Problems relating to Trade and Investment on Chile

14. Taxation Systems
Issue	Issue details	Requests	Reference

(1) Tax Treaty Not Ratified	- Compared to ROK (that already ratified the tax treaty) and PRC (that has begun its negotiation), Japan can likely be in subordinate position in the future investment environment. Especially, in the mining business, tax position will be an important factor for investment decision. To the extent possible, it is imperative that Japan begins from the same starting point as the neighbouring competitors. - Direct/indirect investment into Chile from Japan has grown to the level exceeding 1 trillion yen (US). On the other hand, Japanese Affiliated Enterprises (JAEs), unprotected by Bilateral tax treaty with Chile, face the growing risk of double taxation from Chilean administration's severer application of transfer price taxation system. Thus, JAEs face the deteriorating competitiveness against such countries as South Korea (ROK) that have already ratified the Bilateral tax treaty, as regards additional tax levied on external remittance to Japan of dividend and interest relative to loan from Japan (so called withholding tax). Urgency and importance of early conclusion of tax treaty with Chile grow, in order to invigorate Japanese affiliated enterprises' desire to invest in Chile. - Due to the pending ratification of the tax treaty between Japan and Chile, Japanese enterprises need to consider the high risk of tax consequences in entering the bidding.	- Letters of Request have been submitted to GOJ already from Camara Chileno-Japonesa de Comercio e Industria Asociacion Gremial and JCCI. It is requested that GOJ presses on with its tax treaty negotiation with GOC and provides periodic report on its negotiation status. - It is requested that GOJ takes steps as soon as possible to start negotiation toward conclusion of tax treaty. (Chilean negotiator says: "Government of Chile (GOC) is ready and willing to sit at the negotiation table at any time awaiting the Japan side.")	- Chilean Tax Act - OECD Model Treaty Commentary - OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
	(Action) - In April 2002, Chile signed Convention for the Avoidance of Double Taxation ("CADT") with Korea. - In November 2002, Platform Enterprise Act ("PEA") having an effect of complementing the CADT was promulgated. Foreign investor establishing a business entity in Chile would be exempted from all Chilean taxes on any gains accrued from such third country investment pursuant to the PEA and Income Tax Act. - On 31 March 2003, Chile signed a double taxation treaty with Spain, the second most important country investing in Chile. - In January Chile signed the tax treaty with Peru and Ecuador, respectively, after the OECD Model. - As of November 2012, Home Page of Internal Revenue Service (Servicio de Impluestos Internos) provides the effectuation status of the Chilean bilateral tax treaty for avoidance of double taxation as follows: -- Already entered into force: Argentine, Canada, Mexico, Ecuador, ROK, Spain, Norway, Brazil, Peru, Poland, U.K., Croatia, Denmark, Sweden, France, New Zealand, Ireland, Paraguay, Portugal, Malaysia, Russia, Thailand, Columbia, Belgium, Switzerland, -- Already signed, pending ratification: the U.S., Australia, South Africa. - On 4 September 2012, GOC raised the Corporate Income Tax from 17% to 20% for the year 2012 (1 January through 31 December 2012). On the other hand, GOC would raise the Additional Tobacco Tax for the year 2013, and the Stamp Duty and Personal Income Tax, from the beginning of 2013, while repealing the Additional Tax of 15% on Royalty levied on purchase of software. - In each past year, the concerned bodies of this country (Japan Business Council for Trade and Investment Facilitation, Japan Chamber Of Commerce and Industry, Japan Machinery Center for Trade and Investment, Japan Foreign Trade Council, Inc., International Tax Liaison Council) have requested early ratification of Japan-Chile tax treaty. - The 2014 Tax Amendment has since 2015 progressively raised the corporate income tax, while the tax levy method has been made selective between integrated method and Semi-Integrated Method (SIM). Under SIM, 35% additional tax is levied only when external dividend remittance is made, while the amount corresponding to 65% of corporate income tax is deducted, provided, however, that in the case the dividends or remittances are made to countries / regions contracting tax treaty, the total amount of the corporate income tax is deductible.
	(Improvement) - On 19 October 2015, Japan-Chile tax treaty was agreed in substance. - On 21 January 2016, Japan-Chile tax treaty (JCTT) was signed. After the completion of ratification procedures, JCTT will be enforced on 1st January of the tax year following the year of ratification.

(2) Nebulous Tax Reform	- Tax Reform of 2014 included announcement of change in incentive measures on foreign investment. To this date, however, no substantive measures have been made public.	- It is requested that GOC clearly identifies the foreign investment incentive measures.	- Ministry of Finance, Law No. 20,899.
	(Action) - Major issues on tax reform of 2014 include among others: (1) Progressive staged increase in corporate income tax (CIT) (20% up to the reform point, brought down to 21% upon reform implementation, 22.5% in 2015, 24% in 2016). (2) CIT tax scheme after FY 2017 will be by tax payor's choice between Integrated and semi-integrated schemes, (3) reduction in tax rate of general complementary tax from 40% to 35%, (4) Simplified tax scheme for SMEs, and (5) Other incentive measures to SMEs.
	(Improvement) - On 1 February 2016, tax reform simplification law was promulgated. It clearly identifies the selection base on tax payment method for corporate income tax, restricting switching to other methods.

<<BACK