When a company decides to move their business into a new market and to open up a new office in a new country, one of the first things to be considered is the country’s tax system. Around the world every country has different tax and accounting systems, some are easier to manage than others. Therefore, when moving into a new market, companies have to determine and understand the country’s corporation tax, sales tax, dividend tax, and other applicable tax rates. Additionally, a company must be aware of the accounting standards to be applied in a particular country. Before moving a business into a new market, it is important that a company fully evaluates these matters to determine if the company’s existing accounting, finance, and tax professionals can manage this or if necessary to engage a local professional accounting services provider for the business. Hence, when making the decision to move into a new market, the new country’s tax regime is of high importance and must be taken into consideration.
This article gives further insights on taxation and accounting requirements in Santiago, Chile.
Taxation & Accounting Requirements in Chile
Taxpayers in Chile are companies, individuals and other legal entities, affecting the income of all corporations and individuals. Hence, all individuals and companies are subject to an income tax on their monthly or annual income. Foreign individuals pay income tax only on their Chilean sourced income during their first three years in the country, this period can be extended to three more years, although after that they are also subject to income tax on their worldwide income.
The tax authority in Chile is the Internal Revenue Service (SII – Servicio de Impuestos Internos) which is a public organization and depends on government administration in Santiago, Chile. From the time the taxpayer filed the return, the tax authority (SII) has an official three-year time limit in order to review, amend or rectify any tax return previously filed.
Accounting standards in Chile
Chile’s accounting standards are the IFRS (International Financial Reporting Standard) and the official accounting regulation body is the Chilean Ministry of Finance. Therefore, basic financial statements must include a statement of financial position, a statement of comprehensive income, a statement of cash flows, a statement of changes in shareholder equity and notes to the financial statement. The presentation currency is the Chilean Peso. Concerning accounting laws, all laws registered are defined by the Codigo Tributario. The tax year starts on the 1st of January and ends on 31st of December in the same year.
Chilean Taxation Number
When carrying out business in Santiago, Chile a company has to be registered and obtain a Chilean taxation number and tax ID (RUT). When a company’s deals with the country’s taxation, this number is required in order to deal with the national tax authorities. Moreover, every individual, including foreign individuals in Chile must obtain a Chilean National Tax ID and a password for the Chilean IRS website (www.sii.cl) in order to be able to file their annual tax returns.
Consumer Price Index (IPC)
The following table shows the respective UTM (Monthly Tax Unit) and UTA (Annual Tax Unit) values for the months of 2017, expressed in Chilean pesos (In the first and second columns, respectively). The remaining columns show the IPC for each month of that year and the monthly percentage variation, accumulated to date and annual.
|2017||UTM||UTA||Consumer Price Index||Percentage Variation|
|Value in Points||Monthly||Accumulated||Last 12 Months|
The Chilean income tax system affects business income, salaries, other personal income, as well as income which was obtained by non-residents. Income-tax is structured in different categories and they have to be applied accordingly. Categories are First Category, Second Category, Complimentary Global and Additional taxes. Generally, in Chile two main tax rates have to be taken into account, the first is the tax rate for companies or corporate tax (first category tax), where income is received by exercising commercial, industrial, agricultural and other activities and the second important tax is the tax on employment income (second category tax).
Chiles First Category Tax (Corporation Tax)
All companies which are resident and domiciled in Chile are subject to “First Category Tax” (FCT) and are taxed on their worldwide income. All company’s non-resident in Chile are taxed on their income received in Chile only. The first category tax is calculated on the basis of the company’s taxable profits generated within a tax year. Additionally, all companies based and operating in Chile are required by law to make monthly advance payments (PPM), through monthly declaration (F29), and there is also a non-obligatory voluntary (PPM) for companies who wish to keep an additional provision for the yearly income tax, and in the case of an overpayment the Internal Revenue Service makes a refund of the exceeded amount.
At present, the first category tax rate is set at a rate of 25% or 25.5%, depending on the tax regime the company has chosen. Due to a new tax law in Chile, accurate since the 1st of January 2017, two different tax regimes are available: the Attribute Regime and the Distributed Regime. All companies have to choose one of the two tax regimes and have to stay within one and the same tax regime for a minimum of 5 years.
Attributed Regime: Under this regime the corporate income tax on a company’s annual income is 25% and is annually attributed to its shareholders or partners, not taking into account the effective dividend distributions.
Distributed Regime: For this regime, the applicable tax rate is 25.5% in 2017 and 27% in 2018. Under this regime shareholders or partners are only taxed on the actual distribution of dividends or profits by the company.
Chiles Second Category Tax (Personal Income Tax)
The Chilean income tax law is described in detail in the Decree Law 824 of 1974, known as the Income Tax Law is administered by the Chilean Internal Revenue Service’s (Servicio de Impuestos Internos). In general, it can be said that every person working and living in Chile, resident or nonresident is subject to Chilean income tax. All entities resident or domiciled in Chile are taxed on their worldwide income. Non-residents are only taxed on their income earned in Chile.
Therefore, the Second Category Tax is concerned with all personal sources of income including salaries, bonuses, gratuities and other forms of remuneration. The highest progressive rate for this tax is 40% and all taxes have to be paid on a monthly basis in accordance with a monthly timetable issued by the Chilean Tax Authority (Servicio de Impuestos Internos). This tax is deducted from the gross salary by the employer and subsequently paid over to the Chilean Internal Revenue Service. Depending on the type of income 6 different income tax rates apply. Furthermore, the income tax is based on the following two factors:
- The taxpayer’s place of residence
- Source of the income
The taxpayer’s place of residence: In order to be considered to be a resident, a person has to have lived more than 6 months within a calendar year in Chile. For non-residents and non-domiciled the tax rate is 15% if the activities are technical or professional services if they are not a tax rate of 35% has to be paid on their Chilean-source income alone.
Source of the income: Income is to be considered Chilean source income, when the income is received while performing activities within the country, as of services for businesses and income from property, dividends, royalty and other income. Therefore, the income is sourced where the service is provided.
The following table shows the current tax rate in Chile for June 2017, this table changes on a monthly basis and income has to be taxed accordingly.
|Taxable Income||Tax Rate||Tax Rebate|
|From CLP$||To CLP$||%||CLP$|
Income Tax Chile June 2017
Value-Added Tax (Impuesto al Valor Agregado – IVA)
Value-added tax in Chile has to be paid on all sales and imports of goods and services. Furthermore, additional taxes and import duties have to be applied when importing certain goods such as beverages, jewels, and others. Currently, the VAT rate is set at 19% of the price of the goods or services. With regards to importing, the taxable basis is the customs value, CIF Value, which has to be considered and already includes customs duties. VAT returns must be filed on a monthly basis.
Regarding exports of goods and services, the VAT rate is zero, not considering how the product will be exported.
Frequency of Tax Declarations in Chile
The date for which the annual income tax returns must be filed depends on whether the taxpayer must pay tax or is due to a refund. If the taxpayer owes tax, the filing date is April 30th and in the case of a tax refund, the date to file is the 9th of May of the following year.
Penalties & Fines
When tax returns are not filed within the timetable established by the tax authorities or if they contain errors, fines have to be paid. The amount of the fine depends on the length of the debt due and the channel of payment the taxpayer uses to pay the debt. Usually, the amount is three times the tax, then the tax initially due, but when using the SII online payment the percentage of the fine is lower than when paying at one of the offices directly.
When paying these penalties, the Internal Revenue Service (SII) has a policy known as (Condonacion) in which if you pay the total amount of the debt, is up to a discount of 70% of legal fees (Interest and fines), this a benefit of the new tax reform.
The tax system in Chile is very flexible if everything is always properly informed, even when in debt; it supports businesses to keep on growing, through payment facilities.
Other Employee Contributions – Pension & Health
In general, it can be said that social security deductions make up to 20% off the monthly salary, these contributions include payments into the pension fund, the health insurance, unemployment insurance and the Chilean association of security.
Chile’s health system has existed since the 1950’s, it was originally introduced as a national health care system and was one of the first in Latin America. The relevant agency for the health care system is the Fondo Nacional de Salud (FONASA). Today workers can choose between the private health system Instituciones de Salud Previsional (ISAPRE) and the public health system Fonasa, the monthly mandatory payment is 7% of monthly income for FONASA and about 9.2% for the private system ISAPRE.
Pension Fund Contributions
Regarding the pension system, all employees can choose between six different private pension companies and furthermore are able to choose between different types of funds. The monthly mandatory payment on their income is approximately 12%. Any individual can pay a higher percentage if they decide to. If workers are self-employed they can decide whether to contribute or not and which amount they want to contribute on a monthly basis.
|AFP||OBLIGATORY RATES (AFP)|
|%||SIS (1) (2)||AFP RATE (3)|
(AFP): Pension Fund Contributions
(SIS): Disability and Survival Insurance
1) Employer payment.
2) SIS doesn’t apply for pensioner dependent employee.
3) This rate includes SIS, which corresponds to the employee.
Liability to Social Security On a Monthly Basis:
|TYPE OF INSURANCE||EMPLOYER PERCENTAGE||EMPLOYEES PERCENTAGE||TOTAL PERCENTAGE|
|Pension Fund||0||12 Approx.||12 Approx.|
|Public Health System||0||7||7|
In conclusion, being sure of taxaxtion and accounting requirements in Chile during the company formation process is crucial for the success of your business. To receive more useful, personalized and essential information on this matter, please contact Karl from Biz Latin Hub at [email protected]