Chile: The first stage of tax reform enters into force
In early 2022, the Chilean Government announced a major reform of the tax system which main purpose was to generate resources to fund the main social programs, particularly pensions and health system. As part of this effort, a comprehensive tax reform bill was introduced in July 2022. The proposal sought to amend various laws, including the Tax Code, Income Tax Law, Sales and Services Tax Law, and the Inheritance and Donations Tax Law.
The proposal was ambitious and structural in nature, targeting enhanced tax collection. Key changes included the elimination of exemptions, the introduction of new taxable events, and restrictions on corporate reorganization rules. However, after extensive debate, the bill was totally rejected by the Chamber of Deputies. Consequently, due to constitutional legislative rules in force, no similar proposal was possible to submit by the Government for at least, one year.
Considering that a “no consensus scenario” existed in the Parliament on discussing increase of tax burden, but with the need to incorporate tax changes in the system, the Government decided to split the tax reform into two parts:
1. A Tax Compliance Law focused on reducing tax evasion and avoidance.
2. A future proposal to reform income tax comprehensively.
The initial legislative stage of Law No. 21.713 (Tax Compliance Law) began in January 2024. After the legislative discussions, it was approved in October 2024, and it came into force on November 1, 2024.
Key features of the Tax Compliance Law:
Even though Tax Compliance Law introduces several important amendments, in our opinion the most important are the following:
1. General Anti-Avoidance Rule (GAAR). While initial proposal was to allow the Chilean Internal Revenue Service (SII) to directly declare tax avoidance, the existing system remained. Under this system, only a tax court can declare avoidance, based on a request from the SII Director and recommendations from an Executive Committee.
2. Bank Secrecy. Efforts to enable SII to lift bank secrecy without judicial authorization were not approved. However, procedural modifications have streamlined the process.
3. Reorganization Rules. New requirements limit the SII appraisal faculty for certain reorganizations, such as asset contributions, conversions into sole proprietorships, and international reorganizations. For transactions in jurisdictions with preferential tax regimes, the SII retains full appraisal authority.
4. Relationship Rules. The scope of related-party rules was expanded to include, among others, blood relatives up to the second degree of consanguinity.
5. Corporate Group Regulations. Definitions of corporate groups were introduced, requiring the appointment of an attorney-in-fact to hold communications with the SII. Additionally, the SII can now conduct unified inspections of companies within the same corporate group.
6. Measures against informality. The new provisions aim to reduce informal economic activities, extending obligations for business registration and activity reporting. Tax withholding requirements were established for platforms facilitating transactions between buyers and sellers.
7. Tax amnesty declaration. A temporary regime for declaring overseas assets and income was reintroduced (similar as was in 2015). A 12% substitute Sole Tax rate applies under this regime.
Amendments and future steps:
After its enactment, the Tax Compliance Law was amended through Law No. 21.716 to address processing errors. These adjustments clarified definitions related to tax avoidance and extended the validity of transitory measures, such as the Tax Amnesty, now extended until December 31, 2024.
The Government has announced plans to present the second phase of tax reform, targeting income tax changes. Although details have yet to be finalized, the proposal has already faced significant criticism, with many predicting it will encounter substantial resistance in the legislative process due to its focus on increasing the overall tax burden.