Last week, Chile’s President Michelle Bachelet signed legislation that would reform much of Chile’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system in order to raise tax revenue for the country.
This law would raise the top corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 20 percent to 27 percent by 2017.
The law also creates a separate corporate tax regime that would start taxing corporate dividends on an accrual basis. This is in contrast with their current system, which levies a tax on shareholders only when dividends are distributed. The new Chile law will deem profits distributed at the end of each year, subjecting it to a 35 percent tax rate (after a credit for corporate taxes already paid). This doesn’t only hit domestic shareholders, but it also hit foreign investors as well.
Chile also introduced a carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. , which is estimated to raise approximately $160 million.
There are other smaller changes to how capital gains are calculated, full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for certain businesses, doubling of stamp taxes, a minimum tax on foreign earnings, introduction of CFC rules, and an end to loss carrybacks.
Overall, this is meant raise approximately 3 percentage more in tax revenue as a percent of GDP annually to pay for expanded social services.
While it is typically not news that a non-U.S. country makes significant changes to its tax code, it is atypical for a country to actually raise its corporate income tax rate or taxes on investment. In the past few decades, countries in the OECD (Chile is a member), have continuously lowered corporate income tax rates to become more attractive to investment. Chile is now working against this trend and will actually have one of the highest corporate income tax rates in the developed world and will have a less attractive business tax environment.
Unfortunately for Chile, this will likely have a negative effect on investment and growth, especially considering that the tax changes hit foreign investment significantly.
More on Chile’s Tax Reform: HereShare