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Read My Lips: No New Taxes. Just a Slogan or Viable in Reality?

Joaquín Erlbaun's picture
Published: 12/05/17 - Country: Chile

The presidential election of Chile for the period 2018-2022, is going to take place on 19th of November of 2017. The date is getting closer, which means that the candidates for the presidency are committed to show their game and express their position respect key matters.

One of those matters is the Tax Policy, which is essential for the development of the country and far from ideal has being modified beyond the advisable. The following government has the opportunity to recover the confidence and make the adjustments necessaries to return to the path of growth Chile has travelled during several years. Piñera, who represents the centre-right which lead the country from 2010 to 2014 is leading the polls and recently communicated its proposal referring the reduction of the corporate tax. It’s crucial to understand that the reduction of the corporate tax rate isn’t the most important issue but is without doubt very effective from a media perspective. As essential as the aforementioned, is the way the tax system is going to integrate and abolish a historical and mistaken habit of modifying our tax law by patches, that should be the center of the debate and a must for the coming administration.

The narrative associated to the effects of decreasing taxes is relative, that’s because as important as the tax rate, is important to see what other adjustments are going to be the center of the debate, for example if I’m going to apply a 24% rate, the base of the tax and how it’s going to be calculated is crucial, so in order to be able to maintain a balance, especially in taxes, if there is a reduction and considering that the governments has incurred in social commitments such as education, health, transportation that have to be fulfilled, natural query that arises is, how is going to be compensated that reduction in taxes? What other taxes should increase to obtain that balance?

The proposal is to decrease the tax rate for companies from 27% to 24%, naturally the question is what’s going to happen with that 3%? will the entrepreneurs take it home?. To answer that we have to consider that nowadays, in average, the entrepreneurs don’t withdraw more than 28% of the profits, and if you analyze the statistics of the Internal Revenue Service and take “withdraw subject to personal taxes” or “withholding tax”, you realize that the owners tend not to withdraw more that 30% of the profits they generate, that means that the grand mayor of the entrepreneurs keep reimbursed in the company over 70% of the profits, which has allowed the economical growth. And despite this reduction, most certainly, will continue that way.

The previous fact, has allowed the Chilean investments, the contribution of the companies, and allowed the presence abroad for Chilean companies, as a result of the tremendous saving that the entrepreneurs have realize by leaving  the profits in the company’s instead of withdraw them to their own houses. That’s why the new proposal must be orientated not just to reduce the tax rate but also to take serious measures that allow balance, specify how are those taxes to be paid and what incentives to investments are going to be created.

Other of the proposals is the reestablishment of the marginal tax rate for individuals at 40% rate, the decrease of the marginal tax rate to 35% as a consequence of the tax reform was something that was not understood, especially when it was implemented by a center - left government who’s narrative about the tax reform was that it was mainly designed so that the rich people paid more taxes. Even though the collection for this increment is not going to be considerable, it shows the sign that the center – right wants to restore things that should have never changed, such us the reduction of taxes to the rich people.

Without doubt these and other tax changes are about to come if the center – right wins the election. Hopefully these changes will allow Chile to recover the road towards development, at the speed we require.    

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Joaquín Erlbaun's picture

Mr. Erlbaun is a lawyer in charge of the Tax Area at Cuevas Abogados (since 2016). He worked at Ernst & Young as a lawyer in charge of Litigations and Disputes resolution (2011-2016). He also worked at the IRS as a lawyer in the financial group of the Dirección de Grandes Contribuyentes (2009-2011). He final worked at Deloitte as a lawyer in the International Tax department (2007-2009).

Mr. Erlbaun also contributes as Assistant professor in the Pontificia Universidad Católica de Chile, in the course “Defense of the taxpayer” of the “Magister en Derecho UC” program, mention in Tax Law (2012) as well as Updates in tax matters for Tax Courtrooms and Customs offices (2013).

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