Bill to create a tax on large fortunes in Chile
In order to finance a basic emergency income, aimed at people which income have considerably reduced as a result of the health and economic crisis caused by the coronavirus, deputies presented a constitutional reform project whose purpose is to incorporate a 2.5% tax, to be paid once only by individuals domiciled in Chile who, on 31 December 2019, had gross assets – that is, assets in Chile and abroad, without reducing liabilities – equal to or greater than US$ 22 million. If the bill is approved under the current terms, the people on whom the tax is payable will have a period of one month to pay the tax as it is published.
It should be noted that the project requires a constitutional reform -not a simple law- because, on the one hand, taxes are matters of exclusive initiative of the President of the Republic, and parliamentarians cannot initiate law projects on these matters, and, on the other hand, because the Constitution (Article 19 No. 20) guarantees that taxes are applied respecting the equal distribution of taxes in proportion to “income”.
The bill is in the first stage of discussion, may be subject to amendments and has been criticized for its possible unconstitutionality. The bill is expected to raise about US$ 6.5 billion. However, other countries’ experience with taxes of similar characteristics has not been successful..
Chilean IRS interpretas the new concept of “necessary expenses” to generate income
Chilean IRS published an interpretative resolution regarding the new concept of “necessary expenses” deducible from taxable income, incorporated by Law No. 21,210 that Modernizes Tax Legislation (Tax Modernization), as well as specially accepted expenses, expenses not accepted and expenses rejected subject to the sanction tax (rate 40%).
It should be noted that the new concept of necessary expenses establishes that disbursements “which have the capacity to generate income, in the same or future years and are associated with the interest, development or maintenance of the business line” can be deducted. Provided that the expense complies with the general requirements, the Chilean IRS recognizes that disbursements associated to business’ risk, maintenance of the line of business and welfare of the employees, among others, may be deducted from the taxable income (examples, defense in court, celebration of public holidays and workers’ strike).
Among the especially accepted expenses referred to in the resolution, the modifications incorporated to uncollectible accounts and the new disbursements of corporate social responsibility and objective responsibility should be highlighted.
Tax treatment of international mergers when the foreign company is the absorber
Considering that Chilean law does not provide for the redomiciliation of companies, the Chilean was asked on the tax effects of a merger between a Chilean parent company, and a foreign subsidiary, in which the latter is the acquiring company. The Chilean IRS interpreted the following:
a) With respect to the Chilean company being absorbed, its full (and not simplified) termination of business must be requested;
b) In this case where the shareholders of the absorbed Chilean company were other Chilean companies, the retained earnings of the absorbed company must be incorporated into the records of the shareholders of the absorbed company, which must maintain a separate register from the shareholders to which the distributions from the absorbing foreign company are attributed;
c) The assets of the absorbed Chilean company are not deemed to be assigned to its partners or shareholders, since they were acquired by the foreign company; and,
d) The rights acquired in the foreign absorbing company maintain a tax cost equal to the rights or shares in the absorbed company, without the shareholders of the absorbed company having to recognize any capital gain.
Drilling services for mining operations are not subject to VAT
The Chilean IRS was asked whether or not the drilling service (consisting of small diameter and large length drilling to reach areas inaccessible from the surface) is taxed with VAT, it was resolved that core or diamond recovery drilling is not a service that is taxed with VAT.
Concept of “automatic data processing”
By a decision on May 19, 2020, in a split vote (3-2), the Supreme Court rejected the appeal filed by a taxpayer regarding the decision of the Court of Appeals that confirmed the ruling of the Tax and Customs Court, establishing that the collection and recovery service provided should be taxed with VAT because it is an automatic data processing service.
According to the court’s criteria, ratified by the Court of Appeals and the Supreme Court, such service, since it was computerized, includes the digitalization, typing, storage and contrast for information validation. Consequently, there would be a transformation of the data, which acquires an added value by having been validated, ordered and grouped; in other words, an automatic data processing is performed. Not only that, but the ruling states that even though data processing (consisting in this case of information storage and consultation) would not be fundamental to provide the collection service, the law does not distinguish between data processing with greater or lesser importance, so all such collection service should be taxed with VAT.
Under this broad concept of automatic data processing, most services that include the processing of information or the computerization of data should be taxed with VAT. Consequently, and in case the Chilean IRS extends this criterion, the modification incorporated by the Tax Modernization to the concept of “service” in the VAT Law acquires special relevance, since it specifies that in the case of a service that includes partly affected and partly non-taxed or exempt provisions, VAT should be determined only with respect to the affected provision; and if it is not possible to individualize each provision, the total value of the service will be taxed with VAT, a situation that should be reviewed on a case-by-case basis.