January 30, 2020

Senate approves Tax Modernization bill and is now ready to be promulgated

Senate approves Tax Modernization bill and is now ready to be promulgated
The project raises revenues in a progressive way, fosters investment and simplifies the tax regime for SMEs.

The Senate unanimously approved the green tax article of the Tax Modernization bill, which is now ready to be promulgated. 

 “This is a powerful signal for the country, that we can reach agreements. It is a bill that raises revenues and does so in a progressive manner from higher-income segments,” said Briones. “With this, we will have a simpler, better and more efficient tax system than the one currently in force,” he added.

 He also stressed that the project “fosters investment and simplifies the tax regime for SMEs”.

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.