January 30, 2020

Joint Congressional Commission approves Tax Modernization bill

Joint Congressional Commission approves Tax Modernization bill
Finance Minister Ignacio Briones emphasized that the project favors investment, simplifies the tax system and, once in full force, will raise US$2,200 million in a progressive manner.

Finance Minister Ignacio Briones highlighted the Joint Congressional Commission’s approval of the Tax Modernization bill by eight votes to one.   

“That is transversal support. I would like to thank both the Senate and the Chamber of Deputies very sincerely because we have achieved a good agreement. I am grateful to the deputies, who played a fundamental role in this Tax Modernization bill, which conserves the original bill’s general structure and improvements regarding simplification and legal certainty, and to the senators because we achieved a framework of understanding and an agreement on substantive issues on which we all had to give ground,” he said.

In particular, Minister Briones valued the disposition of the president of the Senate Finance Commission, Ricardo Lagos Weber, who, he said, “played a very important leadership role in both the form and timing of the bill’s passage”.

Minister Briones stressed that, once in full force, the bill will raise US$2,200 million, or close to 1% GDP, doing so in a progressive manner since 55% of the resulting revenues will come from the highest income segment.

He also stressed that the bill favors investment through measures such as instant depreciation for the next two years and accelerated depreciation after that. It also provides an extremely simple framework, which favors MSMEs, and forms of tax treatment for different segments of companies that simplify the current system.

“The tax reform approved today improves our tax system, and also increases revenues,” said Minister Briones.

The bill will now continue its passage through Congress. The agreement reached today has to be ratified by the floor of the Chamber of Deputies and the Senate.

The bill’s measures

The measures included in the bill are as follows:  

-      Pro-SME regime: incentive for entrepreneurship

The bill establishes a new Pro-SME Regime, which improves current benefits for micro, small and medium-sized businesses, simplifies tax compliance and introduces measures that facilitate access to financing. It will benefit more than 1 million SMEs and reach 100% of them.

The Pro-SME Regime will be 100% integrated, with a reduced First Category Tax rate of 25%, and will automatically apply to companies whose average annual income in the last three years has not exceeded 75,000 unidades de fomento (UF).

It also offers an optional tax transparency regime for those owners of SMEs who are natural persons. In this case, the company will not pay tax and its owners will pay personal tax directly on the company’s income. As a result, these companies could be exempt from income tax if the owner is in the brackets exempt from Global Complementary Tax.

-      Single semi-integrated regime for large companies

The project simplifies the tax system for large companies by establishing a single semi-integrated system with a rate of 27%, eliminating the current coexistence of three (parallel) regimes that complicate the administration of tax obligations and compliance with them.

Under the single semi-integrated system, company owners will pay their final taxes when making a withdrawal or receiving distributed profits. The 27% rate of First Category Tax will serve partially as a credit against the final taxes of business owners, who will be liable to a tax rate of up to 44.45%.

-      Measures to encourage investment

The measures designed as an incentive for investment are:

-      A regime of instant depreciation of 50% of the value of new or imported fixed assets acquired between 1 October 2019 and 31 December 2021, and accelerated depreciation of the other 50%. The bill also envisages 100% instant depreciation for projects in the Araucanía Region.

-      A reduction of approximately six months in the period for receiving reimbursement of the VAT paid on investments in fixed assets.  

-      The prolongation until 2035 of benefits for remote areas of the country that were due to expire in 2025.


-      Reduction of property tax for senior citizens

The bill benefits more than 100,000 senior citizens by reducing the property taxes to which they are liable. In the case of those whose income is in the bracket exempt from Global Complementary Tax (approximately 650,000 pesos per month), there will be a reduction of  100% while, in the case of those in the second bracket (approximately 1.5 million pesos per month), there will be a reduction of 50%.

In addition, the ceiling on the assessed value of the property of senior citizens eligible for this benefit will be raised from 75 million pesos to 128 million pesos and, if the senior citizen owns more than one property, the combined limit will be raised from 100 million pesos to 171 million pesos.

-      Progressive levying measures (so that taxpayers with a higher income contribute more revenues)

The Tax Modernization bill includes the following progressive measures:

-      New Global Complementary Tax bracket with a rate of 40% for monthly incomes of more than 15 million pesos.

-      A surcharge on property tax on a person’s real estate assets when their assessed value exceeds 400 million pesos.

-      A regional tax of 1% applicable to new investment projects of more than US$10 million that must be reviewed by the Environmental Impact Evaluation System.

-      A restriction on tax benefits for earnings on the financial market.


-      Taxpayer Defense Service (DEDECON)

The bill introduces a new institution to ensure protection of the rights of taxpayers, especially the smallest SMEs and the most vulnerable individuals.

It will provide its services free-of-charge, advising taxpayers, acting as a mediator between them and the National Tax Service (SII) and issuing recommendations when their rights have been infringed.

In addition, it will be able to represent natural persons with monthly incomes of up to approximately 1.5 million pesos and SMEs with annual revenues of up to approximately 5.6 million pesos in complaints to the SII.

-      Digitalization

Relations between taxpayers and the SII will be digitalized and digitalized enforcement measures will be introduced. For this purpose, the bill allocates US$10 million to strengthen the SII technologically.

Electronic invoicing will become compulsory (making it possible to reduce evasion and collect an additional US$934 million in revenues).

Digital services provided from overseas will become liable to VAT, putting them on the same footing as traditional foreign trade.

-      Tax certainty

The bill will strengthen taxpayers’ rights, provide new resources for their protection and equip the SII with new powers, based on the use of technology focusing on prevention and collaboration. This will, for example, permit rapid voluntary rectification by the taxpayer after being contacted through the expedited means determined by the Director of the SII.