We start a new year with interesting tax issues such as, trades on reinvestments, regulation of current tax registers, exchange rate differences as of December 2020, the second withdrawal of pension funds and eventual reforms that we can expect during this 2021.
The Chilean IRS referred to the tax treatment of the assignment to an individual company of the partnership, acquired by an individual through reinvestments made during the years 2014 and 2015, and the subsequent conversion of such individual company into a corporation. In this respect:
(i) in the assignment of the partnership to the individual company there is no alienation, so the amount reinvested is not considered as a taxable withdrawal of the individual;
(ii) in the conversion of the individual company into a corporation there is a sale and, consequently, a distinction must be made between: on the one hand, reinvestments made up to December 31, 2014, which are not considered to be withdrawn, and on the other hand, those made as from January 1, 2015 and up to December 31, 2016, in which case they must be considered withdrawn and taxed with Final Taxes.
Regarding the tax cost of the partnerships, the reinvestments are considered to be part of this cost for the individual company; however, when the conversion occurs, the part acquired with reinvestments during the 2014 fiscal year must be deducted from the tax cost.
Additionally, the Chilean IRS referred to the obligation to deduct from the tax cost of social rights those amounts that have not paid tax, including reinvestments, specifically when such reinvestment was made on the occasion of an excess withdrawal of FUT and FUNT from a corporation that had terminated its business, pointing out that in such case the reinvestments financed with excess withdrawals should not be deducted from the tax cost.
Tax Records and Final Taxes
The Chilean IRS’s circular regulates the tax records that must be kept by taxpayers of the General Taxation System, established in Article 14 of the Chilean Income Tax Law, that is, Corporate Tax payers who declare effective income according to detail accounting. The circular refers to the orders of allocation, taxation with Final Taxes, business termination, among other matters.
Even though the law does not expressly provide for it, the Chilean IRS has interpreted that the income received by a Corporate Tax taxpayer subject to the General Regime from a taxpayer subject to the SME Regime, is subject to the obligation of refunding 35% of the Corporate Tax when it is assigned as a credit against Final Taxes. If the same income is received by a taxpayer of Final Taxes or another taxpayer of the SME Regime, it may use as a credit the totality of the Corporate Tax, without obligation of restitution.
Exchange rate differences
The value of the dollar at the end of business year 2020 is lower than at the end of business year 2019, so all those taxpayers who keep accounting in Chilean pesos and who must apply monetary correction to their assets and liabilities in dollars, could suffer a tax loss derived from the correction of such assets and a gain in respect of the liabilities, with incidence in the calculation of the taxable liquid income.
Second withdrawal of 10% of the pension funds
On December 10, 2020, was published the law that allows members of the private pension system to withdraw, for the second time, 10% of the funds accumulated in their individual capitalization accounts.
The withdrawal cannot exceed UF 150 (approximately USD 5,900) or be less than UF 35 (approximately USD 1,300), the latter provided that the available balance allows it, otherwise 100% of the savings can be withdrawn.
Depending on the affiliate’s income, this second withdrawal may or may not have the nature of non-taxable-income. To the extent that the income affected by the Final Tax in the year in which the withdrawal is received by the person exercising the option is equal to or less than UTA 30 (approximately USD 25,000), it is a non-income income. If the income affected by the person in the year, he receives the withdrawal exceeds UTA 30, it must be added to the Final Tax base the totality of the withdrawal and pay tax on it according to the general rules.
It is important to note that the limit of 30 UTA must be considered in the year the income is received and not the year the withdrawal is made. Consequently, if the request is made in one year and the payment is received in two installments in different years, the limit and eventual tax in the years of receipt of each installment must be determined.
Although during the discussion of the bill it was proposed the possibility of limiting the destination of the funds withdrawn, for example, to avoid them being used for voluntary savings programs (APV), such restrictions were not approved, so there is total freedom to dispose of the funds once withdrawn.The request for the second withdrawal can be made until December 9, 2021.
New developments in tax matters
To date, there are no bills promoting major tax reforms. However, the Minister of Finance has indicated that such projects are in preparation and should soon be entered into discussion in Congress.
The first of these would unify the donation system in Chile. There is already a project that was entered into Congress in March 2014, whose discussion did not advance from the first constitutional process (Bill No. 9266-05). In a recent meeting held between the Minister and representatives of the main study centers in the field, the first one committed to introduce a new bill during the month of March 2021, to establish a single law on donations that would strengthen civil society in Chile.
Additionally, since October 2019, the need to review tax exemptions and special income regimes in Chile is being discussed. However, this discussion has taken on special emphasis during the last month following the publication of the study commissioned by the Ministry of Finance to the International Monetary Fund in conjunction with the Organization for Economic Cooperation and Development on tax expenditures in Chile. Although the bill is expected to enter Congress in June 2021, when the Minister was consulted on the matter in a meeting with Universidad Católica’s MBA alumni, he expressed his opposition to the need for a presumptive income regime in Chile, so it is expected that there will be modifications on that subject