Overview: Chile

Contributed by Schwencke & Cia

Sanitary and economic crises are challenging Chile’s modernization. Great leadership to guide Chile in combining the right experiences from the past and adapting the country to new demands and reality will be needed to overcome social and economic difficulties Chile is currently facing.

Chile is generally regarded as South America’s most stable and prosperous country, renowned for competitiveness, political stability, economic freedom, and low perception of corruption. Its market-oriented economy, based on a neo-liberal model implemented in the 70’s, is characterized by a high level of foreign trade, open market policy and sound financial institutions and policy. Chile is member of the OECD, being the only South American member (together with Brazil) with a GDP worth USD$282.3bn, and a GNI of USD$15,010, similar to countries like Poland or Croatia. It has the second-lowest tax burden in the OECD and the government maintains a tight rein on fiscal spending, ensuring the highest credit rating among the major economies of Latin America. It is an active member of the Pacific Alliance, the principal regional multilateral trade platforms, and has bilateral free trade agreements with basically all of the major economies in the world.

Being primarily a mining-based economy, Chile enjoyed for several years high economic growth figures of about 5%. Growth rates were, pre-COVID-19 , between a more modest 2% and 4% and similar rates are expected for 2021.

Chilean economic policies favor foreign investments. FDI increased by 63% from USD$7bn to USD$11bn in 2019, sustained by investment in utilities, mining and services. FDI stocks reached USD$268bn, a rise of more than USD$100bn if compared to 2010. Investments are mainly oriented towards mining, finance and assurance, transportation, energy and manufacturing.

The coronavirus crisis and simmering discontent over inequality in a neo-liberal economic model have forced the conservative government under President Sebastian Pinera to adopt measures that both allow for political reforms and stimulate the economy. It announced a constitutional referendum which will be held in October, which may lead to a new model that minimizes social disparities and equalizes the distribution of wealth, and is in the process of implementing a fiscal stimulus package worth USD$11.8bn (4.7% of GDP) to increase productivity and innovation in key sectors.

The stimulus package covers, among other things, increased investment in infrastructure, implementing protective measures to protect workers against a loss of income, providing support through tax measures and the creation of social funds and state backed credits. In parallel, the parliament just adopted a controversial reform, not backed by the government, allowing citizens to have 10% of their pensions savings paid out as emergency coronavirus aid and is discussing legislation prohibiting utilities companies to cut basic services (water, gas, electricity and internet) in case of non-payment by their clients. The Central Bank of Chile, for its part, reduced the fiscal policy interest rate to 0.5% and announced an increase of its bond purchase program of USD$4bn as well as measures loosening regulatory credit requirements.

An injection of over USD$8bn is projected into water and other infrastructure, including short-term projects worth USD$150m starting in 2020. The projects include road maintenance, the building of irrigation systems, drinking water facilities, hospitals, ports, airports, and inland water management systems. Most of these projects will be carried out through private or public concessions and the Ministry of Public Works has already initiated the first tenders in the public health care sector worth USD$2.5bn.

The temporary tax measures, loosened credit requirements and government reliefs include, amongst others: 0% stamp tax rate for credit, financial and refinancing transactions (until October 2020); expenses incurred in Covid-19 related measures will be deductible for income tax purposes; deferral of VAT payable with 0% interest; deferral of annual income tax payment for small and medium sized companies; early return on income tax; deferral of payment of real estate tax; deferral of mortgage backed loans; flexibilization of loan maturities for small and medium-sized companies; increase of the credit capacity of the National Bank to mainly support citizens and micro businesses; creation of a social fund for micro businesses; state support to finance credits for micro businesses; and subsidies and socials fund for citizens without formal employment and unemployment insurance.

In addition, and in order to generate additional resources to the State, opposition deputies of the opposition presented a draft constitutional reform that would allow to establish a capital tax, a project currently under discussion in Congress and which has received strong criticism from experts, taking into account the lack of clarity of the tax to be established, lack of clarity in the determination of the associated tax base and the effects that taxes of this kind have generated in legislation, and that are associated with wealth and capital flight.

Employment and security related measures adopted or underway include: temporary unemployment insurance; the possibility for an employer and employee to agree on a suspension of the labor relationship or reduction of the work hours with a proportional reduction of the salary, cases in which the affected employees access to the benefits of their unemployment insurance; suspension of working contracts in case of a mandate by the competent authority with access to the same benefits; safety obligations to assure the health and wellbeing of the employees. New regulation on ‘teleworking’ (Law N° 21.220) was adopted regulating remote work and work by technological means, establishing rights and duties for workers and employers. The adopted measures have been a relief for employers and employees, as they intend to prevent the termination of the labor contracts and the increase of unemployment, and numerous companies has applied those measures. However, projections show that the companies will not be able to reintegrate all the suspended employees, and will have to dismiss them, in which case their unemployment insurances will be depleted, as they already make use of them during the suspensions.     

On the other hand, aid to large corporations has been difficult. Latam Airlines Group, Latin America’s largest air carrier, sought bankruptcy court protection in New York after the COVID-19 pandemic grounded flights across the region. The government has been reluctant to come to the rescue, very much like other governments in the region, although discussions are ongoing. These discussions seem to stall government support to other large corporations as well.

The implementation of these measures and the direct effects of the economic slowdown on businesses are providing legal practices with a vast stream of advisory work. Additional work comes from significant legislation or legal modifications. Most noteworthy, on a fiscal level, is the adoption in February of law N° 21.210, modernizing the tax legislation. It is aimed to grant certainty to taxpayers regarding audit processes, the possibility of conducting out-of-court transactions in respect of ongoing litigation, and the digitization of processes, among other things. Moreover, it introduced a new tax on digital services provided by suppliers residing abroad, so that depending on the tax quality of the local beneficiary of the service, these will be affected by either VAT (at a rate of 19%) or withholding tax. At the income tax level, a number of amendments are being made, the most relevant being the following: corporate tax of 27% for large companies and 25% for small and medium-sized companies under a simplified income determination system;  the is the possibility for small companies of opting for a ‘pass-through’ system, so that the rents generated by the company are taxed directly at the level of its owners. Other modifications relate to changes to the concept of accepted expenditure for tax purposes; incorporation of legal definitions for the determination of the possible establishment of a permanent establishment in Chile; the establishment of a new entity to support and guide taxpayers; and incorporation of a new tax or contribution applicable at the regional level for certain investment projects.

Other recent or upcoming modifications include a recent update of banking regulations, modernization of the criminal code, and strengthening of anti-trust and anti-corruption regulation, amongst others. In parallel, there is a growing emphasis on compliance, corporate governance, data protection and data privacy, stimulating companies and the business community to adopt higher standards of corporate governance and business ethics. 

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