Bachelet’s tax reform bill submitted to Congress
President Michelle Bachelet submitted a significant tax reform bill to Congress on 31 March 2014. The bill's primary aim is to increase tax revenues in order to finance public education. The bill also intends to simplify the tax regime and correct perceived deficiencies in existing tax rules.
The bill would raise tax revenue by $8.2 billion, or 3% of GDP, including an increase in the corporate tax rate to 25%, up from 20% by 2017. Of the 3 percent, 2.5 % will come from new taxes, while 0.5% will be a result of anti-avoidance and anti-evasion measures. This revenue will fund higher spending on education and health care, while enabling the government to balance the budget by the end of its four-year term.
Bachelet?s aims are to:
- Raise taxes to finance current and future expenses. This initiative seeks to improve social equality by way of tax equity
- Create new and better ways to stimulate savings and investment
- Include mechanisms to reduce tax avoidance and tax evasion
- Fall in line with practices promoted by OECD countries, generating sustained growth, and reducing the income gap between Chileans
Key aspects of the bill:
1. Change income tax. It seeks to gradually raise the corporate tax rate, from its current rate of 20 %, to 25% in 2017.
2. Eliminate the tax deferral mechanism called Fondo de Utilidades Tributarias (Taxable Profits Fund), or FUT, that was created in 1984. The proposal would eliminate the FUT as of 2018.
3. Reduce maximum personal income tax rate from 40% down to 35%.
4. The 5% drop in personal income tax will not apply to some government and political authorities.
5. An ?Accelerated Deduction? mechanism to encourage investment. This mechanism would mainly benefit companies with investments in physical assets, such as the mining and energy industries.
6. Current accelerated deductions could be endorsed to the benefit of companies and their partners.
7. Changes in the VAT to benefit smaller companies.
8. Special taxes and indirect taxes.
9. Specific taxes to finance environmental initiatives.
10. Stamp tax to rise from 0.4 % to 0.8%.
11. Measures to enhance the supervisory powers of Chile?s Internal Revenue Service (SII) and agencies such as Customs and Treasury.
12. Tax code to include an anti-avoidance provision.
13. Decree Law 600 for transferring capital into Chile to be repealed as of 1 January 2016.
The most controversial aspects of the reform proposed by the Bachelet Administration concern the elimination of the FUT (?Key aspects? #2 above) and the DL 600 (#13). In the case of the FUT, political opposition and business associations argue that it will impact investments, particularly SMEs. In the case of DL 600, its critics point out that it will have a negative effect on FDI.
On the political front, the reform has already generated debate and controversy not only between the opposition and the governing coalition, but also among members of the latter. Senator Ricardo Lagos Weber, Chairman of the Finance Committee, declared that it would take at least six months to pass the reform and warned that the Senate will not tolerate any pressures to pass it in a hurry. The Chairman of the Finance Committee of the Lower House, Pablo Lorenzini, responded that the reform needs to be passed as soon as possible. An agitated congressional debate is to be expected. But opposition lawmakers do not have much leeway to modify the bill, since the government only needs a simple majority for its approval.
Some members of the opposition have said that the reform package could slow investments.
Most analysts believe that, due to the slowdown of the economy (the Central Bank has reduced its GDP growth forecast for 2014 from 3.5-4.5 to 3-4%), the reform will fall short of expected revenues. The Minister of Finance has said that the reform is expected to collect US$ 8.2 billion when fully implemented but analysts believe it will fall short of at least US$ 1.5 billion. If so, the administration will be faced with two alternatives: a) reduce social expenses or b) increase taxes again. The first option would be politically complex. Although nothing has been said about the Specific Mining Tax so far, if the Administration opts for the latter option, the SMT would be a likely target.
Tax raise on sugary drinks
The bill also includes a tax increase on sugary drinks--a specific tax on soft drinks called IABA (its acronym in Spanish) from 13% to 18%. This aspect of the bill triggered reactions from the soft drinks industry and a drop in shares of the leading soft drink producers in Chile: CCU, Embonor, and Andina.
The current IABA tax and the VAT amount to 32%. With a higher IABA, the total figure will raise to 37%.
The Minister of Finance, Alberto Arenas, clarified that this new tax will only affect nonalcoholic sugary drinks that are sweetened with sucrose (table sugar), not those labeled Light, Diet, Zero, etc., which will continue to be taxed at 13%.
The sale of non-alcoholic drinks (sugary and not sugary soda, sports drinks, juices, bottled water, etc.) has been on the rise, and grew by 3.9 % between Jan. and September 2013. Sugary juices alone grew by 15% in the same period, with sales of 221 million liters.
Why are authorities raising taxes on sugary drinks?
National authorities are trying to fight some serious health problems, such as obesity and diabetes, which affect large segments of the population. It was expected that the arrival of Michelle Bachelet to the presidency would bring greater emphasis on public health issues. According to a report by the FAO (the United Nations Food and Agriculture Organization) published in late 2013, Chile leads in childhood obesity rates with 9.5%, surpassed only by Peru (9.8%) and Argentina (9.9%).
In addition, Chile ranks 8th among countries with the highest prevalence of obesity in adults older than 20 years of age (29% of cases).
The average percentage of obesity in Latin America among adults is 23%. This figure rises to 61% when including the overweight population.
Some lawmakers, led by Senator Guido Girardi of the ruling coalition Nueva Mayoría, have been pushing for changes in procedural rules of the Food Labelling Act, to raise public awareness of nutrition facts by making more detailed information available on the exact index of fat, salt, and added sugars in every food product
Stricter policies in this area are part of a regional trend. For example, the Latin American Parliament is said to be promoting stricter regulations on advertising and labeling of junk food in countries of the region.
The industry?s views
The National Soft Drink Association of Chile (ANBER) has been asking the authorities to eliminate the Additional Tax on Non-alcoholic beverages (IABA). They are questioning why the tax increase targets select ingredients only (such as sugar) and do not include other ingredients which may also have a negative effect on health (such as sodium and fat). They are also arguing that there is no direct correlation between the intake of sweetened beverages and obesity. Some representatives of the industry have claimed that IABA is a regressive tax because, in their view, it is harder on low income families which are the largest group of consumers of these products.
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