Treasury Ministry Officials emphasize that Chile’s tax reform will have a broad impact on the fairness of the tax system

The Treasury Minister, Rodrigo Valdés, together with the Treasury Undersecretary, Alejandro Micco, emphasized the tax reform’s effect on the fairness of the country’s tax system.

The two officials participated in the World Bank seminar “Fiscal Policy and Income Redistribution”, where the study “Chile: Distributive Effects of the 2014 Tax Reform” was presented.

The World Bank study indicates that “the Tax Reform has a positive impact on income distribution and sharply improves the fairness of the tax system”, because “the effects are strongly concentrated in the upper end of the income distribution curve and are reflected in a substantial increase in the effective income tax burden for the highest percentile in this distribution.”

The report also maintains that the highest-earning percentile “will pay 93% of the increased tax revenue collected because of the changes to income tax.” Of the total collected, “73% comes from increased taxes paid by the wealthiest 0.1%.”

Minister Valdés stated that “the results demonstrate that the income tax changes have a positive impact on income distribution and significantly improve the fairness of the tax system.” He also highlighted that “the effects of the new tax system are strongly concentrated in the upper end of the income distribution curve, specifically the wealthiest 1% of Chile’s population. “Certainly, the ultimate effect of the changes we are implementing will have a substantial impact on equity; the exact scale of this impact will be determined by our ability to spend these resources appropriately.”

Rodrigo Valdés added, “the results of the study are completely in line with the proposed objectives, since the reform will have a broad impact on the fairness of the tax system.”

During his presentation, Undersecretary Micco explained the features of the new tax system being implemented and reiterated that the bill to simplify the reform will be sent to congress in early December.

He explained that the simplification bill maintains the two tax regimes: the semi-integrated system and the attributed income system. However, companies with complex corporate structures may only choose the semi-integrated system. He added that companies whose partners are individuals who reside in Chile may choose between the attributed income and semi-integrated systems. “That considerably simplifies the system,” he said.
The undersecretary also mentioned that some adjustments will be made to simplify the tax records that taxpayers must keep and more specifically define some aspects of VAT application in real estate matters.

Along with thanking the World Bank and the entire team of experts that contributed to the study, the Minister commented that this reform “is probably the most significant transformation of the tax system in the last 30 years.” As part of the implementation process and in order to determine the extent to which the objectives set for the reform are being met, we must have studies from independent organizations with high standards of quality and technical accuracy in order to evaluate its impacts.”

The Treasury Minister explained, “at a time when commodity prices are continually dropping and the boom cycle we experienced for 10 years is clearly coming to an end, this reform has demonstrated its importance. At several events and during budget debates , I have repeatedly said that without the tax reform this year spending could have grown by only 0.5% for the year, rather than the 4.5% proposed in the 2016 budget bill.”

He insisted that “this is not only about fiscal revenue. As demonstrated by the results of the World Bank study, this reform allows us to make progress with tax fairness and will help improve income distribution. The increased revenue collected by the tax reform will also help our country maintain one of its greatest assets: orderly public finances and fiscal responsibility. This gives companies and individuals, for example, access to much cheaper lending than in other countries.”

Implementation

Regarding the implementation of the tax reform, Minister Valdés said his teams are working to make the process as smooth as possible. “We are moving forward at a steady pace to maintain healthy public finances and we are creating room for the economy to gradually adjust to the changes. We are also committed to a tax reform without excessive transaction costs and, therefore, one that is not too complex,” he added.

As a result, he highlighted that “we are preparing technical adjustments that simplify operations and specify some contents of the law, without modifying the substance of the reform. The bill with technical adjustments that we are to send to congress soon is designed to facilitate tax compliance, reduce the administrative costs of applying the reform and provide greater certainty to taxpayers, while protecting the tax reform’s objectives.”