Chile tax update

Chile has undergone many changes in a very short time. Between social unrest, a tax reform and the pandemic, it is important to keep in mind certain regulations that could help your business, and that we would like to communicate to you:

1. Rules on the quarterly recalculation of estimated Monthly Provisional Payments for business income (“PPM” for its Spanish, Pagos Provisionales Mensuales). Cash flow advantages.

On 24 February 2020, Law No. 21.210 was published that "Modernises the Tax System", modifying the way of calculating PPMs for First Category Tax ("FCT") corporate taxpayers.

Thus, the PPM may be recalculated quarterly when there are significant changes in income, costs or expenses that may affect the determination of the Taxable Net Profits (“RLI” for its Spanish, Renta Líquida Imponible). The percentage change in the projected RLI must be at least 30% compared to the previous quarter, in the same financial year.

In this way, the PPMs to be paid should be similar to the FCT to be paid in April of the following year, without generating great alterations from one year to the next. As the law is very recent, the Chilean Tax Authority has not yet issued a General Ruling that will establish the application of this modification.

For the time being, we suggest preparing a provisional determination of the RLI as of 31 March and 30 June, both 2020 (without inflation adjustment, or non-deductible expenses), to perform the quarterly comparison and prepare an action plan in order to optimise liquidity of the company in this regard.

Additionally, we would also like to take this opportunity to inform you that because of the regulations related to COVID-19, you may request the suspension/cancelation of the PPMs corresponding to the months from April to September.

2. 30-day Term for Payment of Invoices.

As a result of a regulation which came about due to COVID-19, the 30 day Invoice’s Payment Law (Law No. 21.131) anticipated entered into force. The aforementioned Law states that all invoices issued after 1 April 2020, must be paid within a maximum period of 30 calendar days from receipt, after which, it is understood that the debtor is in default, accruing interest and giving rise to compensation for recovery costs.

Exceptionally, the parties may agree in writing to a longer period, provided they comply with the legal requirements, sign an agreement and register it with the Ministry of Economy within five business days and record the longer term in the invoice.

We understand that both the signing of the corresponding agreements, as well as the legal, accounting and tax treatment of the corresponding interest, and other aspects derived from the Law, will be of great importance in the coming months, whether you are a creditor or debtor.

3. Tax Regime for Small and Medium Enterprises (SMEs). Explanation, recommendation and effects of the transition.

On or before 30 September 2020, taxpayers will have the right to choose to be subject to the new tax regimes established within the 2020 tax reform. Among these, the new tax regime for SMEs stands out, which determines taxable profit, as a rule, based on income received and expenses paid and requires to carry full accounting records with the possibility of opting for a simplified accounting system.

Taxpayers which meet the requirements to file under this regime will be subject to the FCT with a 25% rate and their owners will be taxed with a final tax (that is, Surtax or non-resident withholding tax), based on dividend distributions, with full credit allocation for FCT (100% and not only 65%). Alternatively, under certain conditions, the SME could opt for a tax transparency regime, in which its income would not be taxed with FCT, but whose owner would be taxed directly with final tax.

In short, the timely analysis of the following is of vital importance:

1. whether your company can benefit from the SME tax regime, or its tax transparency, one of the main requirements being not to exceed an annual level of gross income in which the income of its related companies must be included;
2. the move from the 14 A (attributed) or 14 B (semi-integrated) regime – currently applicable to your company - to the SME tax regime (or general regime, if applicable); and
3. the various benefits of this new SME tax regime versus the pre-reform situation.

4. Request to keep accounting ledgers in foreign currency for tax purposes. Avoid the tax impact due to the exchange rate.

Because of the social unrest which began in October 2019, as well as the current pandemic of COVID-19, it is no surprise that the volatility of the US dollar (USD) to Chilean peso (CLP) exchange rate has recorded all-time highs in recent months.

As FCT taxpayers are generally required to keep their accounting records in CLP for tax purposes, they must recognise a tax profit or loss for the exchange rate difference with respect to their assets and liabilities declared in foreign currency at the end of the year.

Therefore, if the taxpayer's functional currency is, for example, USD, this may have a significant tax impact due to monetary correction. Said effect can be avoided to the extent that the taxpayer is authorised to keep accounting ledgers in foreign currency for tax purposes. The authorisation is granted by the Chilean tax authority upon request, provided that it is proven that it is within one of the scenarios that the law contemplates.

Uncertainty about what the relative value of Chilean currency will be over the next few years relative to the USD (and the Euro, mainly), makes it advisable to eliminate this non-operational tax gain/loss.

5. New advantages of 27 bis and submission of requests.

The tax reform introduced some improvements to the procedure for requesting the refund of the VAT tax credit remainder from the acquisition of fixed assets, aimed at facilitating and expediting their refund.

In particular, the time necessary to maintain the VAT credit is reduced (from a minimum of six to a minimum of two months), as well as the waiting times for a response from the Chilean tax authority.

CMS Carey & Allende has the knowledge and practical experience to support you in these matters. We would be delighted to review your particular situation and offer the best action plan before the tax authority, so that procedures are efficient and successful.