, the fact that there is a more burdensome option or an option that triggers no tax effects shall not be considered abuse. Simulation would be deemed to exist (article 4 quater) when the occurrence of a taxable event, or the nature of the elements that are part of the taxable event, or the real amount or date of the event are concealed. Tax and Customs Courts will be in charge of determining whether abuse or simulation exists, upon request of the Director, and according to a specially regulated process. These rules apply to acts performed or completed over a year from the publication date of the amendments. Amendments to transfer pricing regulations (Article 41 E) The amendments retain the provision that allows the transfer of functions, assets and risks to any country, not only tax havens. Excess indebtedness rules (Article 41 F) Under the amendments, the excess indebtedness limit is determined on a yearly basis and only affects loans granted from the entry into force (1 January 2015), unless their terms are essentially changed or they are transferred to related parties. The amendments eliminate the second excess indebtedness limit equivalent to 50% of the taxable net income. 2 Global Tax Alert Americas Tax Center

3 The amendments clarify that equity shall be the tax owner s equity with some adjustments. The term debt includes: i) debts with creditors abroad; ii) local debt; and iii) debts of permanent establishments abroad, all at their average value for the number of months the loan is registered in the books of the debtor plus unpaid accrued interest. The amendments would impose a 35% penalty on interest subject to the 4% withholding tax or not subject to withholding tax paid to foreign related companies under the terms set forth in the law (including for example, personal guarantees). Controlled foreign corporations (Article 41 G) The amendments clarify that the new obligation to recognize foreign passive incomes from controlled foreign entities on an accrual basis will be effective 1 January 2016, not 1 January Passive income must only be recognized when it is less than 10% of the total income of the controlled company. The credit for taxes paid in the country of the controlling entity would apply when the controlled entity is directly held by a Chilean taxpayer. If not, the foreign tax credit will only be available if a Convention for the Avoidance of Double Taxation or an Information Exchange Agreement has been executed. Transitory articles regulating the repatriation of capital Transitory Article 20 The amendments create a voluntary compliance program for Chilean taxpayers that have not timely filed tax returns or paid taxes on capital from abroad. The program would run from 1 January to 31 December This system does not apply to capital in high risk countries or jurisdictions that do not work to prevent and fight money laundering and the financing of terrorism. An 8% sole tax will be levied on the value of capital as determined by the taxpayer. This sole tax cannot be used as credit or deducted as an expense. Value Added Tax (VAT) From 1 January 2016, some amendments related to VAT are made to the original tax reform bill, as follows: VAT will not apply to the sale of land and houses financed by a housing subsidy. Parameters to determine the habitual basis are established so that the sale of immovable property is subject to VAT. Transactions are presumed to be habitual in the following cases: Subdivision of urban or rural land Sale of buildings by story or apartments, provided that the sale is four years after the acquisition or construction Less than one year has elapsed between the acquisition or construction of real estate and the sale of the real estate (real estate different than building sold by story or apartments) Transfer of real estate made by entities engaged in the real estate business A habitual seller of used immovable property that bore no VAT in the acquisition of such property is allowed to deduct the land value with respect to both the purchase price according to its commercial value as of the transaction date and the proportion it represents in the purchase price. Capital gains on the sale of stock or social rights (effective 1 January 2017) The amendments retain the rules for tax cost determination, but adjust the rules to the new alternative system. The tax cost determination corresponds to the contribution or acquisition value plus or less the capital increases or reductions. Accumulated profits will be part of the tax cost if the entity is subject to the attribution regime. Sales before one year are subject to First Category Tax and Global Aggregate Tax or Withholding Tax on a cash or accrual basis, as selected by the taxpayer. Sales after one year are only subject to final taxes on a cash or accrual basis (taxpayer s election). Global Tax Alert Americas Tax Center 3

4 To calculate the Global Aggregate Tax, if the transaction takes place after one year and the taxpayer has elected to file taxes on an accrual basis, the special rules for the higher value determination will apply. In this case, the higher value will be deemed accrued throughout the period in which shares or rights were held up to a period of 10 years. The loss derived from transactions of the same type and performed the same year may be deducted from the higher value. Interest associated with the investment will be deductible. Other provisions The amendments clarify that: The non-deductible expense regulation only applies to expenses that constitute withdrawals in kind or amounts representing cash disbursements. These non-deductible expenses will be subject to a 49% penalty tax. This rule will be in force from 1 January From 1 January 2015, the amount of goodwill exceeding non-monetary assets will not be subject to amortization. The loss could only be recognized upon liquidation or dissolution. By 31 January 2015 at the latest, a bill of law would be sent to create a new foreign investment regime that replaces DL 600. Foreign investment contracts previously signed will remain in force. For additional information with respect to this Alert, please contact the following: Ernst & Young Ltda., Santiago Felipe Espina felipe.espina@cl.ey.com Osiel Gonzalez osiel.gonzalez@cl.ey.com Antonio Guzmán antonio.guzman@cl.ey.com Mauricio Loy mauricio.loy@cl.ey.com 4 Global Tax Alert Americas Tax Center

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