Sebastian Piñera’s Proposal – Relief to the Corporate Tax Burden?
Written by Miguel Guerrero, Senior Tax Lawyer
Sebastian Piñera is leading the most recent polls to become Chile´s next president. This could mean changes to the reforms that the current administration has been pushing forward the last 4 years. It could calm some of the pessimism that has surrounded the economy, especially when it comes to new investment projects.
Last month, Piñera published his economic plan for the country, which highlighted his basic proposals concerning the overall tax burden on companies as well as his plans for the countries debt. There are still no specific measures, however, the basic proposals and general ideas are already on the table for discussion.
Below we refer to the most recent points promoted by his campaign:
Create a new, simple, and unique tax system, pro-growth, pro-investment and pro-employment.
The tax reform introduced by the current administration in 2014 created two different tax systems that were complex to implement. In fact, during 2015, there was a new law introduced to simplify the reform, and in a way, relieve the new tax burden created by the changes.
On the other hand, corporate tax rates have risen during the last years from 20% to 25% and now to 27% for 2018 (depending on the tax system the taxpayer has chosen or has been granted by default).
In this regard, Piñera´s campaign has proposed the following:
- Gradually refund the taxes paid at the company level with the taxes paid by the shareholders or partners of the same. This measure seems to indicate that Chile will go back to the original tax system that was in place before Bachelet`s tax reform, where shareholders could use 100% of the taxes paid at the company level as a credit when paying their own personal taxes. In other words, it intends to go back to a fully integrated tax system.
- Reduce and simplify the administrative burden of the tax reform and grant greater legal securities to companies and individuals. All though yet not all that clear, everything indicates that Chile will go back to a single general tax system, unlike today, were we have two different general tax systems.
- Establish incentives that shall reactivate investment, favouring small and middle size companies, and should reactivate innovation and entrepreneurship as a priority.
- Gradually converge the corporate tax rate to the OECD average (currently averages around 24%).
- Guarantee a fiscally responsible policy, maintaining the current level of tax collection. In this regard, it has been also said that the total collection of taxes shall not decrease and any cutbacks should be balanced with the extra growth expected for the next 4 years.
Recover Fiscal Responsibility.
The tax reform driven by Bachelet was supposed to finance the full cost of university for all students, regardless of their wealth or economic situation. As of now, it has only reached 60% coverage of the most needed students.
Piñera´s proposal should limit fiscal expenses which have put pressure on the private sector. There is no intention to go back to the original plan of financing 100% of the students which means a significant debt pressure for a country such as Chile.
In this regard, Piñera`s proposal points out the following:
- To reallocate expenses from poorly evaluated programs and reduce expenses in the new administration such as government salaries, travel expenses, overtime and advisors fees.
- Gradually move over the next 6 to 8 years to a balanced budget where structural revenues and administrative expenditures are equal with the goal of stabilizing and then reducing the levels of public debt compared to GDP.
- Improve and institutionalize the fiscal rules to ensure the country maintains fiscal credibility. This shall be done by reducing the administrations’ current debt, that although is still within healthy margins, has increased over the last 4 years.
The presidential election has two rounds if no candidate can win more than 50% of the votes. The first one is set for the 19th of November. Most likely there will be a runoff between the two most popular candidates and second final vote will be required on the 17th of December.
So far all polls indicate that Piñera is leading followed by the successor of the current administration, Alejandro Guillier.
Nothing is set in stone, however, financial markets have already priced in Piñera as the next President.
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