The government’s priorities, such as pension and tax compliance reforms, will likely be approved
The first draft of the government’s Fiscal Pact includes six key components: (i) principles for a modern tax system in Chile; (ii) identification of needs and public spending priorities for the country’s population; (iii) commitments to reforms aimed at strengthening transparency, efficiency, and service quality within the government; (iv) strategies to promote growth through investment, productivity, and formalization of the economy; (v) measures to enforce tax compliance and reform income tax; and (vi) institutional mechanisms for the monitoring and evaluation of the Fiscal Pact. The measures on public spending outlined in the Fiscal Pact concentrate on improving the pension, healthcare, and security systems. Regarding tax measures, President Gabriel Boric’s administration plans to introduce two separate bills: one to combat tax evasion and avoidance and another to implement tax reforms to increase revenue. Given the absence of an absolute legislative majority to approve these reforms, companies should continue to engage with influential and potential politicians across the aisle. Although a rise in corporate taxes seems highly unlikely, multinationals should closely monitor tax discussions in Congress, particularly mechanisms to strengthen tax compliance.
Government spending components of the Fiscal Pact:
- The first draft proposed increasing the Universal Guaranteed Pension to CLP 250,000, benefiting an estimated 166,000 citizens by 2030. Furthermore, the government aims to increase employers’ contribution rate to 6%. The fiscal cost of these measures is projected to be approximately 1.2% of GDP over the next six years.
- Similarly, the government seeks to increase healthcare expenditures by 0.9% of GDP and raise the APS’s per capita contribution from CLP 11,200 CLP to 12,000. This additional public spending will primarily be allocated to reducing waitlists for surgical procedures (targeting an average of 120 days) and constructing 30 Community Mental Health Centers.
- Regarding the security sector, the Boric administration aims to raise government spending by 0.3% of GDP. This increase in funding will be used to create a National System for the Protection of Victims and Witnesses of Organized Crime, invest in new prisons, enhance border security, and improve street lighting and surveillance cameras.
Tax reforms included in the Fiscal Pact:
- As mentioned, the main focus of the Fiscal Pact is to combat tax evasion and avoidance. The bill introduces the concept of the Anonymous Tax Whistleblower and establishes a new offense for individuals who, without legitimate economic reasons, intentionally diminish their assets. Also, modify the procedure for lifting bank secrecy.
- While the details are still being finalized, another key tax component involves the introduction of preferential regimes aiming to boost private investment. These regimes will offer a tax credit that can be applied against future income tax liabilities, primarily to fund investments that yield positive externalities, particularly in the green energy and digital economy sectors. Additionally, they will allow for instant depreciation of 50% for fixed asset investments made in the first year of new projects.
- Finally, President Boric emphasized that the tax reform addresses wealth inequality rather than increasing corporate taxes. Although still in the early stages of the legislative process, the proposed reform seeks to reduce corporate taxes from 27% to 23%, increase taxes on profit withdrawals from companies, and reintroduce a wealth tax.
Our View
In contrast to the 2023 rejected tax reform, the government has been actively discussing its new policies with the private sector and opposition parties. Recently, opposition blocs have shown some commitment to supporting pension reforms and combating tax evasion. For example, 19 out of the 22 pension reform proposals were approved by the lower chamber. However, opposition parties have also expressed concerns about pension contribution reform. Currently, the legislature is in recess, with new legislative committees and initial debates in the Senate set to begin on March 4. Although we expect regulatory uncertainty to remain high, as opposition blocs hold the majority within these committees, we anticipate the approval of key components of the Fiscal Pact by the end of the first half of 2024, especially those related to tax compliance and pension measures.
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