Tax experts have doubts about the effectiveness of concentrating the tax burden on higher incomes, given the relatively small number of individuals affected.
Read the article in La Tercera-Pulso.
The income tax reform is taking shape. The different components the government intends to address in this bill are already on the table. The corporate tax rate will be reduced from 27% to 25%, and a new 16% rate will be introduced for owners subject to final taxes (capital income), which will be withheld at the time dividends are distributed. This will apply only when shareholders withdraw profits, not when distributions occur between partner companies.
Additionally, profits distributed by a company under this regime will be subject to a new tax on the first distribution at a rate of 4%, regardless of who receives the retained earnings at the time of distribution.
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.
To compensate for this reduction in corporate tax revenue, and given that the project must be fiscally neutral, the Ministry of Finance proposed increasing the Global Complementary Tax for the top three income brackets of individuals: those earning from $6 million and above.
This threshold is higher than the last proposal discussed earlier in the year, which considered tax increases for incomes starting at $4.5 million per month. Going back to the original tax reform proposal presented in mid-2022—which was rejected—it included increasing personal tax rates starting from the fourth bracket, affecting those earning from $3.2 million. At that time, the expected revenue was 0.23% of GDP, equivalent to US$780 million, affecting around 253,000 people.
Now, the new proposal covers only 153,516 individuals, representing 1.4% of total taxpayers. According to preliminary estimates by Hugo Hurtado, Lead Partner of Tax & Legal at Deloitte, the expected revenue would be around 0.15% of GDP, equivalent to approximately US$510 million.
In 2023, this group paid taxes amounting to approximately US$4.3 billion, equivalent to 1.3% of GDP.
Tax experts question whether concentrating the tax burden on higher-income individuals will achieve the expected revenue, given that relatively few people earn above $6 million.
This is especially relevant considering that the Ministry of Finance must raise between approximately US$800 million and just over US$1 billion to offset the revenue loss from reducing the corporate tax rate from 27% to 25%.
Alberto Cuevas, Tax & Legal partner at KPMG and former Coordinator of Tax Policy during Michelle Bachelet’s second administration, states that “this is a small group of formal taxpayers, so the elasticity of their capacity to contribute may be affected. A very negative outcome could be a disincentive to formalization or increased evasion and avoidance within this segment.”
Cuevas sees no consensus on the matter: “A significant group of experts has suggested that personal taxation should instead broaden the taxpayer base, using low but effective entry-level tax rates that promote formalization. If taxes are increased only for higher-income professionals or workers, the system becomes unbalanced and may lose efficiency.”
Víctor Fenner, Associate Partner of Tax Policy Knowledge at EY, notes that “this proposal will mainly affect salaried professionals earning at these levels and will have little impact on owners of large companies or large fortunes, who derive income from other sources such as profit withdrawals, allowing them to claim corporate taxes as credits. This could be problematic, as these individuals already bear a significant tax burden—around 30% of their monthly income—and receive relatively limited benefits from the State, with limited planning options.”
Harry Ibaceta, partner at PTL | Prieto Tax & Legal, argues that “this increase appears to have room in the discussion because it affects a small number of taxpayers. However, individuals earning more than $6 million currently face an average tax rate of 10.62%, with a marginal rate of 23% in the highest bracket. That is, for every additional $100 earned, they pay $23 in taxes.”
He adds that “it is necessary to define what level of increased contribution is reasonable for this group, given that a monthly income of $6 million is already close to the next bracket, which currently has a rate of 30.4%, a figure that appears reasonable.”
Javier Jaque, Lead Partner at CCL Auditores Consultores, also believes it could impact formal employment. “Taxing individuals is something that has always been used because it is a simple way to increase revenue, but it also creates strong incentives for informality.”
Marcel’s response
In response to the concerns raised, Minister of Finance Mario Marcel explained the rationale behind the tax reform. He stated that “the government is working on a proposal for a compensated reduction in taxes for smaller businesses and benefits for the middle class. This means that while some measures reduce revenue, others must increase it by the same amount.”
The minister explained that given recent discussions, “it should be fairly clear in Chile that there is no room to reduce revenue. With tight public finances and many spending needs, we cannot afford to lower the tax burden.”
However, he added that “what we can do is make the composition of taxes more favorable to growth. That is why the government is working on a pro-growth reform. Why is it pro-growth? Because it lowers the corporate tax rate, includes direct incentives for investment, research and development, and innovation, and modifies the tax regime for SMEs through what has been called the entrepreneurship pathway.”