Read the article in Diario Financiero.
The Executive’s initiative includes virtually all types of income, excluding those derived from the sale of real estate and any other income considered non-taxable under current legislation. This reinforces the debate on whether it is a repayment or an income tax.
The tax system will play a predominant role in the new public Higher Education Financing System (FES), which, according to the Government’s proposal, will replace the current State-Guaranteed Loan (CAE).
Why? The Internal Revenue Service (SII) and the General Treasury of the Republic (TGR) will be responsible for calculating and collecting the repayment that participants must make to the State for using the FES mechanism. In exchange for not paying tuition or monthly fees during their higher education, individuals will later be required to contribute to the State for a maximum period of 20 years.
Individuals earning less than 7.5 Annual Tax Units (UTA), equivalent to approximately $500,000 per month, will be exempt from the contribution, while those earning above that threshold will be subject to progressive repayment scales, with a cap of up to 8% of their income.
According to the bill submitted to the Chamber of Deputies, the SII will be responsible for annually calculating the amount to be charged and overseeing compliance, while the actual collection will be carried out by the TGR.
Although it was initially stated that salaries would form the basis for calculating the taxable base of the repayment, the bill provides a broad definition of income that will be included to determine the contribution to the State.
Specifically, this includes salaries and self-employment income, payments for independent services (fees), directors’ and board members’ compensation, dividends and withdrawals received from companies, capital gains from the sale of shares, rental income from real estate, as well as any other income subject to the Global Complementary Tax. Income from the sale of real estate and any other income classified as non-taxable under current legislation are excluded.
“The bill establishes that the repayment will be calculated on a broad range of income sources, applying to virtually most income generated by the taxpayer. It will also include those subject to special tax regimes, such as those regulated in Articles 104 (capital gains from the sale of publicly offered debt instruments) and 107 (capital gains from the sale of shares and fund units with stock market presence) of the Income Tax Law,” explains Binatax partner David Fischer.
Patrick Humphreys, partner at Garnham Abogados, notes a particular situation involving partners of professional firms that have opted to be taxed under the First Category (as companies).
The lawyer explains that the bill implies that the beneficiary must include, as part of their total income subject to repayment, an amount equivalent to their proportion of the company’s annual profits: “In other words, it is irrelevant whether the individual actually received all or part of those profits, as they must still include them in their calculation base, even if they remain reinvested in the company,” he adds.
The debate over the nature of the repayment intensifies
Although there has been discussion from the outset about whether the repayment constitutes a tax, the detailed method for calculating it has further reinforced this controversy.
Nicolás Alvarado, partner at Alvarado & Cía., argues that while from a technical standpoint it is debatable whether it meets all the elements of a tax, from an economic impact perspective on individuals, “there is no doubt” that its effects are equivalent to an income tax, particularly considering how its base is calculated.
“In any case, I believe it is comparable to a tax, in which case constitutional principles and limitations would apply, the most relevant being the principle of non-earmarking, which prohibits allocating a tax to specific purposes,” he notes.
Juan Pablo Cabello, partner at Cabello Abogados, states that the contribution is determined by the SII and collected by the General Treasury, functioning “very similarly” to the Global Complementary Tax: “However, strictly speaking, it is not a tax, as it corresponds to a consideration and has a specific purpose,” he argues.
The fact that the repayment of the financing received is calculated based on the beneficiary’s income does not necessarily mean it is an income tax, says Álvaro Moraga, partner at Moraga & Cía.: “What exists here is financing for those who request it, where beneficiaries are required to repay under very particular and favorable conditions, with flexible terms and adapted to their future circumstances.”
Former Budget Director and academic at CIES of Universidad del Desarrollo (UDD), Matías Acevedo, is critical of the repayment mechanism, noting that a middle-class student could end up paying four times the cost of their degree, at an implicit interest rate of 14% annually.
“The FES will incentivize the migration of talented Chileans abroad due to this unfair income tax on graduates. They say it is not a tax because students are free to choose whether to use the FES. Therefore, wealthy talented students will not opt in, while talented lower-middle-class students who lack resources will face two options: not attend university or accept this graduate tax. Is that freedom?” he questions.
Meanwhile, Javier Jaque, Lead Partner at CCL Auditores Consultores, focuses on the fact that the bill states that any other income included in the Global Complementary Tax base will be added to the calculation: “In my view, this should indeed be understood as a new tax. A repayment is being made, but based on the consideration of other types of income, which could conceptually be regarded as an income tax.”