Chile: Chile enacts progressive tax reform in March; fiscal deficit expected to hit 10-year high
On 1 March, the long-awaited overhaul to the tax system finally came into effect. Last-minute tweaks were incorporated to plug the hole in the fiscal accounts, prompted by the government’s rollout of a USD 5.5 billion stimulus package designed to appease protestors and to pay for higher subsidies to healthcare and pensions. The new scheme is expected to raise an additional USD 2.2 billion per year through new levies, while also streamlining the corporate tax system. Although the additional revenue should partly reduce the pressure on the public accounts, the fiscal deficit is projected to reach an over one-decade high this year.
The overhaul introduces a new 40% income tax bracket for people with a monthly income above USD 18,900, establishes a progressive real estate property tax and a new VAT for digital platforms. Small- and medium-sized companies will benefit from a lower tax burden through a new integrated tax regime. Meanwhile, although the government had to backtrack on plans to include large companies into the integrated regime due to lacking parliamentary support, all companies will benefit from an expanded list of deductibles from corporate taxable income. In addition, the reform reduces the tax burden on the elderly, while also requiring private investment funds to distribute ownership between at least eight individuals.
Looking ahead, Chile will strive to retail its title as the most fiscally responsible country in the region, although most of our analyst expect the fiscal deficit to gradually moderate in the coming years after ballooning in 2020. On 12 March, a subdued growth environment and a deteriorating fiscal balance drove Fitch Ratings to lower Chile’s long-term outlook from stable to negative while keeping an A rating. Risks remain tilted to the downside, as uncertainties surrounding April’s constitutional referendum, plummeting copper prices and the likelihood of additional fiscal setbacks prompted by the spread of Covid-19 could press other rating agencies to downgrade their outlook as well.