The minister plans to present the income tax bill in January. While he has opened the door to evaluating a reduction in the corporate tax rate below the original 25% proposal—welcomed by the private sector—a new issue threatens to stall negotiations: the disintegration of the income tax system. This idea, already rejected by businesses and the opposition, remains among the Ministry of Finance’s objectives.
Read the article in La Tercera-Pulso.
It was at a Sofofa seminar where the Minister of Finance, Mario Marcel, sent a signal to the private sector. For the first time, he showed openness to reducing the corporate tax rate—currently at 27%—below 25%, even suggesting it could be considered at 23%. However, this would only be possible if compensatory measures were in place to balance public finances and maintain the core principle of the income tax bill: to be revenue-neutral.
This openness was well received by the private sector, represented by the Confederation of Production and Commerce (CPC), which from the outset of the discussion proposed reducing the corporate rate to 23%, a figure that matches the OECD average and, they argue, would help reactivate investment.
“We value that the government has opened up to lowering the first-category tax rate to 25%, and hopefully somewhat below that to move the needle on growth. It is good news that there is a shared diagnosis that current tax levels are too high,” said CPC President Susana Jiménez to Pulso.
The government’s tax proposal can be divided into two parts: one that includes changes to the tax structure for large companies, and a second part focused on SMEs, the middle class, and personal income taxes.
For the first pillar, a new taxation scheme is proposed. Large companies would fall under a disintegrated or dual system as the general regime. This system would feature a first-category tax rate reduced from 27% to 25%, or even lower, as Marcel has indicated.
In addition, a tax on the first distribution of profits would be introduced at a rate of 4%, regardless of who receives the retained earnings at the time of distribution. Another 16% tax would apply to final taxpayers (capital income), withheld at the time dividends are distributed. This latter tax would apply only when final shareholders withdraw profits, not when distributions occur between corporate partners.
As a result, the total tax burden on corporate profits under the general regime would decrease to 39.5%, compared to the current 44.5%, a level that, according to the Ministry of Finance, would be slightly below the OECD median.
The second pillar is a simplified system for SMEs, which includes what the Ministry calls a transparent regime, where the business owner is taxed according to their personal global complementary tax. An alternative system would also remain, similar to the current general regime, with a rate lower than 25% but higher than the current 12.5%. There will also be a continued effort to increase taxes on individuals earning more than $6 million per month.
So far, one of the main tensions in the debate between lawmakers and the government has been this proposed increase in personal taxes, particularly from the opposition, which has already indicated it would reject any such increase. This new proposal would affect only 153,516 individuals, representing 1.4% of all taxpayers.
While Marcel’s openness to lowering corporate tax rates suggested that an agreement between the public and private sectors might be near, a new red line has emerged: the disintegration of the system—something the Ministry of Finance currently does not intend to concede.
The final red line
The first attempt to disintegrate the tax system occurred during the 2014 reform under President Michelle Bachelet’s second administration. However, that idea did not succeed, and instead two regimes were created.
The first is a semi-integrated system, which grants a 65% tax credit of the first-category tax against personal taxes. Therefore, for shareholders of corporations and other companies under this system, 35% of the corporate tax paid cannot be used as a credit against their personal tax liabilities.
The second is the attributed income system, where income and first-category tax credits are fully attributed to partners. In other words, it is an integrated system based on accrual, unlike the previous system, which was based on withdrawals or cash.
This marked the first major change to the tax system since 1984, when the integrated system was established as the general regime, allowing 100% of corporate tax paid to be credited to company owners.
In this reform, the government aims to introduce a second major change by moving toward a disintegrated system. However, the path to achieving this appears complex: the private sector favors maintaining integration. This has been communicated to Minister Marcel both in formal and informal meetings. According to sources, the Ministry plans to submit the bill with a reduced corporate tax rate—from 27% to 25% or 24%—while including system disintegration, arguing that capital income and labor income should be treated differently.
Those familiar with discussions with Marcel say this is a red line for the minister if tax fairness is to be achieved. However, he appears more open to negotiating the rates applied to dividend withdrawals.
“The problem with disintegration is that smaller companies could end up worse off than they are today, even with a lower corporate tax rate. By contrast, reducing corporate tax and compensating with a tax on first distribution while maintaining integration results in an overall reduction in tax burden, which helps stimulate economic growth,” said CPC President Susana Jiménez.
The business sector argues that disintegration would negatively impact around 100,000 companies, increasing rather than reducing their tax burden. Their proposal suggests lowering the corporate tax rate to 23% and applying a dividend withdrawal tax of 6% to 7%, ensuring that any reduction in corporate tax revenue would be offset.
In a recent Pulso interview, Sofofa Vice President Óscar Hasbún acknowledged positive aspects of the proposal but criticized disintegration: “There are two areas for improvement, one being the idea of a fully disintegrated system. This would have a very negative impact: individuals currently taxed below the minister’s proposed 39% rate would end up paying more, affecting around 100,000 SMEs and hundreds of thousands of other taxpayers. At a time when we need to generate formal employment and encourage entrepreneurship, this would be bad news.”
Given this scenario, the private sector suggests maintaining the current semi-integrated system as an alternative if the government insists on disintegration.
According to sources within the government, “the administration is open to making changes and being flexible with rates, but only if the system is disintegrated. On that point, it is not willing to compromise.”
A tax expert familiar with these issues states that the debate over which tax system is better is largely ideological, as both systems can function effectively depending on the rates applied.
“All systems have strengths and weaknesses. They cannot be evaluated in isolation from the institutional framework surrounding them. There are efficient integrated systems and efficient disintegrated systems, but the right question is which system best suits our country’s long-term needs, considering its institutions and economic structure,” said Víctor Fenner, Associate Partner in Tax Policy at EY.
“Separating the taxation of shareholders from that of companies, especially when both corporate and personal tax rates are high, leads to a burden that ultimately becomes disproportionate and unfair,” said Luis Felipe Ocampo, partner at Recabarren y Asociados.
Javier Jaque, Lead Partner at CCL Auditores Consultores, adds that “at the corporate level, it does not represent a greater cost in simple terms; however, at the level of final taxes integrated by companies, when I am an investor, the disintegrated system certainly becomes more burdensome.”
Loreto Pelegrí, partner in legal and tax advisory at PwC, warns that applying a 4% tax on the first dividend distribution, “by not distinguishing who it applies to, could significantly affect pension funds.” She explains that “currently, the first-category tax on AFP investments in capital markets is effectively lost, as it is neither credited nor returned to pensioners.”
A former government official notes that if no agreement is reached and the system remains unchanged, “it would be better for the government to count its votes carefully, because otherwise, it would not be worth the effort of negotiations and congressional debate if the outcome is the same.”
The difficult legislative path
The latest statement from Minister Marcel is that the bill will be presented in January. However, while negotiations with the private sector have been complex, the outlook with lawmakers appears equally challenging. To begin building consensus, Marcel has already met with members of the ruling coalition to present key ideas and receive feedback.
Although opposition parties have been invited, it is unclear whether meetings will take place when legislative activity resumes.
For now, the proposed tax increase on higher-income individuals lacks opposition support and is even questioned within the ruling coalition, given the current context of low economic growth and slowing employment.
Regarding system disintegration, some ruling coalition lawmakers believe abandoning the idea could create tensions with sectors of the Communist Party and the Broad Front, for whom disintegration is a key element of the proposal.
Deputy Jaime Naranjo stated that “disintegration is a step forward in achieving greater tax fairness” and emphasized that it should not become an obstacle to advancing what the government sees as a social pact for fairer taxation.
From the opposition, criticism is stronger, rejecting both system disintegration and higher taxes on high-income individuals. Senator Juan Antonio Coloma stated that “disintegrating the system is a mistake, as it goes against the goal of a simpler system,” and added that “there is no room for increasing personal taxes.”
Senate President José García Ruminot also opposed the measure, stating that “disintegration hinders SME growth” and is neither timely nor appropriate. He also criticized raising income taxes for those earning over $6 million, noting that many are professionals who already contribute significantly through other taxes.