chilean tax structure - TTN Transnational Taxation Network
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Recent Tax Developments in Chile and Estate and Trust Law In Latin America<br />
MICHAEL GRASTY C.<br />
<strong>TTN</strong><br />
TRANSNATIONAL<br />
TAXATION<br />
NETWORK<br />
SR. PARTNER<br />
GRASTY QUINTANA MAJLIS & CIA.<br />
SANTIAGO, CHILE<br />
MIAMI CONFERENCE , MAY 3 – 4, 2007<br />
The Bankers Club, Miami, Florida
PRESENTATION<br />
• GENERAL DESCRIPTION OF ISSUES IN CHILE TODAY<br />
• GENERAL TAX STRUCTURE IN CHILE<br />
• INVESTMENT PLATFORM LAW<br />
• OTHER TAX AVOIDANCE STRUCTURES<br />
• USE OF TRUSTS<br />
• BLIND TRUSTS<br />
2<br />
Recent <strong>tax</strong> developments in Chile<br />
September, 2006
ECONOMIC HIGHLIGHTS<br />
• Early economic liberalization (1975) compared to the<br />
region (1980).<br />
• “Chilean miracle”: Record real avg. annual growth of<br />
8%, 1986-1997, OJOPJP after debt crisis in 1982. Highest in<br />
region and one of highest world-wide.<br />
• Doubled per-capita income / poverty cut in half<br />
during the 1990s.<br />
• Inflation under control: 2%-4% range since 1999.<br />
• “A” Rating from Standard and Poor’s, January 2006<br />
• Steady GDP growth from 1991- 2006 GDP growth:<br />
4.8%.<br />
3<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CORRUPTION INDEX<br />
2006 Corruption Perceptions Index<br />
Finland<br />
Singapore<br />
Australia<br />
UK<br />
Hong Kong<br />
Germany<br />
France<br />
Ireland<br />
US<br />
Chile<br />
Spain<br />
Uruguay<br />
Italy<br />
S. Korea<br />
Czech<br />
Brazil<br />
Peru<br />
China<br />
Argentina<br />
Bolivia<br />
Venezuela<br />
Bangladesh<br />
0 20 40 60 80 100 120 140 160<br />
Rank<br />
Le s s c orrupt m ore c orrupt<br />
4<br />
Recent <strong>tax</strong> developments in Chile Source: Transparency International 2006<br />
May, 2007
VERY COMPETITIVE<br />
World Competitiveness Report Card 2006<br />
Venezuela<br />
Argentina<br />
Mexico<br />
Brazil<br />
Colombia<br />
40<br />
52<br />
53<br />
55<br />
61<br />
Korea<br />
India<br />
Chile<br />
Malaysia<br />
China<br />
Canada<br />
USA<br />
1<br />
7<br />
19<br />
24<br />
23<br />
29<br />
38<br />
0 10 20 30 40 50 60<br />
Ranking<br />
5<br />
Recent <strong>tax</strong> developments in Chile<br />
Source: IMD, “World Competitivness Yearkbook 2006”<br />
May, 2007
CHILE DOING WELL<br />
• CHILE IS DOING WELL FROM ALMOST ANY PERSPECTIVE<br />
• RECOGNIZED AS A REGIONAL LEADER<br />
• 2007 STUDY OF “CAPITAL HOSPITABILITY” BY FORBES, PLACES<br />
CHILE IN 28th PLACE, A FALL FROM PREVIOUS 20th PLACE, BUT WAY<br />
AHEAD OF MEXICO, NEXT LATIN AMERICAN IN 43rd PLACE<br />
FORBES “CAPITAL HOSPITABILITY RANKING”, 2007<br />
1. USA 28. CHILE<br />
2. CANADA 43. MEXICO<br />
3. JAPAN 47. URUGUAY<br />
4. DENMARK 57. PERU<br />
5. NEW ZEALAND 61. BRAZIL<br />
6. NORWAY 64. COLOMBIA<br />
7. FINLAND 75. ARGENTINA<br />
8. HONG KONG 98. PARAGUAY<br />
9. SWEDEN 115. BOLIVIA<br />
10. ENGLAND 122. ECUADOR<br />
6<br />
Recent <strong>tax</strong> developments in Chile May, 2007
NOT GROWING ENOUGH<br />
GDP GROWTH OF 4.7% ANNUALLY FROM 1980 – 2005 (double Latin<br />
American Average and more than average of India)<br />
So, if we are doing so well why don´t we just apply the old saying, “If it aint broke,<br />
don´t fix it”. Why are we concerned about growth?<br />
HOWEVER:<br />
2006 shows growth of less than 5%, although price of CU all time high<br />
Why not 8% as in early 1990´s?<br />
“Chile is a clear example of the need for Latin America´s economies to complement<br />
their excellent natural resources and production of commodities with high-valueadded,<br />
knowledge based activities to build global business undperpined by<br />
technology” (The McKinsey Quarterly, Heinz-Peter Elstrodt, 2007, Special Edition)<br />
7<br />
Recent <strong>tax</strong> developments in Chile May, 2007
NOT GROWING ENOUGH<br />
“It is clear that Chile has been a star economically. If we compare Chile with its<br />
piers in the Region things look good…. However, we are comparing with the wrong<br />
competition. In comparison with Latin America Chile looks fine, however, when<br />
compared with the real global competitors, it doesn´t look so good. China, Russia,<br />
Estonia, Korea, Greece, Taiwan, Ireland, Kazajstan are all in better shape in terms of<br />
pushing for growth and prosperity, and that is what matters. It doesn´t matter how<br />
fast you grow, what matters is that prosperity increases. So, in comparison to where<br />
Chile wants to be, it is not doing so well and therefore needs to question itself<br />
whether necessary steps are being taken today in order to obtain future growth with<br />
prosperity. I have serious doubts that this is happening and I don´t see a firm<br />
commitment to take action and change. I see a sort of paralysis in the economic<br />
debate in relation to the future of Chile.”<br />
Michael Porter, 06.29.05, Seminar Universidad del Desarrollo MBA Program, Santiago, Chile<br />
8<br />
Recent <strong>tax</strong> developments in Chile May, 2007
NOT GROWING ENOUGH<br />
“The main competitive weakness of the Chilean economy is the relatively poor capacity of<br />
the country to innovate and adopt technological changes.<br />
European Commission<br />
“The challenge for Chile is to ensure a substantial growth in productivity of companies<br />
(but also of public services) and translate that productivity into a comparative advantage<br />
(….) Utopic? Utopic is wanting to compete based on lower wages in an economy where<br />
the value added comes essentially from knowledge and applied innovation in all realms of<br />
society”<br />
Manuel Castells, Prof. Sociology Berkeley<br />
9<br />
Recent <strong>tax</strong> developments in Chile May, 2007
RAW MATERIALS AND COMMODITIES<br />
• RAW MATERIALS AND COMMODITIES<br />
• COPPER, FOREST PRODUCTS, FRUIT, SALMON, WINE, ETC.<br />
• GREAT RIGHT NOW BECAUSE OF PRICES, HOWEVER ….<br />
• WE ARE GOING WHERE THE MARKETS ARE TAKING US AND<br />
NOT WHERE WE SHOULD BE GOING, STRATEGICALLY<br />
• FORTUNATE THAT WE ARE ON THE RIGHT SIDE OF CHINA AND<br />
HAVE SMALL WINDOW OF OPPORTUNITY TO REACT<br />
• NEED TO TAKE ADVANTAGE OF OUR NETWORK OF FTA´S NOW<br />
• NEED TO MOVE IN DIRECTIONS THAT WILL TAKE US AWAY FROM<br />
POSSIBLE DUTCH DISEASE<br />
• NOTWITHSTANDING HOW GREAT WE ARE AND FTA NETWORK,<br />
FDI INTO CHILE HAS DICREASED TO A MINIMUM EXPRESSION<br />
1<br />
0<br />
Recent <strong>tax</strong> developments in Chile May, 2007
DFI DOWN<br />
1<br />
1<br />
Recent <strong>tax</strong> developments in Chile May, 2007
US INVESMENT DOWN<br />
1<br />
2<br />
Recent <strong>tax</strong> developments in Chile May, 2007
IMPORTANCE OF FDI<br />
• FDI IS IMPORTANT TO CHILE FOR NUMEROUS REASONS:<br />
– SHOWS HOW ATTRACTIVE WE ARE INTERNATIONALLY<br />
– NECESSARY TO INTRODUCE TECHNOLOGY AND BEST PRACTICES<br />
– INTERNATIONAL INTEGRATION AND DISTRIBUTION OF PRODUCTS AND SERVICES<br />
• HOWEVER, US FDI IS EVEN MORE IMPORTANT<br />
• WE DON´T WANT JUST MONEY, WE WANT QUALITY INVESTMENT<br />
• US COMPANIES BRING<br />
– CORPORATE GOVERNANCE<br />
– INTRODUCTION OF SOCIAL RESPONSABILITY<br />
– ENVIRONMENTAL AND LABOR CONCERN<br />
– TECHNOLOGY<br />
– ACCESS TO MOST IMPORTANT MARKET FOR CHILE<br />
1<br />
3<br />
Recent <strong>tax</strong> developments in Chile May, 2007
STRONG GOVERNMENT REACTION<br />
• GOVERNMENT CONCERNED AND REACTING ENERGETICALLY<br />
• PRESIDENT MICHELLE BACHELET COMMITED TO STRATEGIC GROWTH<br />
What are your plans to improve the competiveness of the Chilean economy?<br />
“One key area is innovation, around which we are developing <strong>tax</strong> incentives to encourage more industry participation. By OECD standards<br />
the 0.7% of GDP that Chile invests in R & D for science and technology is not only low, but over two thirds of it comes out of public<br />
expenditure. The private sector contributes very little. Out aim is to get industry more closely involved with universities, science centers, and<br />
biotechnology research centers so we can add more value to our products. Our economy is very dependant on natural resources –<br />
copper, pulp and paper, and the fishing industry represent 54% of exports – and we need to do more than just produce<br />
more of them”<br />
What is your message to foreign investors and CEO’s looking at Chile<br />
and the Region?<br />
“Trust Chile, believe in Chile, and invest here”*<br />
* An interview with the president of Chile, The McKinsey Quarterly, 2007,<br />
Special Edition, Shaping a new agenda for Latin America<br />
1<br />
4<br />
Recent <strong>tax</strong> developments in Chile May, 2007
STRONG GOVERNMENT REACTION<br />
• GOVERNMENT CONCERNED AND REACTING ENERGETICALLY<br />
• PROCHILE DOING GOOD JOB OF PROMOTING CHILE<br />
• CORFO PROVIDING MANY INCENTIVES<br />
• HOWEVER, VERY DIFFICULT<br />
• WORLD COMPETING FOR FDI- MANY NEW OPTIONS<br />
• CHILE WITH STRATEGIC PROBLEMS: SIZE, LOCATION<br />
• CHILE NOT KNOWN IN WORLD CONTEXT<br />
• IMAGE IS SOMETHING THAT YOU HAVE AND IS<br />
VERY DIFFICULT TO GET<br />
• CASE OF NEW ZEALAND<br />
– WON AMERICA´S CUP TWICE<br />
– BEST RUGBY TEAM IN THE WORLD<br />
– LORD OF THE RINGS<br />
– MICHAEL CAMPBELL<br />
– SIR EDMUND HILLARY<br />
1<br />
5<br />
Recent <strong>tax</strong> developments in Chile May, 2007
KNOWLEDGE OF CHILE<br />
When you think of Chile, what types of products do you think of?<br />
Wine/Grapes<br />
Coffee<br />
Beef<br />
Fish/Sea bass<br />
Drugs/Cocaine<br />
Spices<br />
Others<br />
Product<br />
Produce/Fruit and vegetables<br />
Textiles/Blankets/Rugs/Wool<br />
Copper/Metal/Tin<br />
FDI IN CHILE APRIL, 2007<br />
Don’t Know/No response<br />
January 2004<br />
(%)<br />
13<br />
19<br />
19<br />
7<br />
4<br />
4<br />
1<br />
3<br />
2<br />
5<br />
23<br />
March<br />
2006<br />
(%)<br />
18<br />
16<br />
12<br />
7<br />
4<br />
4<br />
3<br />
2<br />
2<br />
6<br />
26
INCENTIVE PROGRAMS<br />
• FOREIGN INVESTMENT INCENTIVES<br />
• Law Reform Proposal (“Proyecto Ley, Boletín 4627”)<br />
• Proposal to grant <strong>tax</strong> incentives for private investment in R&D that is carried out in CORFO accredited and registered<br />
research centres.<br />
• 2. High Technology Program<br />
• Special incentives for foreign investment in high-technology projects; available to investments with a minimum value of<br />
US$ 500,000.<br />
• 3. Todo Chile<br />
• Financial support on a 50% matching basis for pre-investment studies or specialized advice required and services for<br />
investment projects for amounts equal to or greater than US$400,000. The subsidy will have a maximum limit of<br />
US$50,000.<br />
• Non-Conventional Renewable Energy Projects<br />
• Financial Support on a 50% matching funding for different types of studies or specialist advice required in the preinvestment<br />
phase of projects equal to or greater than US$400,000 up to US$2,000,000. The subsidy will have a cap of<br />
US$60,000 per company (increased from 2006).<br />
• CORFO recently announced an extension of a long term credit line for US$100 million, destined to finance projects up to<br />
$5 million, allowing unique interest rates, grace periods and amortization periods in the local market.<br />
• Tax Free Zones<br />
• Chile has two <strong>tax</strong>-free zones -one in the northern port of Iquique (Region I) (ZOFRI) and the other in Punta Arenas<br />
(Region XII) (Sociedad Administradora Zona Franca Punta Arenas). Merchants and manufacturers in these zones are<br />
exempt from first-category corporate <strong>tax</strong>.<br />
1<br />
7<br />
Recent <strong>tax</strong> developments in Chile May, 2007
INCENTIVE PROGRAMS<br />
• Area Specific Incentives<br />
• Various financial incentives are available to promote productive investment and services and strengthen the creation of<br />
new labour sources in isolated regions, such as Arica, Arauco, Valparaiso, Austral Zone, Chiloe, Palerna, Tierra del<br />
Fuego, Tocopilla.<br />
• A shared financing scheme also exists between the regional government of Bío Bío, the Ministry of Economy and the<br />
Chilean Economic Development Agency (CORFO) in support of innovative projects.<br />
• 7. Creation of Business Incubators Program<br />
• Co-financing up to 70% of total required for the creation of Business Incubators that strengthen entrepreneurship and the<br />
creation of new businesses in Chile. Foreign investors must be linked to universities, technological entities dependent on<br />
universities, professional institutions or Technical Centres to access this funding.<br />
• 8. Incentives in the Mining Industry<br />
• Certain <strong>tax</strong> benefits accrue to exporting companies. i.e. reimbursement of VAT paid on acquisitions of goods and services<br />
destined to the production of exported goods; reimbursement of specific <strong>tax</strong> paid upon fuel and reimbursement of<br />
additional <strong>tax</strong> paid on technical consulting abroad.<br />
• 9. Science and Technology National Commission (FONDEF)<br />
• Technological funds to strengthen impulse and co-finance national and multi-national R&D and technology innovation<br />
projects that generate a high social and economic impact in Chile.<br />
• 10. Investment Platform Law (Law N° 19.840)<br />
• Investment vehicles in Chile are not subject to Chilean <strong>tax</strong> on earnings generated in third countries, but are able to tap<br />
into the advantages and opportunities that Chile offers as a platform from which to channel and manage these<br />
investments.<br />
• 11. <strong>Network</strong> of Free Trade Agreements, Double <strong>Taxation</strong> Agreements and Bilateral Investment Treaties.<br />
1<br />
8<br />
Recent <strong>tax</strong> developments in Chile May, 2007
DIFFICULTIES FOR FOREIGN INVESTORS<br />
• LABOR FLEXIBILITY<br />
• BUREAUCRACY<br />
• CORRUPTION<br />
• SKILLED LABOR FORCE<br />
• ENGLISH<br />
• INTELLECTUAL PROPERTY<br />
• LACK OF COORDINATION: LABOR DEPARTMENT<br />
1<br />
9<br />
Recent <strong>tax</strong> developments in Chile May, 2007
IRISH SUCCESS STORY<br />
• FROM RAGS TO RICHES IN 20 YEARS<br />
• IRISH GDP PER CAPITA WENT FROM US$ 10,380 IN 1985 TO US$ 38,812 IN 2005<br />
• HIGHEST GDP PER CAPITA IN EU AFTER LUXEMBOURG<br />
• MOTOR OF GROWTH WAS FOREIGN INVESTMENT IN IT<br />
• END OF 90’S FIRST EXPORTER OF SOFTWARE IN THE WORLD<br />
• INTEL, HP, IBM, DELL, MOTOROLA<br />
WENT TO IRELAND<br />
• HOW?<br />
• LOW TAXES (10%)<br />
• TAX AGREEMENT WITH USA<br />
• GOVERNMENT AGENCY IN<br />
CHARGE OF SEDUCTION:<br />
IDA AGENTS IN MAIN IT CENTERS<br />
2<br />
0<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CASE OF IRELAND<br />
• IDA Ireland Business Sectors<br />
• Over 1000 overseas companies have established operations in Ireland. They are a key driver of the economy employing<br />
130,000 people directly and many more indirectly. They account for one quarter of GDP and over 80% of exports.<br />
• IDA’s focus is to attract foreign investment that is of high value, requiring high skill levels and a sophisticated business<br />
environment.<br />
• Key areas of focus are<br />
• advanced manufacturing projects in the ICT, Pharmaceuticals and Biopharmaceuticals, Medical<br />
Technologies, Engineering and Consumer Products sectors<br />
• high value Internationally Traded Services sectors in Software, Financial Services, Shared Services and Customer<br />
Support activities<br />
2<br />
1<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CASE OF IRELAND<br />
• IDA Ireland Business Sectors<br />
• Over 1000 overseas companies have established operations in Ireland. They are a key driver of the economy<br />
employing 130,000 people directly and many more indirectly. They account for one quarter of GDP and over 80%<br />
of exports.<br />
• IDA’s focus is to attract foreign investment that is of high value, requiring high skill levels and a sophisticated<br />
business environment.<br />
• Key areas of focus are<br />
• advanced manufacturing projects in the ICT, Pharmaceuticals and Biopharmaceuticals, Medical<br />
Technologies, Engineering and Consumer Products sectors<br />
• high value Internationally Traded Services sectors in Software, Financial Services, Shared Services and Customer<br />
Support activities<br />
2<br />
2<br />
Recent <strong>tax</strong> developments in Chile<br />
May,2007
CASE OF IRELAND<br />
• Ireland - A young, well educated and productive workforce.<br />
• One of the reasons why so many companies choose Ireland is because of the unique workforce - Ireland has one of the<br />
youngest population in Europe with over 36% under the age of 25 years. Ireland's unique population and age <strong>structure</strong><br />
that has fuelled much of Ireland's recent prosperity will continue for the next 15 years with a key focus on education and<br />
research in Ireland.<br />
In a study of demographic trends, economists at NCB Stockbrokers forecast that projected population declines across<br />
much of Europe meant Ireland's already strong economy would look even more attractive in a European context over the<br />
next decade.<br />
The population of the Republic will grow by 30% to over 5.3 million by 2020 and to six million by 2050.<br />
The population between the ages of 15 and 64 will rise by 700,000 in the next 15 years. Sustained strong growth in the<br />
labour supply will maintain a capacity for growth in Ireland that will far outstrip that in other EU countries where the<br />
demographic outlook is much less favourable the report states.<br />
• Flexibility and Adaptability of workforce when faced with new challenges<br />
• Ireland 7.86 USA 7.60 Netherlands 6.45 Czech Republic 6.51 UK 6.27 Japan 6.26<br />
Hungary 5.67 Germany 4.58 France 3.96<br />
Source - IMD World Competitiveness Yearbook 2006.<br />
•<br />
2<br />
3<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CHILEAN TAX TAX<br />
STRUCTURE<br />
STRUCTURE<br />
CHILEAN TAX STRUCTURE<br />
• 1874: FIRST TAX: STAMP TAX ON CONTRACTS FOR THE SALE OF GOODS, 2%<br />
(Boston Tea Party?)<br />
• 1902 TAX ON PRODUCTION OF ALCOHOL AND “ALCOHOL TAXES<br />
ADMINISTRATION”<br />
• NEXT TAXES ON TOBACCO, CARD GAMES, STAMPS, LEGAL PAPER (“PAPEL<br />
SELLADO”)<br />
• 1916: ALCOHOL TAXES ADMINISTRATION MODIFIED TO BE COME THE GENERAL<br />
IRS, AND RECEIVES MANDATE TO LEVY NEW TAXES INCLUDING LAND AND REAL<br />
ESTATE, PERSONAL PROPERTY AND INVESTMENTS<br />
2<br />
4<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CHILEAN TAX TAX<br />
STRUCTURE<br />
STRUCTURE<br />
CHILEAN TAX STRUCTURE<br />
• Chilean income <strong>tax</strong> is built around three basic principles: a) it is individuals that are <strong>tax</strong>ed<br />
and <strong>tax</strong>es paid by an enterprise are only paid on account of the <strong>tax</strong>es that the owners will<br />
finally pay, b) the <strong>tax</strong> base includes incomes received or accrued during a given <strong>tax</strong> period,<br />
and c) Resident and non resident business owners only pay personal <strong>tax</strong>es for the<br />
withdrawn profits.<br />
• Taxes and rates:<br />
– First Category Tax (company) : 17%<br />
– Personal <strong>tax</strong> (global com. Tax) : gradual, up to 40% (most individuals use companies<br />
only 10.000 individuals pay highest rate)<br />
– Dividends : 35% less FCT 17%<br />
– Interest : 4% (when from Fin. Institution)<br />
– Royalties : 30%<br />
– Engineering and Technical Ass. : 20%<br />
– VAT : 19% (up from 18% in 2003 to compensate for FTA´s)<br />
– STAMP TAX : 0.134 of face value of document w/ max 1.608<br />
– Real estate <strong>tax</strong> : 2% of fiscal valuation of property<br />
– Municipal license : min 0.25% – max. 0.5% of <strong>tax</strong>payers equity; US$<br />
380,000 maximum; charged by Municipality where<br />
office is established<br />
2<br />
5<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CHILEAN TAX STRUCTURE<br />
2<br />
6<br />
Recent <strong>tax</strong> developments in Chile May, 2007
CHILEAN TAX TAX<br />
STRUCTURE<br />
STRUCTURE<br />
CHILEAN TAX STRUCTURE<br />
• Tax evasion a big issue as in most countries<br />
• Chile one of the best in the world down to 19% thanks to new <strong>tax</strong> evasion law and to<br />
facilities given to <strong>tax</strong> payers.<br />
• On line declaration with proposal by SII – click on the box and pay<br />
• 2004: Wharton School of Business and Infosys Technologies presented the Chilean IRS<br />
with the Wharton-Infosys Business Transformation Award 2004, in the category of<br />
Technology Change Agent.<br />
• However, the battle remains on the Judicial level: currently Chile´s <strong>tax</strong> courts and judge<br />
are part of the SII – not independent. Appeal to independent Court of Appels<br />
• Bill presented in 2002 to create independent <strong>tax</strong> tribunals, but moving slowly<br />
2<br />
7<br />
Recent <strong>tax</strong> developments in Chile May, 2007
MODERN INSTITUTIONS - SII<br />
2<br />
8<br />
Recent <strong>tax</strong> developments in Chile<br />
Source: IMD, “World Competitivness Yearkbook 2006”<br />
May, 2007
MODERN INSTITUTIONS - SII<br />
2<br />
9<br />
Recent <strong>tax</strong> developments in Chile<br />
Source: IMD, “World Competitivness Yearkbook 2006”<br />
May, 2007
SECURING TRANSACTIONS<br />
3<br />
0<br />
Recent <strong>tax</strong> developments in Chile May, 2007
MODERN INSTITUTIONS - SII<br />
3<br />
1<br />
Recent <strong>tax</strong> developments in Chile<br />
Source: IMD, “World Competitivness Yearkbook 2006”<br />
May, 2007
CHILE AS AN INVESTMENT PLATFORM<br />
• UNILATERAL MEASURES: 1993 and 1997, reforms to Income Tax Act creating a<br />
credit for <strong>tax</strong> paid overseas, thereby reducing double <strong>tax</strong>ation. Reduces <strong>tax</strong> liabilities<br />
of investors resident in Chile who invest abroad. Arts. 41 A and 41B of Income Tax<br />
Law provides a credit against <strong>tax</strong>es paid abroad, with a limit of the First Category <strong>tax</strong><br />
payable in Chile. Unrelieved <strong>tax</strong> credits may be used as deductible expense or carried<br />
forward against future <strong>tax</strong> liabilities.<br />
• 1997: Chile starts negotiation bilateral Double <strong>Taxation</strong> Agreements, mostly with<br />
countries with FTA´s<br />
• US agreement not moving because of bank secrecy<br />
• Does not consider individuals and only enterprises<br />
32<br />
Recent <strong>tax</strong> developments in Chile<br />
May, 2007
DOUBLE TAXATION AGREEMENTS<br />
3<br />
3<br />
Recent <strong>tax</strong> developments in Chile<br />
Source: IMD, “World Competitivness Yearkbook 2006”<br />
May, 2007
INVESTMENT PLATFORM LAW<br />
• Law N° 19.840 of November 11, 2002 added a new article (41 D) to Income Tax Law.<br />
• Enables foreign investors to set up a platform company in Chile to receive and manage<br />
investments in third countries, allowing the use of Chile´s infra<strong>structure</strong> and not paying<br />
Chilean <strong>tax</strong>es on earnings from overseas investments.<br />
• Up to 75% ownership can be resident in Chile; non residents cannot come from <strong>tax</strong> havens;<br />
cannot invest in <strong>tax</strong> havens either.<br />
• Can be Stock Companies, or Limited Liability Partnerships<br />
• Not considered a resident of Chile and therefore only pays income <strong>tax</strong> on profits generated in<br />
Chile<br />
• Must be subject to supervision of SVS (SEC) like listed stock companies<br />
• Can provide services to subsidiaries and associated companies<br />
• Renounces to bank secrecy<br />
• Idea to copy Spanish ETVE (“Entidad de Tenencia de Valores en el Extranjero”)<br />
34<br />
Recent <strong>tax</strong> developments in Chile<br />
May, 2007
INVESTMENT PLATFORM LAW( problems)<br />
• Law not well received – only 14 companies have used and mostly not operative<br />
• Confusion regarding real intent: holding for investments or services. The object of the<br />
company must be investments. Services can be provided only to related companies<br />
• Some say that only real reason for the law was to <strong>tax</strong> Exxon´s sale of their interest in<br />
Disputada de Las Condes mining project. Taxes sale of shares if as a result the buyer ends up<br />
with more than 11% ownership in a Chilean company<br />
• Terms of law are not compatible with <strong>tax</strong> treaties – platform companies not resident in Chile<br />
and therefore treaties do no apply<br />
e.g.: a company that provides services from Chile to Perú, pays 17% under the Tax<br />
Treaty and 30% (the Peruvian <strong>tax</strong>) under the Platform <strong>structure</strong><br />
• Supervision by the SVS increases administrative costs<br />
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OTHER TAX AVOIDANCE VEHICLES<br />
• Art. 38 BIS, allows for no capital gains on the sale of shares of certain companies with<br />
importance presence in the local stock market<br />
• DFL 2 of 1959, allows for certain <strong>tax</strong> benefits related with income generated with<br />
certain type of property (residential less 140 mts2). No inheritance or donations <strong>tax</strong><br />
(first transfer only) no income <strong>tax</strong> from rental.<br />
• Personal Real Estate: No capital gains <strong>tax</strong> on personal real estate<br />
• Usufruct. Income Tax Law provides that the increase in price of the nude property,<br />
does not affect the holder of the usufruct on consolidation<br />
• Agricultural Activity: allows for a system of, “presumed income” in relation to<br />
appraisal of farm property<br />
• Forests: native or planted forests under DL 701 are not subject to donation <strong>tax</strong>.<br />
• Freedom to agree on distribution of profits allows to transfer patrimony from the rich<br />
partner to the heirs.<br />
• Non payment of personal income <strong>tax</strong> until distribution.<br />
• Easter Island: No income <strong>tax</strong> paid as long as profits not distributed – allows to sell<br />
Easter Island company with no <strong>tax</strong>es<br />
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Recent <strong>tax</strong> developments in Chile<br />
May, 2007
USE OF TRUSTS IN CHILE<br />
• COMMON LAW INSTITUTION<br />
• FEW ROMAN LAW COUNTRIES<br />
• INTERESTING LONG TERM PROJECTION<br />
• PROBLEM IN GETTING FUNDS INTO TRUST<br />
• RISK INTERPRETATION BY SII<br />
• POSSIBLE VIOLATION OF FORCED<br />
HEIRSHIP RULES<br />
37<br />
Recent <strong>tax</strong> developments in Chile<br />
May, 2007
BLIND TRUSTS<br />
• NEW INSTITUTION FOR CHILE<br />
• SENATOR SEBASTIAN PIÑERA RUNNING FOR PRESIDENCY<br />
• US$ 1.3 – US$ 1.5 BILLION<br />
• IN SHARES OF DIFFERENT COMPANIES, INCLUDING CONTROL OF LAN<br />
• ALSO PUSHING THE IDEA OF A FLAT RATE AND MAKING THE MAPOCHO RIVER<br />
NAVEGABLE<br />
38<br />
Recent <strong>tax</strong> developments in Chile<br />
May, 2007
Recemt Tax Developments in Chile and Estate and Trust Law In Latin America<br />
THANK YOU !!!<br />
MICHAEL GRASTY C.<br />
<strong>TTN</strong><br />
TRANSNATIONAL<br />
TAXATION<br />
NETWORK<br />
SR. PARTNER<br />
GRASTY QUINTANA MAJLIS & CIA.<br />
SANTIAGO, CHILE<br />
MIAMI CONFERENCE , MAY 3 – 4, 2007<br />
The Bankers Club, Miami, Florida