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Devastating Earthquake Leads to Changes in Tax Measures

27 May 2010

The devastating earthquake suffered on 27 February 2010 has consequently led to changes in governmental tax measures. In order to face damage left by the earthquake the Chilean government announced a complete reconstruction plan. Taxand Chile assesses the tax measures planned and how they will affect multinationals.

The Chilean government has passed a bill that provides several mechanisms that promote donations for the reconstruction of the country should it be impacted by earthquakes, tsunamis and other natural disasters.

On 16 April 2010 President Pi?era announced the reconstruction plan for Chile.

1. Incorporation of a "reconstruction national plan" financed by certain tax amendments.

2. The establishment of several tax incentives in order to promote donations.

Among other financial sources, this program includes the following tax amendments:

(i) a temporary increase of the First Category Tax (corporate tax) rate for tax years 2011 (20%) and 2012 (18.5%), returning to the current tax rate (17%) on tax year 2013

(ii) in order to benefit small and medium businesses, there's been an extension to article 14 of the Chilean Income Tax Law for taxpayers with yearly sales lower than approximately US$ 2 million (currently it benefits taxpayers with revenue up to approximately US$ 350,000) that reinvest up to US$ 100,000. Please note that article 14 provides a special tax regime that allows to defer taxation until profits are distributed

(iii) temporary increase of the specific tax applicable to mining industry, tobacco tax (from 60% to 67.9%) and real estate tax.

In the latter case, a surcharge of 0.25% will be applied to the 5% of the properties with a high fiscal assessment. Additionally, the program mentions a reduction of tax evasion. The bill has not been sent to Congress, and therefore the specific content of the measures is still unknown.

Besides the above, recently the government has proposed to Congress a bill that provides several mechanisms in order to promote donations for reconstructing the country in case of earthquakes, tsunamis and other natural disasters. Amongst other measures, taxpayers subject to First Category Tax (corporate tax) will be entitled to deduct the donated amount from their income taxable basis. If an excess is determined, it may be deducted in the next commercial exercises, duly adjusted. In case of Additional Tax taxpayers (withholding tax applicable on income earned by non-resident neither domiciled in Chile), a special credit of a 35% of the amount of the donation will be granted. Additionally, a percentage of the donation may be deducted as a tax credit against the Estate Tax. In case of donations granted in order to finance specific objectives, the bill contains certain limitations to the aforementioned tax incentives. The bill is currently under review with Chilean Congress.

Taxand's Take

The eventual tax amendments that were recently announced by the Chilean government, if approved by Congress, will directly affect multinationals. Particularly the temporary increase in the corporate tax rate (currently 17%), that has always been seen as a low tax rate by international standards and the mere anticipation of the final tax burden applicable in Chile (35%). Likewise, mining investors will be also affected by any change or increase made to the mining specific tax known as the mining royalty. Foreign investors should follow these developments and discussions by the Chilean Congress very closely.

Your Taxand contacts for further queries are:
Carola Trucco
T. +56 2 378 8933

Cristi?n Sep?lveda
T. +56 2 378 8933

Taxand's Take Author