The Tax Basis just lately launched the 2022 Worldwide Tax Competitiveness Index (ITCI), measuring the complexity and neutrality of nations’ tax techniques.
Over time, Chile has constantly remained within the decrease half of the Index’s rankings, and within the 2022 model of the Index, Chile fell from 26th to 27th (out of 38 nations) on account of a drop in its particular person tax rating and a slight lower in its consumption tax rating.
Chile scores comparatively properly on consumption tax coverage, rating 11th. Greater than 62.6 p.c of consumption is roofed by the VAT and there’s no basic VAT tax exemption threshold. This enables for an total average VAT price of 19 p.c.
Chile has a very weak rating for particular person earnings taxation. On one hand, the tax price on capital features is 40 p.c, properly above the OECD common of 19 p.c. On the opposite, Chile has the second lowest tax wedge on labor amongst OECD nations at 7 p.c, in comparison with the OECD common of 34.6 p.c.
Chile additionally scores badly on its cross-border tax element. Chile has a worldwide tax system, whereas most OECD nations have territorial provisions. Moreover, Chile levies one of many highest dividend and curiosity withholding charges, requiring companies to withhold 35 p.c of a dividend or curiosity fee paid to overseas entities or individuals. These taxes make funding extra pricey each for traders, who will obtain a decrease return on dividends, and for companies, which should pay the next quantity in curiosity or royalty funds to compensate for the price of the withholding taxes. These taxes additionally scale back funds obtainable for funding and manufacturing and enhance the price of capital. Whereas tax treaties between nations can both scale back or eradicate withholding taxes, Chile has a comparatively small tax treaty community of simply 33 treaties.
One other weak spot of the Chilean tax system is its company tax element the place Chile ranks 13th. That is primarily as a result of at 27 p.c, the company tax price is considerably above the OECD common of 23.6 p.c. Nonetheless, as a response to the COVID-19 pandemic, Chile quickly lowered its company earnings tax price to 10 p.c for smaller companies. Moreover, it quickly allowed companies to right away write off investments in buildings and equipment and to right away amortize intangibles.
Boric’s Tax Reform Will Deter Financial Development and Scale back Chile’s Tax Competitiveness
Chilean President Gabriel Boric has launched an bold tax reform plan in search of to lift further income of about 3.6 p.c of GDP. The newest draft of the invoice caps at 50 p.c the present limitless use of carry-forward tax losses, raises the highest marginal dividend tax price from 33.3 p.c to 43.06 p.c, and proposes an extra 2.5 p.c tax on prime of the undistributed income tax. Moreover, the reform additionally proposes a brand new wealth tax and a rise in mining royalties.
If these insurance policies are applied, they may scale back the nation’s total rating within the 2023 ITCI from 27th to 35th (out of 38 nations). The company earnings tax rank will fall from 13th to 17th, the property tax rank will drop from 13th to 25th and the person earnings rank will drop from 34th to 35th. And they may not elevate the three.6 p.c of GDP projected income.
The non permanent insurance policies launched in the course of the pandemic to spur capital funding had been well timed, however non permanent insurance policies are typically not a useful strategy to producing long-term progress. Moreover, the brand new tax reform will wipe out a lot of the Chilean tax code’s few strengths.
As Chile seems to be to the longer term, the accelerated deductions for capital funding prices needs to be prolonged and made everlasting whereas pointless tax hikes on people and capital needs to be prevented. Policymakers ought to give attention to growth-oriented tax coverage that encourages funding, financial savings, and entrepreneurial exercise, growing Chile’s worldwide tax competitiveness.