## 1chlea2020004 ## Source details **Canonical URL:** [1chlea2020004](https://www.imf.org/-/media/files/publications/cr/2020/english/1chlea2020004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1chlea2020004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1chlea2020004.pdf.json) --- ### Mission context and team - Remote mission by joint IMF and OECD staff during April – October 2020. - Main purpose: assist the Minister of Finance of Chile with technical support to review Chile’s tax expenditure methodology and its corrective excise taxes. - Report written jointly by IMF and OECD: - IMF led assessment of tax expenditures in the corporate income tax (CIT) and analysis of excises. - OECD led assessment of tax expenditures in the personal income tax (PIT) and value added tax (VAT). - Presentation to the Minister of Finance on October 6, 2020. - Report incorporates comments from the Ministry and the Chilean Revenue Administration (SII). - IMF team leadership: Led by Mr. Ruud De Mooij; team included Mr. Shafik Hebous, Mr. Roberto Schatan, Mr. Charles Vellutini. - OECD team leadership: Led by Mr. Bert Brys; team included Ms. Gioia de Melo, Mr. Sean Kennedy; additional CTPA contributors acknowledged. ### Key findings and recommendations — overview - Chile follows international best practice by calculating tax revenue foregone from a wide range of Tax Expenditures (TEs) and presenting these to Congress annually. - SII methodology broadly aligned with OECD practice but scope for improvement. - Major recommended actions: - Define more explicitly a benchmark tax system against which to assess TEs. - Proposed TE benchmark for 2020 onwards: income tax benchmark combining a pure conceptual approach and a pragmatic approach based on current tax law. - Small business transparent regime and the partial dividend imputation regime are part of the benchmark; the preferential regime for small firms is not. - Improve quality of data used in TE estimations. Identified gaps: Free Trade Zones, capital gains on shares listed on the Chilean stock market, business income under presumptive regimes, rental income from DFL2 property, life insurance policies. - Provide a complete list of TEs and strengthen TE calculation methodology for certain items; expand TE assessment beyond CIT, PIT and VAT over time. - Form a Working Group with members of SII and MOF to develop and improve TE calculation methodology. ### Implications of the newly defined benchmark tax system - A newly defined benchmark will reclassify some provisions (some no longer qualify as TEs; new items will be added). - Specific treatment changes: - All CIT TEs estimated considering the partial dividend imputation regime as the benchmark. - The reduced CIT rate and the full (rather than partial) imputation credit in the SME regime are qualified as TEs. - In the PIT: - Items that no longer qualify as a TE: deferral of tax liability due to retained business profits; deduction of mandatory “social” contributions linked to pensions, health and unemployment. - Items qualified as TEs: deduction of voluntary pension contributions; non‑taxation of the return on voluntary savings that accumulate within the privately managed fund. - Note: Qualifying a provision as a TE is distinct from assessing its desirability (cost-benefit); structural benchmark features are outside TE list and require broader tax policy discussion. ### Definitions, purpose and measurement of Tax Expenditures (TEs) - TEs: provisions in tax law that modify tax liability of specific groups. - Purposes: achieve economic, social, equity objectives; simplify tax system. - Importance: regular estimation supports fiscal transparency and informed resource allocation. - Benchmark choice is central — deviations from benchmark define TEs. Benchmarks differ across countries and time; TE estimates not directly comparable across countries/years. - Measurement methods (three main): - Tax revenue foregone (static, based on actual take-up). - Tax revenue gain (ex-ante, includes behavioral responses). - Outlay equivalent method (cash-equivalent subsidy outside tax system). - Timing preferences: cash-flow vs NPV approaches for deferrals; NPV requires assumptions and may lower TE compared to cash-flow. ### Proposed TE benchmark for Chile (2017–2019 and from 2020 onwards) - Preferred hybrid benchmark between Schanz‑Haig‑Simons comprehensive income and pragmatic reference-law elements. - For 2017–2019: - Concern: SII used inconsistent benchmarks (CIT: regimes A and B; PIT: regime A only). - Preferred consistent dual benchmark incorporating regimes A and B at both CIT and PIT levels for 2017–2019. - From 2020 onwards: - Proposed TE income tax benchmark applies same rules to CIT and PIT and recognizes three components: - (i) optional Transparent regime for SMEs (taxes profits only at PIT level), - (ii) Partial Dividend Imputation regime for most corporations (largely equivalent to regime B), - (iii) SME reduced CIT regime (reduced rate with full imputation credit and cash accounting). - Include (i) and (ii) in benchmark; exclude (iii) (the reduced SME regime) from benchmark so its preferential treatment is quantified as a TE. - Choice between including 25 percent or 27 percent CIT rate in benchmark depends on whether full or partial imputation is selected. ### Data: gaps and improvements - Lack of data is a main obstacle for proper TE measurement. - Specific TEs with data gaps: Free Trade Zones, capital gains on listed shares, companies under presumptive regimes, exemptions of investment via funds, rental income from DFL2 property, life insurance policies. - Recommendations: - SII should obtain better data — may require legal changes or regular data exchange with other government bodies. - Require tax returns regardless of exceptional regimes; income declared even if exempt. - Use administrative tax return data where possible; supplement with other sources (VAT returns, business registry, customs, employment office, pensions, social security). - SII to apply proposed methodology to full set of tax returns (IMF-OECD applied to anonymized sample). ### Tax expenditure analysis — Corporate Income Tax (CIT): main findings - SME regime preferences should be measured as a TE. Key differences from benchmark: - (i) reduced CIT rate of 25 percent (temporarily reduced to 10 percent until 2022 in light of COVID-19); - (ii) notional deduction up to 50 percent of reinvested profits up to a cap; - (iii) full imputation credit instead of partial credit under PIT; - (iv) cash basis accounting vs accrual basis. - Optional presumptive regime for small taxpayers in agriculture, transport, mining generates a TE; appropriate benchmark for these taxpayers is SME Transparent regime, so TEs are best categorized under PIT rather than CIT. - Leasing: TE arises from faster depreciation deductions than benchmark; recommendation to use exact lessee and lessor data rather than approximated ratios. - Intangibles: - Start-up costs: allowed expensing → positive TE. - Intellectual property (IP) acquisitions: no expensing/depreciation → negative TE (reduced by 2020 temporary amortization). - Recommendation: use actual “adjustment” data between financial accounts and tax treatment. - Cooperatives and universities: preferential treatments constitute TEs; require full tax returns to compute TEs accurately. - Free Trade Zones (FTZs): computing TEs requires additional data and new methods; SII should enforce filing and use VAT, customs, employment, pensions and social security data to estimate. - Investment and mutual funds: funds treated as pass-throughs; TEs arise from under- or no taxation of investors (PIT if investors are individuals; CIT if legal entities). - Capital gains exemption under Section 107: TE if exempt gains are realized by a corporate entity; requires reporting and data from the Financial Market Commission. ### Tax expenditure analysis — Personal Income Tax (PIT): main findings - Deduction of mandatory contributions (pensions, health, unemployment) and non-taxation of returns to mandatory pension savings within pension funds should NOT be considered TEs (they are universal/social protection features). - Voluntary retirement savings: - Preferential Exempt-Exempt-Taxed treatment for voluntary retirement savings is a TE under the comprehensive-income benchmark. - Measurement: exemption of pension contributions similar to other deductions; exemption of returns best determined by cash-flow method; taxation of pension withdrawals constitutes a negative TE via cash-flow method. - Pension funds must provide disaggregated data to split mandatory vs voluntary components. - Presumptive deduction for independent workers (30 percent of gross fees) should NOT be considered a TE post‑2018 because SSCs became compulsory (levied at 17 percent); common OECD practice is to include simplifying presumptive deductions in benchmark. - SME regime additional imputation credit creates a PIT TE interacting with reduced CIT. - Mortgage interest deductions: treated as TE (imputed rent excluded from income in benchmark); SII methodology adequate. - Capital gains on real estate: - Exemption up to UF 8000 per person lifetime is a TE; reduced taxation above that threshold is a TE. - Recommended to estimate both exemption and reduced taxation of excess. - SII’s benchmark for UF 8000 has chosen option 2 (10 percent rate) in 95 percent of cases; IMF‑OECD propose broader measurement. - DFL2 property privileges and grandfathering rules are TEs; better microdata needed. - Exempt capital gains on sale/transfer of shares in publicly traded companies, quotas of publicly traded investment funds and mutual funds: better microdata and updated methodology required. - Tax exemptions of life insurance proceeds: not a TE for income tax but is a TE for inheritance tax; insurance companies should provide disaggregated data. ### Tax expenditure analysis — VAT: main findings - VAT benchmark: uniform consumption tax on all final sales (destination principle). Exemptions and reduced rates on domestic supplies qualify as TEs; zero-rating of exports is not a TE. - SII VAT TE approach broadly consistent with international practice; detailed input-output modelling review needed for potential improvements. - Chile levies VAT only on a restricted list of services (art 20 numbers 3 and 4 of ITL); VAT exemption of professional services to final consumers likely gives rise to a large TE. - Special housing construction credit is a VAT TE; incidence determines who benefits. ### Excise duties — overview and major recommendations - Scope to improve design of excise taxes in Chile and expand revenue once economic conditions permit (post‑COVID‑19 stabilization). - Chile has above-average consumption of health-hazard products: - Smoking prevalence is the second highest of the world. - Alcohol consumption is high internationally (notably binge drinking among teenagers). - Sugar consumption above WHO recommended levels; Chile ranks close to the top in child overweight ratios. - Total revenue from excises in Chile ~ 1.5 percent of GDP (around 1.5 percent), which is more than 1 percent of GDP lower than OECD average (2.6 percent). - General excise policy recommendations by product: Fuel - Findings: - Diesel tax rate is 1/4 of gasoline excise though environmental costs are higher for diesel. - Efficient tax estimates (2017): motor diesel US$2.80 per gallon; gasoline corrective tax US$2.90 per gallon. - Increasing fuel excises to efficiency levels would have a revenue impact of about US$ 3.8 billion, or 1.5 percent of GDP. - Diesel tax credits cost nearly US$630 million (aggregate), 14 percent benefits trucking industry; trucking credit recorded as a TE. - Chile’s green tax prices carbon at only US$5 per ton (global carbon price to meet Paris Agreement goals estimated at US$ 75 per ton of CO2 by 2030). - Recommendations (phased): - Include excises in the base of the VAT. - Phase out the credit to trucking companies. - Gradually reduce difference between gasoline and diesel tax rates. - Gradually raise green tax and include kerosene, with distributional measures for low-income households. Alcohol - Findings: - Chile’s excises are relatively low, especially on cheaper brands. - Structure is entirely ad valorem, which incentivizes consuming cheaper, higher-alcohol products. - Recommendations: - Introduce a specific (alcohol-content related) tax floor; shift greater share of excise to specific component; consider rate increases where appropriate. Tobacco - Findings: - Little scope to increase excises; tax base could be expanded to cover novel products (e‑cigarettes, HTP). - Administrative controls against contraband need strengthening; survey finds ~25 percent of cigarette consumption illicit. - Tobacco tax mix: specific and ad valorem components with specific representing 55 percent of revenue share (55/45). - Tax burden on cigarettes is high; prior to 2014 tax burden near top of Laffer curve; since 2016 revenues have fallen nominally. - Recommendations: - Do not increase existing tax rates on tobacco products until enforcement is strengthened. - Keep balance between specific and ad valorem excises. - Strengthen administrative control, raise penalties on smuggling, tax e‑cigarettes and HTP by nicotine content or per unit. Sugary drinks - Findings: - Chile’s sugary-drink excise reduces intake but substitution to other sugar sources may occur. - An ad valorem excise incentivizes opting for cheaper variants. - Recommendation: - Consider a specific excise based on sugar content, applied to drinks and food, acknowledging implementation challenges. ### Excises — fuel specifics, credits, scenarios and estimated revenue impacts - Fuel base excises (US$/gallon, reported): - Gasoline: 2019 US$1.58 per gallon. - Diesel: 2019 US$0.40 per gallon. - 2019 fuel price/effects: - Average premium gasoline price metropolitan region 2019 = CHP 818.2/lt; retail diesel = CHP 598.9/lt. - Base excises 2019: gasoline = CHP 293.9/lt; diesel = CHP 73.5/lt. - In 2019 gasoline excise = 36 percent of final price (including VAT); diesel tax burden = 12 percent. - Diesel credits: - Trucking companies receive credit from 80 percent down to 31 percent depending on UF-based turnover bands (80%, 70%, 52.5%, 31%). - Industrial (stationary) users get a full credit. - Trucking diesel credit (2019) = CHP 65.9 billion (recorded as TE); industrial credit = CHP 379.4 billion (arguably also a TE). - Policy revenue scenarios (Box 4, Table 20; values in US$ millions): - Eliminating trucking diesel credit: Diesel 87.7; Total 87.7; Percent GDP 0.03 - Including excise in VAT base: Gasoline 352.3; Diesel 83.3; Total 435.6; Percent GDP 0.15 - Increasing diesel tax to equal gasoline's: Diesel 1461.4; Total 1461.4; Percent GDP 0.52 - Raising excises to corrective level: Gasoline 1247.3; Diesel 2585.3; Total 3832.6; Percent GDP 1.51 - Kerosene: - Kerosene tax-exempt; residential use (2018) 143.4 million liters; emissions factor 2.76 kgCO2/liter. - Tax of US$5 per ton CO2 on kerosene would yield close to US$2 million assuming no consumption adjustment. ### Selected TE items and recommended methodological changes - Section 8.17 (capital gains exemption for publicly traded shares and quotas): - Current SII computation unclear, based on procedure dating to 2001; IMF-OECD recommend dismissing current estimation and replacing with new method. - Corporate taxpayers should report separately all realized capital gains exempt under Section 107 in their tax returns. - Decompose TE attributable to Section 107 into PIT and CIT components in computation and reporting. - Investment and mutual funds: - Funds treated as pass-throughs; TEs depend on taxation of investors. - No TEs currently computed for funds per se; TEs arise for under- or no-taxed investors. - Presumptive regimes (Items 1.1–1.4): - Tax base thresholds: Agriculture UF 9,000; Transports UF 5,000; Mining UF 17,000. - Current TE estimation uses cash-flow approximation based on VAT minus labor costs and sector averages; recommended to compute cash-flow/taxable income ratios within sales brackets and sectors. - Post-2020 benchmark for presumptive regimes may be SME Transparent regime (no CIT); from 2020 CIT TEs would be negative equal to CIT effectively paid; measure these vis-à-vis PIT TEs. - Free Trade Zones (FTZs): - Profits in FTZs of Iquique and Punta Arenas exempted from CIT; SII extrapolates 1999 estimates; methodology needs revision and up‑to‑date taxpayer information. - Recommendation: require full tax returns for FTZ taxpayers; enrich data using VAT, business registry, customs, employment office, pensions and social security. - For computing TE, apply 27 percent tax rate for all FTZ firms; interaction with SME regime FTZ exemptions should multiply exempt profits by 2 percent. - Cooperatives: - Cooperatives exempt from CIT on surplus generated through transactions among members; currently no TE computed. - Recommendation: require cooperatives to report total surplus to SII; TE basis = total surplus − current CIT basis. - Illustrative sample (partial data): for some cooperatives TE/CIT ratios large (examples: TE 15,022; TE/CIT 11.1). - Universities (Item 2.3): - Profits from educational activities exempt; SII benchmark taxes profits at 25 percent but filing Form 22 not required. - Recommendation: require universities to file Form 22; compute TE by applying 27 percent on profits from educational activities (since SME regime excluded from benchmark). - Leasing (Item 5.2): - Current SII uses lessee Form 1926 adjustments and cash-flow approach; recommended to: - Retain cash-flow approach. - Use lessor-declared transfer loss data at transfer for TE basis. - Use lessee F1926 adjustments post-transfer for negative TEs. - Intangibles (Item 5.3): - Start-up costs expensed → positive TE; IP items not depreciable → negative TE (reduced after 2020 amortization). - Use actual F1926 adjustment data for all taxpayers rather than extrapolating from total fixed assets. - Donations for cultural purposes: - Current SII applies a 40 percent rejected expense penalty rate for aggregate TE; recommendation: - Apply CIT rate 27 percent to donated amount for each firm. - For SME interaction multiply donated amount by 2 percent. - Compute TEs on cash basis; consider NPV for loss-making firms in medium term. - Capital gains on real estate (exemption up to UF 8000 and options for excess): - Provision is a TE; SII currently measures exemption up to UF 8000 using option 2 (10 percent rate) in 95 percent of cases. - IMF‑OECD recommend measuring both exemption and reduced tax liability for realized gains in excess of 8000 UF; IMF‑OECD sample estimate for 2018 = 219,586 million pesos (SII value: nd). - Exempt bracket / Basic PIT allowance: - Not a TE under proposed benchmark; IMF‑OECD microsimulation estimates (2018 sample): - Scenario 1: Total 1,679,774 Million $ (Million USD 2,470) = 0.8% of GDP. - Scenario 2: Total 967,545 Million $ (Million USD 1,423) = 0.5% of GDP. - Voluntary pension contributions and returns: - Deduction of voluntary contributions (Option 1) and non-taxation of returns (Option 2) are TEs under proposed benchmark. - SII has individual-level data; proposed methodological correction: compute difference in PIT payable if contribution added to taxable income vs current PIT paid. - IMF‑OECD sample estimates (Foregone Revenue, Million Pesos, 2018): - SII previous methodology: 106,509 - Proposed methodology: 134,813 - Investment returns on voluntary pension contributions: - Preferred primary method: cash-flow method using aggregate pension fund data and voluntary/mandatory shares, apply real profitability and average marginal PIT rates; set negative TEs in years with negative returns to zero. - NPV method discussed as secondary/optional; critiques include sensitivity to assumptions on discount/return rates and horizon. - Agreed deposits (depósitos convenidos) and reduced withholding rates: - Agreed deposits: TE (deductible for employees in agreement with employer); SII currently measures together with APV; recommendation to separate items. - Reduced withholding rates deviating from standard domestic rates are TEs; measure by comparing benchmark withholding rate (standard + treaty rates) with actual rate multiplied by offshore payment amount. - DFL2 concessions: - DFL2 benefits (property tax reductions, stamp tax exemptions, deductible mortgage interest for pre-June 2001 properties, exemption of rental income, inheritance tax exemptions for first transfer etc.) are TEs under proposed benchmark. - SII currently measures rental income exemption and mortgage payment deduction; IMF‑OECD recommend rental income be reported in F22 and collect data for other benefits. - SII reported foregone revenue for exemption on rental income from DFL2 properties: - 2018: 107,646 - 2019: 117,902 - 2020: 121,036 (Million Pesos). - Life insurance proceeds: - Non‑taxation of life insurance proceeds: TE under inheritance tax. - Insurance companies should provide data disaggregated to identify returns from saving component. ### VAT selected items and numeric figures (as reported) - Selected VAT tax expenditures and measures (values in Million Pesos as presented): - 13.1 Passenger transport 249,426 - 13.2 Education 309,105 - 13.3 Health services 220,352 - 13.4 Financial services 26,014 - 13.7 Life insurance 82,632 - 13.10 Leisure services 26,014 - 13.11 Services provided to businesses -159,143 - 13.12 Certain other services 273,910 - 13.15 Free Trade Zone imports 66,539 - 13.16 Tips 77,204 - 13.17 Defense Ministry and companies: Enaer, Asmar and Famae 17,409 - 13.32 Financial leasing 10,415 - Credits: - 14.1 Special tax credit for housing construction companies 420,026 - Deferrals: - 15.3 Two-months deferral in VAT payment 44,290 ### Cross-country practices and TE reporting best practices (summary) - TE reporting best practices: - Annual publication integrated into budgetary process. - Clearly define and document benchmark; describe methodology item-by-item; include legal references. - Classify TEs by tax base, type, function, objective and beneficiary. - List all identified TEs (even if not measured); rank or list top TEs to guide users. - Provide distributional impact and grade estimation reliability where possible. - Cross-country idiosyncrasies influence benchmark choice (example countries: Australia, Canada, France, Italy, United States) — practices vary on deferrals, pensions, presumptive regimes, etc. - Assessment of Chile’s TE reporting (summary of checklist: SII follows many practices but lacks clear documented benchmark, detailed methodology description, legal references for each TE, distributional impact information, and assessment of reliability for estimates). ### Final prioritised recommendations (synthesis) - Define and publish an explicit TE benchmark consistent across CIT and PIT for 2020 onwards (partial dividend imputation and SME Transparent regime included; preferential SME regime excluded). - Improve and expand administrative data collection and inter-agency data sharing (FTZs, Section 107 capital gains, DFL2 rental income, life insurance proceeds, cooperatives, universities, leasing and intangibles adjustments). - Revise and standardize TE calculation methods for key items (Section 8.17, SME computations, leasing, intangibles, pensions, DFL2, FTZs, cooperatives). - Gradually reform excise design and consider revenue-enhancing options when economic conditions permit: - Include excises in VAT base; phase out trucking diesel credit; narrow diesel–gasoline tax gap; raise green tax and include kerosene; introduce specific alcohol-content excise floors; expand tobacco base to e-cigarettes and HTP while strengthening enforcement; consider sugar-content based taxes for foods and drinks. *Italic: Source — 1chlea2020004 (IMF‑OECD joint mission report, April – October 2020; canonical PDF filename: 1chlea2020004). * ### PREFACE _____________________________________________________________________________________ 6 ### 1chlea2020004 - PREFACE ### Mission context and team - A remote mission was conducted by a joint team of staff from the International Monetary Fund (IMF) and the secretariat of the Organisation for Economic Co-operation and Development (OECD) during April – October 2020. - Main purpose: assist the Minister of Finance of Chile with technical support to review Chile’s tax expenditure methodology and its corrective excise taxes. - The report was written jointly by the IMF and the OECD, with the IMF team leading the work assessing tax expenditures in the corporate income tax (CIT) and the analysis of excises, and the OECD team leading the work assessing tax expenditures in the personal income tax (PIT) and value added tax (VAT). - A presentation of the main findings was given to the Minister of Finance on October 6, 2020. - The report incorporates comments provided by the Ministry and the Chilean Revenue Administration. - IMF team leadership and members: - Led by Mr. Ruud De Mooij (Division Chief, Tax Policy Division, Fiscal Affairs Department (FAD)). - Team included Mr. Shafik Hebous, Mr. Roberto Schatan and Mr. Charles Vellutini (all Tax Policy Division, FAD). - OECD team leadership and members: - Led by Mr. Bert Brys (Head of Country Tax Policy Team, Centre for Tax Policy and Administration (CTPA)). - Team included Ms. Gioia de Melo and Mr. Sean Kennedy (both CTPA). - Additional CTPA contributors acknowledged: Mr. Alastair Thomas; Mr. Piet Battiau; Mr. Stéphane Buydens; Ms. Dimitra Koulouri; Mr. Eduardo Jimenez; Ms. Luisa Dressler; Mr. Kurt Van Dender. - Acknowledged Chilean counterparts (selected): - Ministry of Finance: Mr. Manuel Alcalde, Mr. Claudio Agostini, Ms. María Luisa Marraccini, Ms. Javiera Suazo. - Revenue Administration (Servicio de Impuestos Internos, SII): Ms. Danae Chandia, Mr. Francisco Henriquez, Ms. Sandra Luckeheide, Mr. Francisco Montes, Mr. Carlos Recabarren. ### Key findings and recommendations — overview - Chile follows international best practice in fiscal management by calculating the tax revenue foregone from a wide range of Tax Expenditures (TEs) and presenting these to Congress on an annual basis. - Overall, the methodology applied by the tax administration (SII) to calculate TEs is aligned with practices in other OECD countries. - The joint IMF‑OECD mission identified scope for improvement and recommends that Chile: - Defines more explicitly a benchmark tax system against which to assess TEs. - The report proposes a TE benchmark for the current tax regime (2020 onwards) that, for the income tax, combines a pure conceptual approach with a more pragmatic approach based on current tax law. - The small business transparent regime and the partial dividend imputation regime are part of the benchmark, while the preferential regime for small firms is not. - Improves the quality of data used in TE estimations. - Identified lack of data as a key obstacle in Free Trade Zones, capital gains on shares listed on the Chilean stock market, business income taxed under the presumptive regimes, rental income from DFL2 property and life insurance policies. - Provides a complete list of TEs and strengthens the TE calculation methodology of certain items. - TE assessment could be gradually expanded beyond CIT, PIT and VAT. - SII methodology was mostly appropriate and accurate, but some estimates could be enhanced and a proposed methodology was tested using an anonymized sample of tax returns. - Forms a Working Group with members of the SII and Ministry of Finance (MOF) to continue developing and improving TE calculation methodology over time. ### Implications of the newly defined benchmark tax system - A newly defined benchmark tax system proposed in this report will have implications for the TE assessment: - Some provisions would no longer qualify as TEs, whereas new items will be added. - Specific treatment changes cited: - All CIT TEs are estimated considering the partial dividend imputation regime as the benchmark. - The reduced CIT rate and the full (rather than partial) imputation credit in the SME regime are qualified as TEs. - In the PIT: - Items that no longer qualify as a TE include the deferral of tax liability due to retained business profits and the deduction of mandatory “social” contributions linked to pensions, health and unemployment. - The deduction of voluntary pension contributions as well as the non-taxation of the return on voluntary savings that accumulate within the privately managed fund are qualified as TEs. - Note: Qualifying a tax provision as a TE differs from an assessment of its desirability, which requires a more complete analysis of costs and benefits. Structural features that are part of the benchmark tax system are outside the TE list and require broader tax policy discussions. ### Excises — main findings and policy recommendations - The report finds scope to improve the design of excise taxes in Chile and notes that revenue could be expanded once economic conditions permit. - General recommendations (each excise raises different policy challenges): - Fuels: - When the economic conditions turn more stable, fuel excises can be strengthened by increasing tax rates (most notably on diesel), rationalizing tax credits to trucking companies, broadening the VAT base to include the excise tax, increasing the green tax on CO2 emissions, and including kerosene in the tax base (while addressing equity concerns through complementary measures). - Alcohol: - The structure of alcohol excises could be improved by introducing a specific (alcohol-content related) tax floor; rates on selected products could be increased as the circumstances allow. - Tobacco: - There is little scope to increase tobacco excises, although the tax base could be expanded to cover novel products (such as e-cigarettes) and administrative controls against contraband could be strengthened. - Sugary drinks: - Consideration could be given to explore an expansion of the current tax on sugary drinks to other products with high sugar content. *Preface and Key Findings and Recommendations, 1chlea2020004 (IMF‑OECD joint mission, April – October 2020).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overall assessment - The IMF and the OECD received a request from the Chilean Minister of Finance to provide an assessment of Chile’s tax expenditure (TE) methodology and practice and its corrective excises. A team of IMF and OECD staff prepared this joint report and presented it to the Minister of Finance. - The report concludes that Chile follows international best practice by calculating the tax revenue foregone from a wide range of TEs and presenting these to Congress on an annual basis. - The methodology applied by the SII to calculate TEs is broadly aligned with international practice, although there remains scope for improvement. - The report defines a more explicit TE benchmark for the income tax in Chile and uses it to provide an assessment on an item-by-item basis of corporate and personal income tax expenditures. - The report recommends collecting more and better data to further improve the assessment. - The report includes a brief section on TEs within the VAT. A separate chapter discusses excise duties in Chile and provides options to improve their design and enhance their revenue once economic conditions permit. ### Definitions and purpose of Tax Expenditures (TEs) - TEs are provisions in the tax legislation that modify the tax liability of specific groups of individuals or businesses. - Governments use TEs to achieve economic, social and equity objectives, or to simplify the tax system. - TEs might have a significant cost for the budget, which makes it important that they are estimated on a regular basis to contribute to fiscal transparency and support informed decision making on the allocation of public resources. - A key issue is the choice of the benchmark tax system against which to establish the nature and extent of any tax concession; once defined, TEs are identified as deviations from the benchmark. - Benchmarks differ across countries and over time; TE estimates are usually not directly comparable across countries or years. - The most important goal is to increase the transparency and accountability of tax policy so TEs undergo the same scrutiny as direct expenditures. - Recommendations for TE reporting improvements in Chile: - Be more explicit about the choice of the applied TE benchmark. - Describe in more detail the TE estimation methodology in the TE report. - List all TEs and reference their legal source. - Provide information on the distributional impact of TEs. - Obtain better data for appropriate calculation of some TEs. - Revisions are proposed that, compared to previous reports by the SII, imply some TEs will no longer be labeled as such, while others will be added; proposals are made to enhance calculation of certain TEs. ### A benchmark tax system for Chile - Guidance is provided for defining a TE benchmark for Chile’s income tax for the period 2017 – 2019 and from 2020 onwards. - A hybrid benchmark is proposed between the Schanz-Haig-Simons definition of “income” and a pragmatic approach considering the main general aspects of the current Chilean tax system. - The benchmark is based upon realization-based taxation (e.g., capital gains once realized are taxable; deferral of an accrued gain does not constitute a TE). - Concerns about the 2019 TE report benchmark: - The income tax system in 2019 comprised two regimes, labelled regimes A and B. - Regime A: an attribution regime that levied PIT on accrued income (irrespective of distribution), provided a full credit to the PIT taxpayer for underlying CIT paid, provided specific requirements were met. - Regime B: a partially integrated regime allowing deferral of final taxes until profits were distributed, allowing as a credit 65 percent of the CIT paid (unless profits distributed to tax treaty partners in which case a full credit is available). - The SII applied both regimes A and B as the benchmark at the CIT level but only used regime A as the benchmark for the PIT—this approach is inconsistent. - TEs calculated were not “actionable” in the sense that policy makers could not recoup the revenue foregone by reforming the TE. - A preferred consistent benchmark for 2017-2019 would incorporate regimes A and B within the benchmark system for both CIT and PIT. - For the reformed tax system in 2020 (and onwards), the proposed TE income tax benchmark applies the same rules for the CIT and the PIT consistently and recognizes three components: - (i) an optional Transparent regime for small and medium-sized enterprises (SMEs), which taxes all profits only at the PIT level, irrespective of distribution (as long as shareholders are final taxpayers); - (ii) a Partial Dividend Imputation regime for most (large) corporations, largely equivalent to regime B in 2017-2019; - (iii) an SME regime that applies to businesses with turnover below some threshold, taxing income at a reduced CIT rate, with a full imputation credit under the PIT (taxed upon realization) and based on cash accounting. - Proposed inclusion/exclusion in the 2020 benchmark: - Include (i) and (ii) in the benchmark since they are structural elements. - Exclude (iii) from the benchmark because its preferential treatment of some SMEs should be quantified as a TE to facilitate policy makers’ decisions. ### Data - SII should improve the scope and quality of available data on some TEs; lack of data is a main obstacle for proper TE measurement. - Specific TEs with identified data gaps: Free Trade Zones, capital gains on shares listed on the Chilean stock market, companies taxed under presumptive regimes, exemptions of investment channeled through investment funds, rental income from DFL2 property, and life insurance policies. - Obtaining better data may require legal changes for SII to collect them or regular exchange arrangements with other government bodies. - SII should receive tax returns regardless of exceptional regimes; income should be declared even if exempt from tax. - For this report, a small representative sample of anonymized individual and business tax returns was shared with the IMF-OECD team to provide an indicative quantitative assessment. - The proposed TE methodology was applied to this sample to infer indications of size for some TEs; SII could apply the same methods to the full set of tax returns for more accurate estimation. - In many cases the TE methodology applied by the SII seems appropriate and accurate; recommendations provided for enhancing estimation of specific TEs. ### Tax expenditure analysis in the Corporate Income Tax (CIT) - SME regime preferences should be measured as a TE. Main differences from the benchmark: - (i) a reduced CIT rate of 25 percent (temporarily reduced to 10 percent until 2022 in light of COVID-19); - (ii) a notional deduction from the tax base of up to 50 percent of reinvested profits up to a deduction cap; - (iii) a full imputation credit instead of a partial credit under the PIT; - (iv) taxation on a cash basis instead of an accrual basis. - The optional presumptive regime for small taxpayers in agriculture, transports and mining generates a TE; appropriate benchmark for these small taxpayers is the SME Transparent regime, so TEs are best categorized and measured under the PIT rather than the CIT. - Leasing generates a TE by allowing faster depreciation deductions than in the benchmark; recommended to use exact data from both lessees and lessors rather than approximated ratios. - Tax treatment of intangible assets gives rise to both positive and negative TEs: - Start-up costs: allowed expensing in the year incurred → positive TE. - Intellectual property (IP) items: neither allowed expensing nor depreciation → negative TE. - Recommended to use actual “adjustment” data between financial accounts and tax treatment as reported by taxpayers. - Cooperatives and universities receive preferential treatment constituting a TE: - Cooperatives are exempt from CIT on the share of net income deemed generated through transactions among cooperative members; cooperatives should report full net income (“surplus”) to compute TEs. - Profits earned by universities are exempt; universities should be required to file full tax returns (Form 22) to improve TE computation. - Computing TEs in Free Trade Zones requires additional data and a new computation method; businesses should ideally file full tax returns and a study should exploit VAT returns, business registry, customs, employment office, mandatory pensions, and social security data. - Investment and mutual funds as pass-through entities do not lead to TEs for the funds per se, but under-taxation or no taxation of the investors leads to TEs (PIT expenditures if investors are individuals; CIT expenditures if investors are legal entities). - Capital gains exemption under Section 107 leads to a TE under the CIT if exempt gains are realized by a corporate entity; computing these TEs requires taxpayers to report these gains and acquiring data from the Financial Market Commission. ### Tax expenditure analysis in the Personal Income Tax (PIT) - Deduction of mandatory contributions linked to pensions, health and unemployment and the non-taxation of returns to mandatory pension savings that accumulate within the pension fund should not be considered TEs because they are universal and do not reflect discretionary spending. - Pension withdrawals that correspond to mandatory pension contributions are taxed under the proposed benchmark, implying the corresponding tax is no longer a negative TE. - Voluntary retirement savings: - The report follows a comprehensive income benchmark (Tax-Tax-Exempt treatment of (i) pension contributions, (ii) returns to pension saving, and (iii) pension withdrawals). - Preferential Exempt-Exempt-Taxed treatment for voluntary retirement savings is considered a TE under the new benchmark. - Measurement of TE associated with exemption of pension contributions could be similar to other deductions. - Exemption of investment returns is best determined by a cash-flow method. - Taxation of pension withdrawals constitutes a negative TE based on the cash-flow method. - Pension funds need to provide more information on mandatory and voluntary contributions, savings and pension withdrawals to allow SII to split revenue forgone and determine fraction associated with voluntary savings. - Presumptive deduction for expenses by independent workers should not be considered a TE: - Independent workers can choose actual expenses or a presumptive expense of 30 percent of gross fees. - SII previously considered these as TEs for years prior to 2018 when SSCs were not compulsory; since 2018 SSCs for independent workers are compulsory (levied at a rate of 17 percent), removing the reason to consider the presumptive deduction a TE. - Common practice among OECD countries is to include simplifying presumptive deductions in the benchmark system. - The additional imputation credit available under the special SME regime compared to the partial dividend imputation credit under the TE benchmark gives rise to a TE; this TE interacts with other SME regime provisions including the reduced CIT rate. - Mortgage interest deductions: methodology and data used by SII is adequate; under the proposed benchmark imputed rent from owner-occupied housing is not included in income while mortgage interest is not deductible → mortgage interest relief and deduction of property taxes are TEs. - Capital gains from sale of real estate: - Exemption up to UF 8000 per person for a lifetime is a TE. - Reduced taxation of capital gains in excess of 8000 UF should be included as a TE. - Tax privileges for DFL2 property are a TE, including the grandfathering rule for DFL2 property acquired before 2010. - Better microdata are needed to estimate TEs regarding exempt capital gains on sale/transfer of shares in publicly traded companies, quotas of publicly traded investment funds and quotas of mutual funds; current SII methodology is out-of-date. - TEs associated with the exemption of capital gains for individuals that invest in any type of shares up to 10 UTA (Unidad Tributaria Anual) should be estimated using information on capital gains reported in annual tax returns. - Tax exemptions of proceeds from life insurances should not be a TE for the income tax but should be for the inheritance tax (proceeds received by a beneficiary upon death are commonly taxable under an inheritance tax). - Special withholding tax rates that differ from the standard rate are considered a TE except where treaty rates differ from domestic law standard rates—treaty rates do not constitute a TE since they reflect tax treaty obligations. - The foregone revenue associated with the deduction of the basic tax allowance from personal income is typically not considered a TE, but there is merit in calculating its revenue foregone to inform policy makers. ### Tax expenditure analysis in the VAT - The common benchmark for the VAT is a uniform consumption tax on all final sales based on the destination principle; exemptions and reduced rates on domestic supplies qualify as TEs; zero-rating of exports is not a TE. - The current SII approach to measure VAT-related TEs is broadly consistent with international good practice. - Whether scope exists to improve Chilean VAT TE estimation has not been identified and would require a more detailed review of Chile’s input-output modelling. - The IMF’s VAT gap analysis conducted for Chile provides a good starting point for TE assessment. - Chile levies VAT only on a restricted list of services (those listed in art 20 numbers 3 and 4 of the ITL), whereas most OECD countries apply VAT broadly to all services unless explicitly exempt; the VAT exemption of professional services provided to final consumers in Chile is expected to give rise to a large TE. - The special housing construction credit is a TE under the VAT; incidence (buyer, seller, or both) determines who benefits. ### Excise duties — overview and recommendations - There is room for improvement in the design of excise taxes in Chile, including expanding revenue as economic circumstances permit (i.e., when the economy has become more stable after the initial recovery from COVID). - Chile has above average consumption of products that are health hazards: - Smoking prevalence is the second highest of the world. - Alcohol consumption is high by international standards, especially considering binge drinking by teenagers. - Sugar consumption is above World Health Organization recommended levels; Chile ranks close to the top in child overweight ratios. - Fuel consumption imposes significant external costs; Chile’s taxation is far from adequate to reflect these costs, with tax breaks to diesel fuel of special concern. - Diesel exhibits a disproportionate per capita consumption—the largest in Latin America and twice the regional average. - Taxes in Chile can do more to address public health and environmental concerns, particularly for fuels. Fuel - The tax rate on diesel is only a 1/4 of that on gasoline, although environmental costs are higher for diesel. - The efficient tax for motor diesel was estimated in 2017 at US$2.80 per gallon, almost seven times higher than its current level. - The difference for gasoline is nearly 80 percent. - Considering price elasticities of demand, increasing fuel excises to their efficient level would have a revenue impact of about US$ 3.8 billion, or 1.5 percent of GDP. - Diesel tax credits introduce distortions: - Trucking companies obtain a credit of up to 80 percent on the diesel excise; industrial (stationary) users get a full credit. - Aggregate cost of these credits is nearly US$630 million, 14 percent of which benefits the trucking industry; this is recorded as a TE. - Since 2017 industrial users and vehicle emissions have been subject to a green tax; Chile’s green tax prices carbon at only US$5 per ton (global carbon price to meet Paris Agreement goals estimated at US$ 75 per ton of CO2 by 2030). - Recommended phased approach: - Include excises in the base of the VAT. - Phase out the credit to trucking companies. - Gradually reduce the difference between gasoline and diesel tax rates. - Gradually raise the green tax and include kerosene (currently tax free), while considering distributional measures for low-income households using kerosene for heating. Alcohol - Excise structure can be made more effective; Chile’s excises are relatively low, especially on cheaper brands of beer and liquors. - Chile’s excise structure is entirely ad valorem; an ad valorem tax provides an incentive to consume cheaper alcohol. - A greater share of the excise as a specific tax (levy per alcohol by volume) would be more effective in targeting consumption behavior. Tobacco - Some scope exists to improve design, but the main challenge is enforcement. - The tobacco tax comprises a specific and an ad valorem component; the specific component has the largest weight (55/45) in revenue. - Tax rates have increased considerably since 2010 and consumption has trended downward modestly. - Prior to the latest rate increase in 2014, the tax burden on cigarettes in Chile (including VAT) was very close to the top of the Laffer curve; since 2016 revenues have fallen in nominal terms. - Illegal consumption may explain the decline; a recent survey finds approximately 25 percent of all cigarette consumption in Chile is illicit (smuggled without paying tax). - Aside from taxing novel smoking devices (E-cigarettes and heated tobacco products) which are currently exempt, the greater concern is administrative enforcement. - Some measures have been taken (marking cigarette packs), but steeper penalties for smuggling excisable goods have failed to pass Congress. Sugar - Chile is a pioneer in adopting an excise on sugary drinks; current structure is an additional rate to the general VAT on non-alcoholic drinks above a sugar content threshold. - The tax reduces intake of sugary drinks, but consumers may substitute sugar sources (e.g., sugary foods), implying possible substitution to unhealthy nutrients (fat and salt). - Emerging consensus: taxing nutritional content is more effective in inducing changes in nutritional habits. - An ad valorem excise incentivizes consumers to opt for cheaper variants; a specific excise on sugar content, applied equally to drinks and food, is preferable but requires pioneering tax policy work and exploration of implementation challenges. *Source: IMF-OECD joint report (EXECUTIVE SUMMARY), prepared for the Chilean Minister of Finance.* ### Chapter 4 of this report provides an analysis of various corrective taxes in Chile, such as excises on ### 1chlea2020004 - Chapter 4 of this report provides an analysis of various corrective taxes in Chile, such as excises on ### Corrective taxes in Chile: scope and performance - Chapter 4 analyzes corrective taxes in Chile on fuels, alcohol, tobacco, and sugary drinks. - These products cause health and environmental concerns and taxes are commonly used to discourage their consumption. - The consumption of these goods is relatively high in Chile compared to other countries in Latin America and the rest of the world. - Some excises imposed in Chile to discourage the consumption of these goods are relatively low or are weakly designed, leaving scope for improvement. - Total revenue from these excises in Chile is around 1.5 percent of GDP, which is more than 1 percent of GDP lower than the average in the OECD (2.6 percent of GDP). - Section 4 elaborates in more detail on the design issues and the comparative level of excises. ### Tax expenditures: definition, rationale, and concerns - Tax expenditures (TEs) are provisions in the tax legislation that reduce the tax liability of specific groups of individuals or businesses; they are deviations from a benchmark tax system in which such specific provisions are absent. - Forms of TEs include tax exemptions, allowances, credits, reduced rates or tax deferrals. - TEs are widely used in number of provisions and scale across countries. - Governments use TEs to achieve a wide range of policy objectives: incentivising behavioural change (labour supply or demand, investment, innovation, consumption, savings), social or cultural objectives (e.g., education expenses, donations), aligning taxation with ability to pay, or simplifying administration and compliance. - The term tax “expenditure” arises because they are equivalent to public expenditure implemented through the tax system. - TEs may be preferable to direct expenditures when the tax administration has comparative advantage in administrative economies of scale and data verification, and when eligibility criteria are linked to data already reported on tax returns. - TEs are less likely to fall under scrutiny than direct spending programmes. - Measuring TEs allows for a complete view of public expenditure. ### Costs, evaluation, and distributional implications of TEs - TEs often come at a significant tax revenue cost; they should be assessed via cost-benefit analysis. - In principle, TEs are justified if social benefits exceed associated social costs. - Example social benefits for investment incentives: net increases in investment, employment or wages and productivity spillovers. - Social costs include net public revenue losses, administrative and compliance costs, and distorted resource allocation. - TEs may open opportunities for tax avoidance and evasion and might lower horizontal and vertical equity. - Evaluations should account for the marginal cost of public funds being generally larger than one (public dollar worth more than private dollar) because taxes to generate public revenue are distortionary and/or involve administrative and compliance costs. - TE evaluations are data demanding and should primarily target large TEs. - TEs should come under scrutiny like direct expenditures, given opportunity costs and the need to determine cost-effectiveness and fairness. - Distributional concerns: - Some TEs target the less affluent or households most in need, but other TEs may disproportionately benefit richer individuals. - Richer individuals tend to benefit more from some TEs because tax reliefs often take the form of allowances whose value increases with the taxpayer’s marginal tax rate and because higher income households have higher take-up rates for many reliefs. - Examples: mortgage interest deduction benefits higher income households (larger mortgages and higher marginal tax rates); preferential tax treatment of retirement savings benefits higher income taxpayers in absence of limits. ### Defining the benchmark tax system for TE analysis - A key issue is choosing the benchmark tax system against which TEs are identified. - Once defined, TEs are those provisions deviating from the benchmark. - Benchmarks differ across and within countries over time, complicating TE comparisons. - Three common approaches to defining a benchmark: 1. Conceptual approach: normative benchmark based on a theoretical comprehensive income or broad-based consumption tax base. 2. Reference tax law approach: uses a country’s existing tax system as the starting point; yields a narrower list of TEs and provides better sense of revenue impact of eliminating provisions. 3. Expenditure subsidy approach: costs only concessions clearly analogous to expenditure subsidies; rarely used and results in a narrower list. - Hybrid approaches combine conceptual benchmarks with practical features of actual tax systems. ### Criteria to guide benchmark choice - Well-defined and transparent: assumptions should be understandable and verifiable. - No discrimination: benchmark should represent standard taxation treatment for similar taxpayers or activities (horizontal equity); progressive PIT structure is typically included. - Avoid negative TEs: provisions that increase tax burden should be part of benchmark where possible; negative TEs may be informative in some cases. - Consistent: benchmark should be consistent across taxes and explicitly address relief for double taxation (integration). - Actionable: benchmark should produce a TE list that informs policy makers about reform options and serves as a starting point for evaluation. - Aligned with international obligations: benchmark should reflect international tax rules a country has committed to (e.g., double tax treaties). - Facilitate international comparability: choosing a benchmark used by other countries can help comparability, but caution is required due to methodological differences. *Content from the provided Chapter excerpt (PDF filename: 1chlea2020004).* ### Box 1. Comprehensive Income Versus Broad-Based Consumption Tax Benchmarks ### Box 1. Comprehensive Income Versus Broad-Based Consumption Tax Benchmarks ### Conceptual benchmarks: comprehensive income versus consumption tax - Comprehensive income (Schanz-Haig-Simons): sum of the market value of consumption and the changes in net wealth; income taxed when accrued. - Under a comprehensive income tax benchmark: - Savings are made out of taxed earnings; the return on these savings is part of the benchmark and subject to income tax on an accrual basis. - Withdrawals of assets from saving vehicles are fully exempted from tax (a “taxed-taxed-exempt” regime for savings). - Broad-based consumption tax: conceptually equal to a comprehensive income tax net of the deduction of net savings. - Under a consumption benchmark, taxation of income from capital that is reinvested constitutes a negative TE. - Under a comprehensive income benchmark, any concessional taxation of income derived from capital is a TE. - Example for pensions: - Comprehensive-income treatment: deductibility of pension savings or exemption/deferral of returns are TEs (exempt-exempt-taxed pension system); exemption from income tax of the pension itself is not a TE. - Pure consumption tax ≡ exempt-exempt-taxed (EET) regime: contributions exempted, income accruing within the scheme exempted, capital taxed on payout. ### What items are included/excluded under a comprehensive income tax base - All income from salaries, entrepreneurial activities and investments, including dividends, interest, rents, capital gains and royalties is taxed upon accrual; included in the benchmark. - Employment-related benefits exempt from tax (e.g. bonuses, remuneration for extra time worked, fringe benefits) are TEs. - Deductibility of pension savings from income tax or exemption/partial taxation/deferral of the return on these pension savings are TEs. - Deductions or credits for personal consumption expenditure (cost of food, cars or medical expenses incurred, etc.) are TEs. - Housing treated as an investment good: allows deductions from home mortgage interest and possibly for property taxes on owner-occupied housing, and includes imputed gross rental income in the tax base. ### Measuring tax expenditures (TEs): methods and characteristics - TE calculations ideally use administrative tax return data; other data sources can complement. - Three main measurement methods: 1. Tax revenue foregone - Quantifies direct ex-post revenue loss associated with a provision relative to the benchmark (holding other factors constant). - Characteristics: - No dynamic tax effects: static calculation; does not capture behavioral changes. - No interdependence: each TE estimated in isolation; interaction effects ignored. - Dependent on take up: based on actual take up of a relief. - Assumes constant compliance and enforcement. 2. Tax revenue gain - Ex-ante estimate of additional revenue from eliminating a TE when behavioral responses are taken into account. - Requires data on elasticities and comprehensive models; may be more contentious due to assumptions. - Countries may include revenue gain estimates for selected TEs. 3. Outlay equivalent method - Estimates TE as the expenditure required if the subsidy were provided outside the tax system. - Ignores taxpayers’ “taxable capacity” and other determinants of actual tax liability. - Illustrative example: R&D allowance - Firm spends EUR 100 on eligible R&D; can deduct EUR 120 (insufficient taxable income to claim full EUR 150). - Revenue forgone method (50 percent corporate tax rate): computes a TE of EUR 10 (50 percent of EUR 20). - Outlay equivalent method: computes cash equivalent of EUR 25 (50 percent of full EUR 50 additional allowance) if cash outlay is non-taxable (EUR 50 if cash outlay is taxable). ### Cash-flow versus net present value (NPV) approaches for deferrals - Within the revenue forgone method, two complementary approaches for deferrals: - Cash-flow calculation method - Focuses on current fiscal year revenue effects: deferred income taxes from current-year activities represent a cost; income taxes on prior-year activities with completed deferral are a revenue gain. - In steady state, amounts may cancel and TE could be zero, but this is an over-simplification for pensions (households often deduct contributions at higher PIT rates than tax rate on pensions). - Ignores future drop in revenues if unclaimed TEs are carried forward and claimed later. - NPV approach - Provides discounted present-value estimates of foregone revenue by accounting for effects in current and future fiscal years from current-year transactions. - Cash-flow method can overstate overall effect when deferred taxes will ultimately be received; NPV method typically yields a lower value for the TE in such cases. - Requires assumptions on future tax rates faced by taxpayers, profitability of savings, discount rate, duration of deferral, and carry-forwards. - Raises double counting challenges (e.g. retained profits leading to higher share value; deferral of distribution of profits vs taxation of capital gains on realization). - Countries should explicitly disclose elements and assumptions incorporated into NPV calculations. - Numerical example (Canadian report illustration): - If taxpayer defers $100 in income tax for one year and discount rate is 8 percent, present value of future obligation is $92.59 and the taxpayer’s benefit is $7.41 in today’s dollars; representing an implicit interest cost to the government. - Practical considerations: - Estimating NPV accurately is challenging when activities are not in a steady state or when long-horizon projections are imprecise (examples: capital cost acceleration in mining/oil and gas sectors; Registered Pension Plans projections). - Countries vary in use of NPV: only the United States TE report includes a table with NPV estimates (reported separately for each provision without a grand total); Australia and Canada measure deferrals on a net cash flow basis. ### International comparability and reporting challenges - TE values cannot be adequately compared across countries even when using the same method because: - Differences in definition of the benchmark tax system. - Coverage differences (e.g. central government only versus all government levels). - TE values depend on marginal tax rates, take-up, and other country-specific factors. - Comparability is more feasible for TE methodologies and benchmark choices; peer learning on methods is useful. ### Best practices in TE reporting - Publication and frequency: - Integrate publication of TE reports into the budgetary process, ideally compulsory by law. - Reporting should ideally be annual. - Benchmark and methodology transparency: - Clearly define and document the benchmark tax system and justify its choice. - Describe TE estimation method in detail on an item-by-item basis (main body or annex). - Classification and documentation: - Classify TEs by tax base (PIT, CIT, VAT, excise taxes, etc.), type of TE (credit, allowance, exemption, reduced rate), function (education, fuel and energy, health, defense, etc.), policy objective (employment, R&D and innovation, housing, reducing poverty, etc.), and targeted beneficiary group (corporations, individuals, SMEs, self-employed, etc.). - Include legal reference for each TE. - Aggregate figures and presentation: - Despite drawbacks, total sum of all TEs as a share of GDP and/or percentage of total tax revenues might be included with warnings about limitations; countries differ (Australia, Canada, Italy, United States do not include an overall TE figure; France does). - Ranking TEs by value or listing top TEs can guide users (United States ranks all TEs by total value; France, Germany and Australia provide top-ten/-fifteen lists). - All identified TEs should be listed, even if not measured. - Provide distributional impact information if possible (take-up rate and TE value across income distribution). - Grade estimation reliability (e.g. “high”, “medium-high”, “medium-low”, “low”). - Empirical note: nine countries identified as publishing detailed and comprehensive TE reports: Australia, Austria, Canada, France, Germany, Italy, Netherlands, Korea and Sweden. ### Impact evaluation and policy use of TE reports - TE reports increase transparency and accountability, supporting well-informed resource allocation and reducing scope for rent seeking. - TE reports are starting points for cost-benefit and distributional assessments: - Require information on number of beneficiaries and characteristics (income distribution, industrial sector). - Assess effectiveness, efficiency, distributional impact, and simplicity (administrative and compliance costs). - Consider that revenue forgone is not itself a welfare loss, though it creates opportunity costs because public funds are scarcer than private funds due to tax-induced distortions. - Evaluation scope and methodologies: - Impact evaluations often focus on direct effects (additional investment or jobs attributable to the TE) using difference-in-difference and matching techniques. - Indirect effects (crowding out, spillovers) may require general equilibrium models. - TE assessments should consider compliance and administrative costs, often omitted from simple cost-benefit evaluations. - Incidence and pass-through: - Incidence analysis can determine whether TEs benefit intended targets; pass-through to consumer prices matters for consumption tax concessions. - Empirical findings: - Kosonen (2015): VAT cut on hairdresser services in Finland reduced prices by only half of full pass-through; quantity barely changed. - Benzarti and Carloni (2019): large VAT reduction for sit-down restaurant meals in France primarily benefited restaurant owners; limited benefit to employees, consumers, and suppliers. - Benedek, de Mooij, Keen and Wingender (2019): full pass-through generally confirmed for standard rate changes; pass-through less than full for reduced VAT rate changes and reclassifications into reduced rates. ### Country approaches to benchmark choice (selected OECD examples) - Australia: follows a conceptual approach; uses a comprehensive income tax benchmark (benchmark not presented as “optimal” tax system). - Canada: defines benchmark on fundamental aspects of the tax system; argues this is less subject to interpretation than a normative optimal system. - France and Italy: follow a reference law approach. - United States: uses both conceptual and reference tax law approaches, both based on a comprehensive income tax base; benchmark allows personal exemptions, a standard deduction, and deduction of expenses incurred in earning income. *Source: Box 1. Comprehensive Income Versus Broad-Based Consumption Tax Benchmarks (extracted from the provided PDF content).* ### Appendix 1 and Appendix 2 include a more detailed analysis of provisions that could be of particular ### 1chlea2020004 - Appendix 1 and Appendix 2 include a more detailed analysis of provisions that could be of particular ### Cross-country practices and methodological choices in Tax Expenditure (TE) reporting - TE reports reviewed vary in tax coverage: - Canada: personal and corporate income tax TEs and goods and services tax TEs. - United States: focuses exclusively on TEs linked to PIT and CIT (sales taxes levied at state level). - Australia, France, Italy: include income tax TEs and VAT/GST TEs; Australian, French and Italian reports also include information on TEs related to other direct and indirect taxes. - Choice of benchmark approach (practical variant of conceptual approach vs reference law) affects scope and whether deferrals are treated as TEs. - All countries consider accelerated and enhanced depreciation as TEs. - France and Italy do not identify tax deferrals on profits as TEs; Australia, Canada and the United States do. - Measurement of timing preferences: - Australia and Canada: nominal cash-flow basis. - United States: both cash flow and NPV estimates. - Differences in departures from a comprehensive income (SHS) definition: - US and Australian benchmarks: income taxable only when realized → deferral on unrealized capital gains not a TE. - Canada: deferral on unrealized capital gains is regarded as a TE. - Pensions: - Australia, Canada, United States: identify TEs related to pension savings following a Tax-Tax-Exempt rule. - France: does not identify TEs associated with deduction or concessional treatment of pension contributions; identifies reduced taxation of income earned within pension fund as a TE (not measured). - Italy: identifies fewer pension TEs; exemptions to earnings for a maximum of 10 percent of assets in pension funds are not considered a TE; only deduction of voluntary contributions is viewed as a TE. - Australia: concessional treatment of mandatory employer contributions and voluntary contributions to superannuation funds is a TE; concessional tax rate or deferral on returns within the fund is a TE; taxation on withdrawal generates a negative TE. - Health insurance: - Voluntary health insurance contributions generally viewed as TEs. - United States: deduction of contributions to health savings accounts is a TE. - Australia: does not identify TEs for deductibility of health insurance premiums but measures TEs regarding life and disability insurance premiums. - Italy: deductibility of complementary private health insurance viewed as a TE. - Canada and United States: exclusion of medical insurance premiums from employee gross income and deduction of self-employed medical insurance premium viewed as TEs. - France: no TEs associated to contributions to health in its TE reports. - Housing-related TEs: - Comprehensive income tax would allow deduction of mortgage interest and property taxes but include imputed gross rental income. - United States: allows deduction of mortgage interest on owner-occupied residences and measures deduction of property taxes and exclusion of net imputed rental income. - Australia and Canada: mortgage interest expenses are not deductible; exclusion of net imputed rent considered part of benchmark. - France: views deductibility of mortgage interest on owner-occupied residences as a TE but not exclusion of net imputed rental income. - Italy: allows deduction of mortgage interest on owner-occupied residences and imputed income of main residence and measures both as TEs. - Basic allowance / zero-rate bracket: - Considered part of the benchmark in all reviewed countries. - Canada: measures revenue forgone associated to the Basic Personal Amount but treats it as part of the benchmark (not a TE). - Provisions such as EITC, dependency tax offsets and credits for childcare expenses are generally considered TEs. - Simplification and presumptive regimes: - Presumptive tax regimes uncommon: France and Italy have them. - France does not view presumptive regimes as TEs; Italy lists and measures them. - Cash basis accounting in Canada and simplified trading stock rules for small businesses in Australia are listed (not measured). - International taxation: - Preferential withholding tax rates due to double taxation treaties: none of the countries reviewed consider these as TEs. - Australia and Canada measure exemptions or preferential non-resident withholding tax rates relative to domestic withholding rates or treaty highest rate. - Australia: CFC rules, transfer pricing and thin capitalisation considered part of the benchmark. - United States: measures TE associated to preferential taxation of active income of U.S. controlled foreign corporations. - Canada: lists (but does not measure) exemption of active business income of foreign affiliates and deductibility of expenses incurred to invest in foreign affiliates. - Australia: lists some TEs associated to controlled foreign companies but does not measure them. - France and Italy: do not identify any TEs related to international taxation. ### Assessment of Chile’s TE reporting (summary of Table 1 findings) - Current Chile TE report practices (√ = follows, X = absent): - Publication of TE reports integrated into the budgetary process compulsory by law: √ - Reporting on annual basis: √ - Clearly defined and documented benchmark: X - Description of methodology used in TE estimates: X - Classify provisions along different dimensions: √ - Include legal reference for each TE: X - Sum of all TEs expressed as a share of GDP: √ - Include an explanation that summing TEs is misleading and does not reflect an accurate measure of tax revenue foregone: X - Rank all TEs by their value or list top TEs: √ - List all TEs: X - Provide information on the distributional impact of TEs: X - Assessment of the reliability of the estimates: X ### Recommendations and proposed benchmark approach for Chile - General recommendation: - Adopt a hybrid TE benchmark: stay as close as possible to a genuine comprehensive income tax base while including several actual Chilean provisions as part of the benchmark; include a policy rationale for deviations from comprehensive income base. - Specific guidance for benchmark design: - For CIT: benchmark should be based upon accruals accounting standards irrespective of partial or full dividend imputation choice. - Capital gains: taxable in benchmark once realised; any under-taxation or absence of final tax on realised capital gains identified as a TE. Dividends taxed under PIT upon distribution as part of the benchmark. - Interest income: under benchmark all interest income is taxable; preferential household treatments on interest income are TEs. - Fringe benefits: taxed same as labour income in benchmark; under-taxation is a TE. - Period-specific benchmarking: - For 2017-2019: - Chile applied a dual TE benchmark: CIT benchmark included regimes A and B (reference law approach); PIT benchmark was a fully integrated accruals regime (conceptual comprehensive income). - Concerns: - Inconsistency between CIT and PIT benchmarks. - Resulting TEs were not “actionable” (e.g., deferral of tax on retained earnings by firms choosing Regime B was reported as a PIT TE but not easily reformable at PIT level). - Single benchmark across CIT and PIT not preferred: each option (attributed income regime A or dividend imputation) has drawbacks if forced onto both levels. - Preferred approach for 2017-2019: - Consistent, dual TE benchmark that incorporates core elements of both regimes A and B for both CIT and PIT; this implies foregoing measurement of tax deferral of retained profits as a TE. - From 2020 onwards (post-February 2020 reform): - Proposed TE benchmark: the partial dividend imputation regime rather than the full dividend imputation system. - Reasons: - From 2020, assignment to partial imputation regime is size-based (turnover), so full imputation would constitute targeted preferential treatment for SMEs and be a TE. - Choosing full imputation as benchmark would create negative TEs (undesirable). - If full imputation were policy-preferred, changing the benchmark could be justified but would be a broader tax-design discussion outside TE reporting. - Choice between including 25 percent or 27 percent CIT rate in benchmark depends on whether full or partial imputation is chosen: - Full imputation in benchmark → CIT rate 25 percent. - Partial imputation in benchmark → CIT rate 27 percent. - Recommendation: exclude the SME regime (full imputation) from the TE benchmark (except the SME Transparent regime). ### SME regimes, cash-basis accounting and example TE calculations - SME Transparent Regime: - The SME Transparent regime taxes personal business income under PIT irrespective of dividend distribution; suggested to be included in TE benchmark from 2020 onward. - Applies only to small businesses with shareholders liable for PIT. - Empirical expectation: - Only taxpayers with taxable personal business income below 90 UTA (about USD 63,000) face a tax-induced incentive to prefer SME Transparent regime to SME regime. - Taxpayers with taxable personal business income up to 90 UTA face a marginal PIT rate of 23 percent, below the 25 percent CIT rate under SME regime. - Temporary reduction in CIT for SMEs from 25 percent to 10 percent until the end of 2022 increases incentive to prefer SME regime. - SME TE computation (post-2020): - Direct CIT TE from SME regime stems from 2 percent rate difference with general regime; computed by applying 2 percent to reported taxable income. - Interaction example: - Taxpayer in SME regime with taxable income 100 and no extra CIT exemptions: TE = 2 (100 x 2 percent). - Same SME with preferential treatment reducing taxable income from 100 to 80: - TE attributable to preferential treatment: 20 x 25 percent = 5. - TE due to SME regime: 100 x 2 percent = 2. - Total TE = 7. - Cash-basis vs accruals under SME regime: - SMEs taxed on a cash-basis after 2020 (including immediate expensing of assets) vs general regime accrual basis. - Practical considerations: - In steady state, cash-basis taxable income would be close to accruals equivalent, including for asset expensing. - Computing accelerated depreciation TEs would require SME asset data, defeating purpose of simplified accounting. - Using 2019 pre-reform depreciation data to approximate would be complex and is not recommended. ### Selected TE item: Capital Gains (Item 8.17, Section 107 of ITL) - Description: - Under certain conditions, capital gains from disposal or redemption of shares of publicly traded corporations, or quotas of publicly traded investment funds or mutual funds with “market presence” are deemed non-taxable income. - Market presence test: adjusted presence ≥ 25 percent or have a market maker; adjusted presence calculation considers days with transactions ≥ UF 1,000 (approx. USD 33,650) over last 180 trading days. - Current TE practice and issues: - Absence of final tax on realized capital gains identified as a TE and computed under item 8.17. - Computation methodology for item 8.17 is unclear, based on a procedure dating to 2001. - Characteristics: - TE can be volatile and driven by a few exceptional transactions; can attract public attention. - If exempt capital gains are realized by a corporation, exemption is a CIT TE; if realized by an individual, it is a PIT TE; if realized by mutual or investment fund, benchmark treats taxation at PIT side. - Historical magnitude: - Item 8.17 has typically indicated a relatively small TE amount below one percent (around 0.5 percent) of total TEs. - Caveat noted: - Computation methodology for item 8.17 requires clarification (procedure dating to 2001). *Italic: Source — 1chlea2020004 - Appendix 1 and Appendix 2 include a more detailed analysis of provisions that could be of particular (canonical URL: https://www.imf.org/-/media/files/publications/cr/2020/english/1chlea2020004.pdf).* ### 8.17 should be revised in light of the latest changes to the tax system as well as making the best use ### 1chlea2020004 - 8.17 should be revised in light of the latest changes to the tax system as well as making the best use ### Revision of Section 8.17 — summary recommendation - The current estimation of this TE should be dismissed and replaced by a new method. - Corporate taxpayers should be required to separately report in the tax return all realized capital gains that are exempt under Section 107. - Rationale: This information is readily available in corporate financial accounts and should not constitute additional compliance costs. - Complement and verify reported information with additional data from responsible regulators (such as the Financial Market Commission—La Comisión para el Mercado Financiero—and other relevant sources). - Decompose the TE attributable to Section 107 into a PIT and a CIT component, both in computation and in reporting the outcome, since the exemption can be attributed to the PIT or the CIT. --- ### B.3 Investment and Mutual Funds - Description — tax regime: - Investment and mutual funds in Chile are not taxed at the entity level but are treated as pass-throughs. - Funds are required to maintain relevant tax information on their distributions of dividends, which are generally subjected to the PIT and capital gains taxes for resident individuals (subject to some exceptions). - In principle, distribution by resident entities is subject to the CIT and capital gains taxes whereas non-residents are subjected to WHTs, but exceptions (including CIT exemption and reduced WHTs) lead to under- or no taxation. - Current TE estimation: - No TEs are computed in this regard. - Discussion / implications: - Treating funds as indirect investment/pass-throughs implies: - i) If management fees charged by these funds are taxed, there are no TEs on the side of these funds. - ii) As long as distributions and capital gains are taxed in the hands of the investors there will be no TEs. - Under- or no taxation of dividends and capital gains of investors leads to TEs under the CIT or PIT depending on investor type (individual or entity). - Examples of CIT TEs: - Capitals gains of resident legal entities under Section 108 of the ITL from the disposal of shares in mutual or public investment funds. - Capitals gains of legal entities from the disposal of shares in mutual and/or public investment funds that are acquired or sold in the stock exchange market (and are deemed to have “a market presence”; Section 107 of the ITL). - Note: These TEs arise on the side of the investor and would be computed under the classification of the corresponding section in the ITL (including all capital gains exemptions under Section 107). - Examples of PIT TEs: - Resident individuals’ capitals gains of below 10 UTA (USD 7,000) from the disposal of shares in investment funds. - Capitals gains of resident and non-resident individuals from the disposal of shares in mutual and/or public investment funds that are acquired or sold in the stock exchange market (and are deemed to have “a market presence”; Section 107 of the ITL). --- ### B.4 Presumptive Regimes – Items 1.1 to 1.4 - Description — tax regimes: - Small taxpayers in agriculture, transports and mining can use a presumptive tax base (subject to maximum sales thresholds). - Agriculture: UF 9,000 (approx. 300,000 USD) - Transports: UF 5,000 (approx. 164,000 USD) - Mining UF 17,000 (approx. 566,670 USD) - In agriculture and transports, the tax base is estimated as a percentage of the fiscal value of land or vehicles; in mining, as a percentage of sales. - Current TE estimation: - Benchmark is the standard CIT regime. - For agriculture, freight transport and mining, cash flow is used as an approximation of the true CIT tax base, estimated on the basis of VAT and labor cost data (VAT minus labor cost providing an approximation of cash flow). - An average cash flow/taxable income ratio is computed for taxpayers in the standard regime for a given economic branch, where both true cash flow and taxable income are observed. - That ratio is applied to taxpayers in the presumptive regime in the same economic branch to approximate their taxable income on the basis of their estimated cash flow. - The TE is the difference between the corresponding estimated CIT and the presumptive tax actually paid. - Caveats: - A different average ratio is computed for taxpayers with mixed presumptive/standard activities, as cash flow data cover all activities for a given taxpayer. - Because passenger transport is a VAT-exempt activity, there is no VAT data available for estimating the cash flow. The declared presumptive tax base is used instead (value of vehicles). - Discussion — findings and data issues: - Using a cash flow approximation is likely to generate relatively precise estimates of true taxable income and is less susceptible to underreporting. - The average ratio is computed on the entire universe of a given activity, but cash-flow to income ratios may vary considerably with sales. - Figure 1 (Number of Taxpayers by Increasing Sales Brackets and Activities (2019)) shows a relatively large number of taxpayers under the standard regime in the lowest sales brackets, where they could have opted for the presumptive regime — suggesting taxpayers may choose the regime based on expected tax burden rather than compliance costs. - Among the 5 OECD countries surveyed only Italy reports TEs for its presumptive regimes (methodology unspecified). - Suggested adjustments: - Distinguish periods before and after the 2020 reform. - For the period before 2020 (benchmark Regimes A and B): improve current cash-flow based estimates by computing cash-flow/taxable income ratios within each sales bracket in each sector (data permitting) rather than at the sector level. - For the period after 2020: - The appropriate benchmark for the presumptive regime is arguably the SME Transparent regime (which has no CIT). - From 2020 onwards, CIT TEs would consequently be negative, in the exact amount of the CIT effectively paid. - Consider these negative CIT TEs in conjunction with the positive PIT TEs estimated for these regimes. - Special situation: when a taxpayer maintains both a presumptive and an effective regime, a more realistic benchmark may be the general regime. Then compute the TE using the same approach as for the period before 2020, but with the post-2020 general regime as the benchmark. --- ### B.5 Free Trade Zones (FTZs) - Description — tax regime: - Profits of businesses located in free trade zones (FTZs) of Iquique and Punta Arenas are exempted from the CIT on profits generated in these zones. - Current TE estimation: - Benchmark is a non-exemption from the CIT, but computation is complicated by lack of information on net income of businesses in FTZs. - The SII extrapolates TEs estimates for 1999 computed by Jadresic (2000). Methodology and detailed computation of this study are unclear and not readily available to the SII. - Note: Only taxpayers that have operations inside and outside the free trade zones file Form 22. - Discussion — computation issues and suggested adjustments: - Revisit the methodology and maintain up-to-date information on all corresponding taxpayers to improve accuracy. - Verify information from tax returns of all taxpayers in the FTZs and enrich the database by exploiting other sources — such as VAT returns, business registry, customs, employment office, mandatory pensions, and social security contributions — to accurately estimate revenues and costs in the FTZs. - Computation specifics: - For computing TEs, the applicable tax rate should be 27 percent for all firms in the FTZs — even for those with a turnover below UF 75,000. - To compute the TE resulting from the interaction between the SME regime and FTZs, exempt profits of SMEs in FTZs should be multiplied by 2 percent. - Data caveat: The mission could not verify whether there is sufficient information to assess all TEs related to the FTZs. --- ### B.6 Cooperatives - Description — tax regime and preferential treatments: - Cooperatives are legal persons that provide limited liability to their members; their shares are transferrable. - Cooperatives could not opt for Regime A before the 2020 reform and are either in the general regime or the SME regime as a function of their turnover after the reform. - Cooperatives are exempted from CIT on the portion of their “surplus” that is generated through transactions carried-out with their members. - The surplus is determined following the accepted deductions used to determine the CIT tax base. - This criterion applies only to transactions on (procurement of) inputs, not sales. A cooperative procuring all its inputs from its members would be CIT exempted, irrespective of whether it sells its production to non-members. - Other preferential treatments include: - Transactions between a cooperative and its members are not subject to VAT; - Stamp taxes are exempt; - 50 percent of municipal taxes except those related to alcohol and tobacco are exempt; - The capital gain derived from the disposal of the cooperative shares is exempt; - 50 percent of the immovable property tax is exempt. - Current TE estimation: - No TE is currently computed on cooperatives. - Discussion — data availability and suggested computation: - Data issue: Cooperatives only report the portion of their surplus that is CIT taxable to the SII — but not total surplus including the portion originating from transactions with members. Total surplus is reported to the Ministry of Economy (Department of Cooperatives). - Recommendation: Make it compulsory for cooperatives to report their total surplus to the SII. - Recommended TE computation: - The basis for the TE should be the difference between the total surplus and the current CIT basis. - Illustrative sample estimates (Amounts in Peso Millions) for 4 cooperatives (partial data from the Ministry of Economy; data spanning 2018 and 2019; illustrative only): - OTRAS ACTIVIDADES DE SERVICIOS — Branch CIT rate .27 — Surplus 2018 295 — Taxable income 2019 5 — CIT 2019 1 — TE 78 — TE/CIT 61.0 - ACTIVIDADES FINANCIERAS Y DE SEGUROS — Branch CIT rate .27 — Surplus 2018 294 — Taxable income 2019 14 — CIT 2019 4 — TE 75 — TE/CIT 19.7 - ACTIVIDADES FINANCIERAS Y DE SEGUROS — Branch CIT rate .27 — Surplus 2018 60,637 — Taxable income 2019 4,999 — CIT 2019 1,350 — TE 15,022 — TE/CIT 11.1 - AGRICULTURA, GANADERIA, SILVICULTURA Y PESCA — Branch CIT rate .27 — Surplus 2018 2,344 — Taxable income 2019 918 — CIT 2019 234 — TE 399 — TE/CIT 1.7 - Interpretation: For at least one cooperative (in the financial sector) the TE is very significant at an estimated 15 billion pesos. - These estimates confirm that estimating TEs on cooperatives is important. --- ### B.7 Universities – Item 2.3 - Description — tax regime: - Profits from educational activities of recognized universities are exempt from the CIT. - Current TE estimation: - Benchmark thus far is taxing those profits at 25 percent. - Computation is based on financial statements and information from the Ministry of Education, but faces difficulties as filing Form 22 is not required and information on wages is lacking. - Discussion / recommended benchmark: - As the SME regime has not been deemed to be part of the benchmark, it becomes important to compute TEs of item 2.3 by applying a tax rate of 27 percent on profits from educational activities. *Source: 1chlea2020004 (provided content).* ### Box 2. Maximizing the Use of Data for Improving the Accuracy of TE Estimates ### Box 2. Maximizing the Use of Data for Improving the Accuracy of TE Estimates ### Summary of suggested areas for strengthening data sources - Leasing - Lessor data on declared loss following transfer of financed assets - Lessee F1026 adjustment data - Intangibles - F1026 adjustment data - Cooperatives - Data on total cooperative surplus, to be reported to the SII - Free Trade Zones (and other areas subject to preferential tax treatments) - Fully enforce the filing of tax returns by all taxpayers in the FTZs and verify and enrich this database using third-party information such as data from the employment office, mandatory pensions, and social security contributions - Capital gains under Section 107 of the ITL - Data from the Financial Market Commission and other related regulatory agencies as well as commercial sources of transactions of shares of publicly traded corporations and quotas of investment funds or mutual funds - Universities - Requiring universities to file Form 22 - Suggested adjustments: Ideally, all universities should be required to file form 22. Meanwhile, information from the Ministry of Education can be complemented by information from the mandatory pension system and social security contributions to estimate wages and labor costs attributed to profits from educational activities. - General numerical guidance - Generally, the rate of 27 percent should be applied to other similar deductions beyond this particular item. ### B.8 Leasing — Item 5.2: key findings and proposed data improvements - Description and tax treatment highlights - Leasing is a financing mechanism for tangible goods with an optional ownership transfer prior to normal depreciation. - During the first phase the lessor retains ownership and depreciates the asset for CIT; lessee deducts leasing instalments for CIT which include financing costs and implicit principal repayments on a shorter schedule than depreciation. - Example: a car with initial value $10,000 leased; tax depreciation schedule may be five years, implicit repayment period up to transfer may be three years, resulting in a low or zero residual transfer payment. - At transfer the lessor often records a CIT “loss” because transfer payments are typically less than the undepreciated tax balance (example: undepreciated balance $4,000 after three years, $2,000 transfer payment generates lessor “loss” of $2,000). - After transfer the lessee depreciates the asset for the transfer payment (example: $1,000 per year for two years). - Current TE estimation practice - Benchmark: lessee acquires asset and depreciates it. - No TE exists during initial phase (lease instalments offset lessor income), but a TE arises at transfer due to lessor loss; subsequent negative TEs follow but NPV of tax savings is positive. - Current implementation uses lessee Form 1926 “adjustments” as source data; a cash-flow approach is used (no NPV computation). - Because accounting treats leased assets as owned by lessee, F1926 adjustments drive the TE computation, causing timing approximation: initial period overestimated, transfer underestimated, post-transfer overestimated. - Discussion and recommended data steps - Retain cash-flow approach to preserve fact that initial period generates no TE. - Proposed steps and data sources: - Ascertain that no TEs is recorded during the initial period. In practice, when leasing installments are higher that the depreciations as per the lessee’s financial accounts, as observed through F1926 adjustment data, no TE should be recorded. - Lessor side data on the declared loss for CIT should be the basis of the TE at the time of the transfer. - During the period after the transfer, lessee side F1926 adjustments should be the basis of (negative) TEs estimates. ### B.9 Intangibles — Item 5.3: key findings and data recommendations - Description and tax treatment highlights - Two TE categories: start-up costs expensed immediately; Intellectual Property (IP) acquired externally not normally allowed for expensing or depreciation (temporary 2020 measure allows amortization up until 2022). - Current TE estimation practice - Benchmark follows financial accounts. For start-up costs benchmark assumes expensing or depreciation; for IP items benchmark assumes depreciation over time. - For start-up costs expensed, losses are carried forward indefinitely leading to a TE recorded in the initial period after profits arise. - For IP items, prior to 2020 TEs are negative due to no-amortization. - Current TE estimates use Form 1926 adjustments; before 2020 those adjustments were only provided for partially integrated regime taxpayers, requiring extrapolation using total fixed assets as basis. - Discussion and suggested adjustments - Rationale for computing a TE on expensing of start-up costs is sound (international practice amortizes such costs). - Negative TEs for IP items are justified; these should be reduced following the 2020 amortization measure. - The extrapolation using total fixed assets appears imprecise and could systematically overestimate the TE. - Recommendation: use actual adjustments data from financial to tax treatment for all taxpayers and for both start-up costs and IP items. ### Donations for Cultural Purposes: measurement and recommendation - Tax regime and current TE treatment - ITL provides deduction of 50 percent of qualified donated amount for cultural purposes and a tax credit for the remaining 50 percent. Since the 2020 reform, loss-making firms can carry forward unused deductions. - Current SII benchmark applies a rejected expense penalty rate of 40 percent for computing TE; donations amounts are available in Form 22. - Discussion and suggested adjustments - For aggregate TE, applying a penalty leads to misleading figure. - Recommended approach: - Apply the CIT rate of 27 percent to the donated amount for each firm—irrespective of regime (partially integrated or effective-distribution SME regime). - To compute the TE resulting from the interaction between the SME regime and donations for cultural purposes, multiply the donated amount by 2 percent. - TEs for this item should be computed on a cash basis. - Additional NPV calculations for loss-making firms could be considered in the medium-term. ### C. Tax Expenditure Analysis in the Personal Income Tax — selected capital gains items and data actions - C.1 Full Dividend Imputation System Under the SME Regime - SME regime provides 100 percent dividend imputation credit instead of 65 percent in the general regime; the 35 percent additional credit is considered a TE under the proposed benchmark. - Need to account for different CIT rates: 0.25 SME CIT rate; 0.27 general regime CIT rate; 0.65 percentage of CIT paid that is credited against PIT in the general regime. - Proposed per-taxpayer formula specification includes factor 0.0745 where 0.0745 = (0.25-0.27*0.65). - Table 3 numerical illustration (per 100 profits): - Profits 100 / 100 - Taxable income 100 / 100 - Tax rate 0.25 / 0.27 - CIT paid 25 / 27 — CIT TE = 2 - Dividends distributed 75 / 73 — grossed up dividends taxed at PIT level 100 / 100 - Net income x PIT rate (35%) = 35 / 35 - Credit 25 / 17.55 — difference -7.45 - PIT due 10 / 17.45 — PIT TE = 7.45 - Total TE = CIT TE + PIT TE = 9.45 - C.2 Exemption on Capital Gains (section 107 of the ITL) - Provision - Exemption for sale/transfer of shares in publicly traded companies, quotas of publicly traded investment funds and quotas of mutual funds if securities have adjusted presence >= 25 percent or have a “market maker”. - When market presence is met exclusively under market maker, exemption applies only for one year from first public offering. - Further requirements: trades must be on authorised stock exchanges; for investment funds, exemption may apply even when market presence not met if fund invests at least 90 percent in shares with stock market presence and management company distributes dividends and interest to contributors. - Measurement and data used by SII - Current methodology uses an ex-ante estimate from the Budget Department financial report (2001) updated by CPI and an adjustment for average PIT rate. - Assessment and data recommendations - Provision is a TE under proposed benchmark. - Exemption has wide coverage: available to resident individuals, resident companies and non-Chilean residents; covers PIT and CIT; no cap; market presence requirement not particularly restrictive. - Data points: 39 percent of stocks, 25.3 percent of investment funds and 4.9 percent of mutual funds meet market presence criteria. Top 20 companies with market presence 50 percent or above comprised 52.05 percent of the market in first half of 2020. - Current SII microdata limitations: - Form 22 requires quantity and value of sales of shares/quotas meeting section 107, but acquisition cost is not reported. - Financial traders report capital gains under Form 1922; for 2019 this figure is 196,238 million Chilean pesos, which represents 0.1 percent of GDP. - Data are not cross-checked and may underestimate capital gains. - Recommendation: require all taxpayers to report acquisition value of shares in addition to disposal value and number of shares/quotas reported under Form 22; add exempt capital gains to taxable income to compute TE at individual level using PIT progressive schedule. If taxpayer identifier unavailable, estimate using top marginal rate for individual residents and 35 percent for non-residents. - Complement TE estimation with tax policy evaluation of the exemption’s historical role and reform impact. - C.3 Exemption on Capital Gains up to a Threshold of 10 UTA - Provision - Capital gains exempt for individuals up to 10 UTA per year (approx. USD $7,000); if gains exceed 10 UTA, taxpayer taxed on full amount. - Assessment and data recommendation - Provision is a TE under proposed benchmark. - Scope relatively narrow but threshold relatively high; applies to any type of shares, bonds and quotas from private investment funds. - This TE is currently not estimated by SII. - Recommendation: estimate using current capital gains data reported under Form 22 and enhance quality by cross-checking with third-party sources; require institutions to report capital gains information to the tax administration. - C.4 Concessional Treatment of Capital Gains from Disposal of Real Estate - Provision - Capital gains from sales of real estate are exempt up to UF 8000 per person; exempt amount can be claimed over the owner’s lifecycle (unused exemption can be used later). - Further options for excess over exempted amount are discussed in the source. *Source: 1chlea2020004 - Box 2. Maximizing the Use of Data for Improving the Accuracy of TE Estimates* ### 1. To include such excess in the annual tax return of the relevant year, as ordinary income; ### 1chlea2020004 - 1. To include such excess in the annual tax return of the relevant year, as ordinary income; ### Capital gains on real estate — legal options and TE assessment - Three administrative options described for excess capital gains: - 1. To include such excess in the annual tax return of the relevant year, as ordinary income; - 2. To tax such excess on a 10 percent tax rate; or - 3. To reassess the annual tax returns filed over the years holding the real estate, up to 10 years, in order to include the excess in the taxable base of such years. - Is this provision a TE under the proposed TE benchmark? Yes - Under the revised benchmark: when capital gains are realised, they are included in taxable personal income and taxed at the corresponding marginal PIT rates. Any deviation is considered a TE. - The exemption and both options 2 and 3 are TEs because they reduce tax liabilities relative to option 1. - Current SII practice: - Only exempt capital gains (capital gains earned when the accumulated gains do not exceed UF 8.000) are considered as a TE (item 8.22). - The benchmark used for this exempt income is the 10 percent rate (second option) which is chosen by 95 percent of taxpayers. ### Measurement and recommended methodology for capital gains TE - Current SII formula for item 8.22 (exempt capital gains below UF 8.000): - iicca ii 8.22 = CCiicciicil giiii_c * 10% - (Where capital gain_t stands for capital gains from disposal of real estate earned in time t by individuals with accumulated capital gains below 8000 UF.) - Recommendation: calculate TE not only for the exemption up to 8000 UF, but also estimate reduced tax liability for realised capital gains in excess of 8000 UF. - Proposed TE calculation formula (textual representation preserved): - iicca ii 8 .22 = PPPPPP(cci t iit lla ii ii co ia + cic iiicciil giiiis / cc) − PPPPPP(cci tii ttlla ii ii co ia) − taxpaid_option2 − taxpaid_option3 - Where capital gains_t stands for the total amount of realised capital gains on real estate by individuals in year t (below and above the 8000 UF cap) minus the case in which the taxpayer accumulated capital gains above 8000 UF and chose option 1 for the amount in excess. - tax_paid_option2 and tax_paid_option3 stand for the additional tax liability that taxpayers currently pay on realised capital gains above UP 8000 UF under options 2 or 3, respectively. - Value of the TE measurement: - Table 4. Foregone Revenue Associated to the Concessional Treatment of Capital Gains from the Disposal of Real Estate, Million Pesos, 2018: - Value estimated by the SII: nd - Value estimated by IMF-OECD using a sample: 219,586 ### Exempt bracket / Basic PIT allowance - Is this provision a TE under the newly defined TE benchmark? Answer: No - Rationale: - Basic tax allowance viewed as amount covering expenses incurred to earn income; structural element of tax system and generally applicable. - Revenue forgone due to universal basic allowance typically not considered a TE. - If basic tax allowance exceeds average costs to earn income, the “excess” could be viewed as a TE, but measurement is complex and not common practice. - Evidence and measurement: - OECD (2018b): 76 percent of Chileans that file tax returns are in the exempt bracket. - SII does not calculate revenue forgone arising because of the basic tax allowance in the PIT. - IMF-OECD measurement approach (2018): - Microsimulation using sample tax returns and sworn statements. - Scenario 1: assume taxable income taxed at lowest non-zero PIT rate (4 percent) for income below $ 7,609,464; estimate difference vs current schedule. - Scenario 2: estimate tax foregone if threshold for basic tax allowance set so only 30 per cent of taxpayers face zero taxable income. - Scenario 2 zero-rate threshold in sample: $ 2147815 (note: threshold determined by sample and considers income from formal workers only). - Table 5. Foregone revenue in 2018 from Standard Basic Allowance (sample-based results): - Scenario 1 (Million $): - Individuals whose income is below the exempt threshold: 879,341 - Individuals whose income is above the exempt threshold: 800,434 - Total: 1,679,774 - Million USD: 2,470 - % of GDP: 0.8% - Scenario 2 (Million $): - Individuals whose income is below the exempt threshold: 386,586 - Individuals whose income is above the exempt threshold: 580,959 - Total: 967,545 - Million USD: 1,423 - % of GDP: 0.5% ### Presumptive tax at the CIT level and PIT interactions - Description: - Presumptive taxation applies to agriculture, mining and transport under sales thresholds: 9000 UF (agriculture), 17000 UF (mining), 5000 UF (transport). - Presumptive tax for transport and agriculture: 10 percent of the fiscal assessment of the vehicle (transport) or the land (agriculture). - Mining sector tax rate: between 4 percent and 20 percent of sales depending on the copper price. - It is compulsory for businesses to distribute profits taxed under presumptive tax; distributed profits taxed under PIT with a tax credit for presumptive tax paid. - Tax administration lacks information on actual amount of profits earned. - Is this provision a TE under the proposed TE benchmark? Answer: Yes - Assessment and TE measurement approach: - Firms choose presumptive tax if it yields tax saving; TE = difference between PIT paid based on effective income and PIT paid under presumptive regime (accounting for presumptive tax credit). - TE formula (textual preservation): - PPPPPP PP E ccaaasiiiccciaa aaggiiia = PPPPPP(aaaaaccicciiaa ii ii co ia) − [PPPPPP( cccaasssiiccciaa ii ii co ia) − caaasssiiccciaa cciitt cciiii] - For taxpayers earning income both under presumptive and SME/partial imputation regimes, benchmark is partial imputation regime and formula includes factors such as 0.65*0.27 and assumptions of dividend distributions. ### Mandatory “social” contributions and replacement income - Description: - Mandatory contributions to pension funds, mandatory health insurance contributions, and mandatory unemployment insurance contributions are deducted from individual taxable income. - Are these provisions a TE under the proposed benchmark? Answer: No - Rationale: - In Chile, benefits are funded through compulsory contributions to private sector funds rather than public SSCs. - Deduction of mandatory contributions is generally not considered a TE in OECD practice. - Reasons: not discretionary spending, universal coverage, not actionable (contribute to social protection). - Therefore, deduction of mandatory contributions not considered a TE; benchmark for mandatory pension schemes follows an expenditure approach (exempt-exempt-taxed). - Measurement by SII (current items): - Deduction of mandatory health insurance contributions (item 9.1) - Deduction of mandatory disability insurance contributions (item 9.2) - Deduction of mandatory unemployment insurance contributions (item 9.14) - Deduction of mandatory pension contributions (item 11.3.1) - Exemption on return of mandatory pension contributions estimated jointly with return on voluntary contributions (item 11.3.2) - Taxation of pension withdrawals currently measured as a negative TE in item 11.3.3 ### Tax deductibility of voluntary pension contributions / savings (Item 11.4.1) - Description: - Two tax alternatives for voluntary retirement savings (Section 42 bis ITL): - Option 1: deduction from gross income up to a maximum; withdrawals become taxable income when withdrawn, with penalty if before legal retirement age. - Option 2: contributions not deductible when made but returns are exempt; person receives 15 percent contribution from State (annual cap 6 UTM) the year contribution is made; returns and subsidy become part of gross income when person retires. - Is this provision a TE under the proposed benchmark? Answer: Yes - Deduction under Option 1 is a TE. - Non-taxation of the 15 percent subsidy under Option 2 is a TE (positive TE when contribution made; tax levied on corresponding pension withdrawal is a negative TE under tax-tax-exempt benchmark). - Measurement and data used by SII: - SII has individual-level information on income and voluntary contributions under Option 1 via tax returns and sworn statements (F22, F1887, F1899, F1879). - Current SII methodology for Item 11.4.1 (textual formula preserved): - iicca ii 11.4.1 = aaaaaccicciia_aaiiccaa tt (iioo llii iicc ciaat t coii caaiittii ciooiiss) - aaaaaccicciia_aaiiccaa = [PPPPPP(iiii co ia + iiiiiiiicciiccc coiaat iiiii iiiioolliiicciiiaatt coii caaiittii ciooiiss) − PPPPPP(iiii co ia)] / (iiiiiiiiiccoaat + iioolliiicciiiaat coii caaiittii ciooiiss) - Proposed correct approach: compute at individual level the difference between PIT payable if contribution were part of taxable income and PIT currently paid: - iicca ii 11.4.1 = PPPPPP(iiii co ia + iioolliiicciiiaat coii caaiittii ciooiiss) − PPPPPP(iiii co ia) - Note: current SII formula yields different results if addition of contributions changes income bracket because mandatory contributions are also included in calculations, but deduction of mandatory contributions is not a TE under proposed benchmark. - Projections: - Estimates include projections for two years (t+1 and t+2). - Projection of t+1 based on growth rate between t and t-1 of voluntary savings as informed in Form 22 (code 767). - Second year projected based on nominal GDP growth projections. - Recommendation: apply same projection criteria for both years; growth rate in a variable closely linked to the variable of interest for most recent year may be more precise than expected GDP growth. - Value of TE measurement (Table 6. Foregone Revenue from the Deduction of Voluntary Contributions, Million Pesos, 2018): - Value estimated by the SII using the previous methodology: 106,509 - Proposed methodology (*): 134,813 - (*) Estimated using a representative sample of tax returns. ### Tax exemption of returns on investment for pension funds from voluntary contributions (Item 11.3.2) - Description: - Investment returns generated by voluntary contributions are exempt from tax in Chile. - This is consistent with the “Exempt-Exempt-Taxed” (EET) variant used by many OECD countries. - Is this provision a TE under the newly defined TE benchmark? Yes - Voluntary pension savings reflect discretionary spending; exemption on returns to voluntary savings (both Options 1 and 2) is a TE. - Exemption on returns from Option 2 also applies to the 15 percent subsidy and is not currently measured as a TE. - Measurement and data used by SII: - Exemption on returns to voluntary savings is included in item 11.3.2 but not measured on a cash flow basis. - IMF-OECD estimation uses NPV method (equation (1)) to estimate discounted present value of future investment returns by growing current contributions to future years. - NPV method (equation (1)) textual preservation: - NPVNN = (igg.PPPPP aaa) t (Fiii CCooiccaaiittiicciiiooiiss iiggiaa ttaiiaa) t � T i (1 + aa) ii (1 + ii) ii − (1 + aa)(ii−1) (1 + ii)(ii−1) - The NPV method: first part is effective marginal tax rate based on progressive PIT ‘Complementary Global Tax’. The estimate is based on tax record microdata at individual level. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1chlea2020004.pdf* ### part is the value of individual contributions in a given year. Voluntary contribution data come from ### 1chlea2020004 - part is the value of individual contributions in a given year. Voluntary contribution data come from ### Investment returns on voluntary pension contributions — proposed measurement - The cash-flow method is the proposed approach to estimate the TE corresponding to the tax exemption of the return earned by the pension fund on the voluntary pension contributions. - The proposed cash-flow method would: - Use aggregate data sources: total value of the pension fund from Pensions Superintendence data applied to an estimate of the proportion of funds from voluntary savings (Options 1 and 2 including the subsidy provided by the government under Option2). - Potentially base the voluntary/mandatory shares on an aggregation of available AFP data or shares from tax record data over several years. - Establish the investment return by applying the annual rate of real profitability of the pension fund in the latest available year (same as for mandatory pension returns). - Project the estimate forward using the growth rate in real GDP. - Apply the pension fund estimate to an average marginal PIT rate drawn from tax record data. - The cash-flow method should be the preferred method for the investment returns TE; retaining the NPV method as a secondary alternative is optional but not recommended. - Negative TEs driven by negative investment returns should be set to zero: - Years with negative fund returns (examples given: 2008, 2011, 2018 and 2019) have produced negative computed TEs; the recommendation is to set TE to 0 in such years. ### NPV method — description and methodological commentary - The NPV method calculates the net present value (NPV) of the investment returns in future years and includes estimates of: - the investment return (r) - a baseline discount rate (d) - Chile selects (d) based on 10-year government treasury bonds over the past 6 years. - Chile selects (r) based on the average historical pension returns over an 18-year period between 2002 and 2019. - The NPV equation discounts the difference between growth on investment (1 + r) and growth in the baseline discount rate (1 + d) applied sequentially from period (t – 1) to t up to final period T, where T = time remaining to retirement (j) for each individual plus half of the expected time to life expectancy (e). - Critiques and considerations: - The NPV method requires several assumptions (for example, d, r, e), each with uncertainty and associated statistical error; combining errors increases overall error in the TE estimate. - Whether a 6-year time horizon for d is sufficient is unclear given recent declines in 10-year bonds; a longer horizon might be preferable. - (r) is based on a mean average since 2002 (18-year horizon), which is significantly longer than the horizon for d; aligning and lengthening time horizons could be preferable. - The complementarity between cash-flow and NPV methods is limited; they differ in method and data and cannot be usefully compared in many respects. - Given the importance of simplicity and transparency in TE measurement, the cash-flow method is preferred; the NPV method could be retained as an alternative but is not recommended. - If Chile retains the NPV method, improvements could include aligning time horizons for d and r and lengthening them. ### Tax treatment of pension withdrawals associated with voluntary savings - Under the proposed TE benchmark, the voluntary component of pension regimes would be taxed on a tax-tax-exempt basis; the taxation of withdrawals linked to pension savings made under both options 1 and 2 should be computed as a negative TE. - Measurement and data: - The SII has access to information on income and voluntary contributions at the individual level through tax returns and sworn statements (F22, F1887, F1899, F1812, F1879). - These contributions were made under the first option in which their deduction from taxable income is allowed. - Currently, taxes on pension withdrawals are measured in cash flow terms only for both mandatory and voluntary pension withdrawals together (negative value of taxes paid from pension payments in sworn statement F1812). - The negative TE associated exclusively to voluntary pension withdrawals from option 1 is measured separately under the NPV method (item 11.4.3 of the TE report). - NPV method for withdrawals: - Estimates the discounted present value of the taxes that will be paid on the withdrawals from voluntary savings made in time t, based on individual tax returns and similar assumptions to the returns TE estimation (see NPV methodological commentary). - The PIT function applies the progressive PIT rate schedule given each individual taxpayer’s taxable income. - Replacement rates used in the analysis are the actual replacement rates for 2016: 34.6 percent for women and 51.6 percent for men. - The formula assumes voluntary pension contributions made in time t will continue growing for T years, where T = time remaining to retirement (j) plus half of expected time to life expectancy (e). - The discount rate (d) is selected based on 10-year government treasury bonds over the past 6 years. - The annual rate of return (r) is selected based on the average historical pension returns over an 18-year period between 2002 and 2019. - Assessment and recommendation: - Deciding to publish TE values separately for deductions from contributions, non-taxation of investment income on these contributions, and tax revenue from benefit payments promotes transparency and is good practice. - A separate estimate of the negative TE based on the cash-flow method should be included and should be the primary methodology used, while the NPV method should be optional. - Ideally, SII would break down pension amounts into mandatory contributions and returns, voluntary contributions and returns, and the 15 percent subsidy received under option 2 and its returns. ### Agreed deposits (depósitos convenidos) - Description: - Voluntary contributions to pension savings made only by salaried workers in agreement with their employer. - No cap; can be one-time or monthly deposits; can be deposited in all institutions authorized to receive voluntary contributions. - Deposits up to UF 900 per year are non-taxable to the employee under PIT. - All deposits made are deductible in the case of the employer. - Is this a TE? Answer: Yes — concessions to agreed deposits are TEs following a comprehensive income benchmark (TTE). - Assessment: - Currently SII measures TEs associated with agreed deposits together with APV contributions; suggested that these TEs be reported in separate items using the same methodology. ### Reduced withholding rates - Description: - ITL sets standard withholding tax rates for payments made abroad (examples: interest payments, dividends, royalties, trademarks and patents at 30 percent; amounts paid for use of invention patents at 15 percent). - Double tax treaties may foresee different withholding tax rates for transactions between jurisdictions. - Certain legal provisions set withholding rates that deviate from the standard rates. - Is this a TE? Answer: Yes — withholding tax rates that deviate from the standard rates specified for each type of income are considered a TE. - Suggested measurement approach: - Determine a “benchmark” withholding tax rate by combining the standard rate (as defined) with withholding rates found in double tax treaties Chile has with other countries. - Compare the benchmark rate with the actual withholding rate that applies; the difference in rates multiplied by the amount of the payment made offshore gives the TE. - Approach applied separately for each type of income (dividends, interest, royalties, etc.) and for each treaty country separately. ### Concessions arising from Decree with Force of Law No.2 (DFL2) - Description: - DFL2 regulates residential property “economic housing” with constructed area of less than 140 m2. - Benefits granted only to individuals for a maximum of two new or used acquired properties, except properties acquired before 2010 (no restriction on number; may be held by entities or individuals); grandfathering rules apply for properties transferred. - Acquisition of new property entitled to more tax benefits than used property to incentivise construction. - Benefits for New Properties: - A reduction of 50 percent of property taxes for time-periods varying by size: - Up to 70 m2: benefit granted for 20 years from the acquisition date. - Between 71 and 100 m2: benefit granted for 15 years from the acquisition date. - From 101 to 140 m2: benefit granted for 10 years. - A deduction of 50 percent on the fee charged by the Real Estate Curator for registration of property qualified as DFL2 if registered within two years after municipal reception. - The first transfer of the property qualified as DFL2 will be exempt of Stamp Tax. - DFL2 property will be exempted from Inheritance and Gift Tax if: - The deceased/donor built or acquired the property in its first transfer (i.e. first time sold), and - The deceased acquired or built the property at least 6 months prior to date of death. - Mortgage payments from property acquired before June 2001 are deductible from taxable income (discussed in item 9.7). - Benefits for Both Used and New Properties: - A reduction of 50 percent of the stamp liability tax on the second transfer if transfer is made within 2 years since municipal authorisation to be inhabited. - Reduction of property taxes by 50 percent; transferable to future owners to the extent remaining years of benefit exist. - Rental income from DFL2 property is considered as non-taxable income. - Are these provisions TE under proposed benchmark? Answer: Yes (although not under income tax except for tax exemption for rental income and deduction of mortgage payments from dwellings from DFL2 properties). - Measurement and data used by SII: - Currently only the exemption for rental income from DFL2 property and deduction of mortgage payments are measured in the TE report (items 8.10 and 9.7). - Measurement of the exemption for rental income is poor due to lack of data in F22; a proxy of rental income meeting DFL2 requirements is estimated based on the Income Supplementary Survey (ESI). - Value of the TE measurement (Foregone Revenue from the Exemption on Rental Income from DFL2 Properties, Million Pesos): - 2018: 107,646 - 2019: 117,902 - 2020: 121,036 - Source: SII - Assessment: - Access to micro-level data with taxpayer identifiers needs significant improvement to measure TEs linked to DFL2 concessions. - Rental income from DFL2 properties should be reported in F22. - Efforts needed to gather data for other benefits (property tax, inheritance tax and stamp tax). - Grandfathering rule for pre-2010 DFL2 property gives rise to TEs at individual and corporate levels that should be measured. ### Life insurance proceeds - Description: - Proceeds from life insurance policies are considered non-taxable income under both the inheritance tax base and the income tax base. - Is this a TE under the proposed TE benchmark? Answer: Yes — the non-taxation of life insurance proceeds is a TE under the inheritance tax. - Key points and assessment: - Premiums are paid out of after-tax income (premiums are not deductible). - Payments by the insurance company matching original premiums paid should not be included in taxable income — this is the approach in the Chilean tax code and the TE report does not identify a TE for this component (this is considered correct). - If proceeds are received by a beneficiary upon death and the total amount received (original premiums plus return on investment) is treated as new income for the beneficiary, taxation under the income tax would be triggered — this approach is uncommon; most countries include life insurance within the inheritance tax. - International practices cited (examples): Chile, Italy, Portugal fully exempt life and accidental death insurance; France has special rules (assurance-vie) with thresholds (EUR 152,500 tax free per beneficiary if policy established before age 70, taxed at 20 percent above that threshold, with higher marginal rates above another threshold; for policies established after 70 the first EUR 30,500 tax free per beneficiary with limitations). *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1chlea2020004.pdf* ### Section 17 No. 3 of the ITL and article 20 of the Inheritance Tax Law. ### Section 17 No. 3 of the ITL and article 20 of the Inheritance Tax Law. ### Life insurance proceeds and inheritance tax - Key point: Strong arguments exist for measuring the exemption of life insurance proceeds as a TE under the inheritance tax. - Design details: - Some life-insurance policies include a savings component (contrato de seguro de vida individual con ahorro) that accumulates returns while invested by the insurance company. - Final payment can consist of original premiums plus accumulated return. - Funds in the savings account can be withdrawn by the insured under policy terms or form part of compensation to beneficiaries upon death. - The return is taxable income and is included under the proposed TE benchmark, aligned with the tax system design. - Returns from the saving component are justified to be taxable under PIT as in Chile and other OECD countries. - Assessment and recommendation: - Insurance companies should provide information so that the TE under the inheritance tax can be measured. - Information should be disaggregated to allow identification of returns from the saving component of life insurance policies. ### Deduction of Mortgage Interest Relief and Immovable Property Tax (item 9.13) - Description of provision: - Mortgage interest payments are deductible from taxable income up to certain limits: the deduction equals actual mortgage interest payments up to an amount of 8 UTA (approx. US$ 5,800). - Taxpayers with annual income up to 90 UTA (approx. US$ 65,000) can deduct 8 UTA, and this deduction decreases to 0 as income increases up to 150 UTA (approx. US$ 110,000). - Taxpayers with annual income in excess of 150 UTA are not entitled to deduct any mortgage interest payments. - Deduction applies to one or multiple properties, owner-occupied and let houses. - A taxpayer cannot benefit from both this deduction and the deduction of the mortgage payment from DFL2 properties (item 9.7). - Until 2019, property taxes were deductible from taxable income for individuals receiving rent; from January 2020 the property tax became a credit against the PIT. - Is it a TE under the proposed TE benchmark? Yes. - Under a practical variant of the comprehensive income benchmark, imputed rent from owner-occupied housing is not included in income but mortgage interest relief is a TE. This approach is recommended and applied. - Credits or deductions linked to property tax would be considered a TE under the proposed benchmark. - Measurement and data: - Currently measured as a TE in Chile’s TE report using Form 22 code 750. - TE estimated by microdata on tax returns with a PIT function applying the progressive PIT rate schedule to taxable income. - Assessment: - Methodology and data used by the SII are adequate. - Recommendation: Chilean TE report should include deduction of immovable property tax for individual taxpayers receiving rent as a TE. - Recommendation: Explicitly state that exclusion of imputed rental income is treated as part of the TE benchmark and therefore not identified/measured as a TE. - Value of TE measurement (Table 9, Foregone Revenue Associated to the Deduction of Interest on Mortgages, Million Pesos, 2018): - Value estimated by the SII: 96,724 - Value estimated by IMF-OECD using the sample: 116,395 ### Deduction of Mortgage Payments from DFL2 Dwellings (item 9.7) - Description: - Mortgage payments from New DFL2 property acquired before June 2001 are deductible from taxable income. - Is it a TE under the proposed TE benchmark? Yes. - Measurement and data: - Included as a TE in Chilean TE report using Form 22 code 740. - TE estimated by microdata with PIT function applying progressive PIT rates. - Assessment: - Provision is a TE under the proposed benchmark and aligned with Chile’s current TE report. - Sample-based IMF-OECD estimate significantly exceeds SII reported value; difference may be due to sample data limitations. - Value of TE measurement (Table 10, Foregone Revenue Associated to the Deduction of Mortgage Payments, Millions of Pesos, 2018): - Value estimated by the SII: 1,687 - Value estimated by IMF-OECD using the sample: 3,672 ### Deduction of 30 Percent of Independent Workers’ Turnover as a Presumptive Expense (item 9.12) - Description: - Independent workers as CIT taxpayers may choose to deduct actual expenses or alternatively deduct 30 percent of turnover as a presumptive expense with a cap of 15 UTA (approx. USD 10,600). Objective: simplification. - Is this a TE under the proposed benchmark? It depends. - Under the income tax benchmark, legitimate expenses are deductible. If the presumptive percentage is a good approximation of effective expenses, it should not be a TE. - If the percentage exceeds average effective expenses, the excess could constitute preferential treatment and be measured as a TE. - Most independent workers choosing the option may suggest 30 percent is high, but behavioral/compliance reasons could also explain the choice. - Measuring such provisions as TE is unusual; among five countries reviewed, none measures deduction of presumptive expenses as a TE. France treats a 10 percent fees deduction as part of the benchmark for simplification. - Measurement and data: - Current benchmark assumes presumed expenses in excess to social security contributions (SSCs) for independent workers are taxable income. - SSCs amount to approximately 17 percent of fees and are compulsory only since 2018. - Form 22 code 494 reports presumptive expenses deducted by independent workers. - SII methodology assumes 20 percent of gross fees deducted are legitimate expenses (largely non-tax contributions), 3 percent to other business expenses, and the remaining 10 percent is measured as a TE. - TE estimation formula applies the PIT progressive rate schedule. - Assessment and recommendation: - On balance, deduction should not be considered a TE overall. - Prior to 2018 (when SSCs were not compulsory) the deduction of 10 percent of turnover could be justified to be measured as a TE; post-2018 there are no strong arguments to consider it a TE because only 13 percent of turnover deductible may cover other expenses. - It is not recommended to measure this provision as a TE in the future. - Suggested analyses: compare number of independent workers choosing the option before and after 2018; compare tax returns of independent workers who do and do not choose presumptive deduction within the same sector to estimate appropriate presumptive percentage. - Value of TE measurement (Table 11, Foregone Revenue from the Deduction of 30 Percent of Independent Workers’ Turnover as a Presumptive Expense, Million Pesos, 2018): - Value estimated by the SII: 39,869 - Value estimated by IMF-OECD using the sample: 48,571 ### Credit for SMEs located in Free Trade Zones - Description: - Owners of SMEs located in Free Trade Zones (FTZs) and subject to the Transparent Regime are entitled to a tax credit of 50 percent of the CIT that would have been applicable to the profits generated in the FTZ (if the company would not have been subject to the Transparent Regime), which can be offset against the PIT. - For the deemed credit, profits generated by the SME in the FTZ are deemed to be subject to CIT. - Is this a TE under the proposed benchmark? Yes. - This credit should be measured as a PIT TE. ### VAT: benchmark, reduced rates, and exemptions - Choice of TE benchmark for the VAT: - VAT is levied on final household consumption through a staged process on value added; credits are provided for VAT paid on business inputs. - VAT follows the destination principle; for imports tax collected at the border; exports are normally zero-rated. - VAT TE benchmark is largely the same across countries and based on VAT core design principles. - VAT TEs arise from reduced VAT rates (including zero-rating of domestic supplies) and exemptions without the right to deduct input VAT. - Reduced VAT rates and VAT exemptions — measurement considerations: - TE from reduced rates: difference between VAT revenue that would be collected if the standard rate applied and revenue actually collected at reduced rates (assuming full compliance). - Zero-rating of exports is part of the benchmark and not a TE. - VAT exemptions: benchmark defined as imposition of standard VAT rate with ability to claim input tax credits net of VAT collected despite the exemption. - Businesses selling exempt goods/services cannot reclaim input VAT, which can generate revenue for government and creates tax cascading that increases final consumer prices. - Measuring TE of VAT exemptions is more complex than for reduced rates: must account for revenue lost on final consumption and revenue gained by denial of input tax credits (direct lack of refund and tax cascading effect). - Common practice: use National Accounts input-output tables to estimate expenditure for which VAT is non-recoverable; Chile follows such an approach. - High-level examination suggests SII’s approach is broadly consistent with international best practice; detailed input-output modelling review would be required to identify scope for improvements. - Policy note: VAT exemptions are inefficient and inequitable because of tax cascading, higher prices, distortion of business and consumption decisions, and non-transparent taxation — undermining VAT neutrality. - Main VAT TEs in Chile: - Chile has a wide range of items exempt from VAT and transactions that are non-taxable under VAT. - Unlike most OECD countries, Chile levies VAT only on a restricted list of services (those listed in article 20 numbers 3 and 4 of the ITL); most OECD countries tax most services unless explicitly exempt or out of scope. - This restricted approach is not aligned with practice in countries reviewed. - Table 12 lists Chile’s main VAT TEs (SII source). *Source: Section 17 No. 3 of the ITL and article 20 of the Inheritance Tax Law.* ### 13.1 Passenger transport 249,426 ### 13.1 Passenger transport 249,426 ### Overview: Selected VAT tax expenditures and measures - Itemized VAT-related figures (as reported in the source): - 13.1 Passenger transport 249,426 - 13.2 Education 309,105 - 13.3 Health services 220,352 - 13.4 Financial services 26,014 - 13.7 Life insurance 82,632 - 13.10 Leisure services 26,014 - 13.11 Services provided to businesses -159,143 - 13.12 Certain other services 273,910 - 13.15 Free Trade Zone imports 66,539 - 13.16 Tips 77,204 - 13.17 Defense Ministry and companies: Enaer, Asmar and Famae 17,409 - 13.32 Financial leasing 10,415 - Credits: - 14.1 Special tax credit for housing construction companies 420,026 - Deferrals: - 15.3 Two-months deferral in VAT payment 44,290 ### VAT exemptions and items not measured in the TE report - Some VAT exemptions not measured in the TE report include: - Services carried out between the cooperative and their members (Section 5, second paragraph of the VAT Regulation, Decree No. 55 of 1977) - International freight by sea, air and land (Section 12, letter E, No. 2 of the VAT Law) - Payments made abroad effectively subject to WHT under Section 59 ITL (Section 12, letter E, No. 7 of the VAT Law) - Payments made by foreign tourist in foreign currency (a) to hotels, and (b) for the rental of furnished property (Section 12, letter E, No. 17 of the VAT Law) - Purchase of dwelling by a housing subsidy beneficiary (Section 12, letter F of the VAT Law) ### D.4 Special Housing Construction Credit (summary and assessment) - Design and operation: - Buyers of new housing are charged 35 percent of the standard VAT rate levied on the purchase price (Section 21 Decree Law 910 of 1975). - Construction value of the dwelling cannot exceed UF 2,000 to qualify (UF 2,200 if housing financed in whole or in part with subsidies granted by the Ministry of Housing and Urban Development). - Construction companies declare 100 percent of the VAT on the sale in their VAT return, even though only 35 percent was charged to the purchaser. - A special housing construction credit equal to 65 percent of the VAT on the sale of new housing compensates the construction company for the additional VAT it paid but did not receive from the buyer. - The special housing construction credit can be offset against mandatory monthly provisional CIT payments (or other tax liabilities). - Measurement and magnitude: - The VAT credit is identified as a TE in Chile’s TE report. - Its estimated value by the SII is 420,026 million pesos in 2018. - Practical implications and incidence: - In practice, the mechanism reduces CIT revenue (or revenue from other taxes) rather than VAT revenue because the credit offsets CIT payments. - Whether buyers, sellers, or both share the tax reduction is a matter of tax incidence and is outside the scope of the report. ### D.5 VAT Exemption of Professional Services - Measurement challenges: - Under the current TE methodology, the VAT exemption on professional services cannot be quantified in isolation. - Professional services are not subject to VAT unless they fall within the scope of article 20 N° 3 and 4 of the Income Tax Law. - Professional services are captured mainly in items 13.11 (services provided to businesses) and 13.12 (other services), and also in other items (e.g., doctors in private consulting rooms in item 13.3). - Services provided to businesses are expected to generate a negative TE under the benchmark system because no input credits are provided. - Recommendations to improve measurement: - SII could refine estimates using National-Accounts input-output data identifying more subsectors. - Alternatively, SII could use a bottom-up approach leveraging income tax returns of professional service providers to estimate value added, foregone VAT revenue, and denied VAT credit on inputs. - As Chile moves to electronic cash receipts (from 2021) and has implemented mandatory e-invoicing, these data sources might allow better estimation of this VAT TE. ### D.6 Deferral of VAT payments - Existing concession: - SMEs benefit from a two-month deferral of VAT payments. - This concession was extended to three months until 2021 as part of measures introduced in light of the Covid-19 pandemic. - Measurement critique and recommended refinement: - The TE for the two-month deferral was calculated as “the sum of the amount of VAT deferred in the months of November and December of a given year, minus the sum of the amount paid in the months of January and February of that year, that had been deferred previously”. - This approach is unlikely to capture accurately the deferral benefit provided. - Recommended method: apply an appropriate discount rate to the value of the VAT payments due for a two-month period; a conservative discount rate would be a short-term bank deposit rate. ### IV. EXCISES — Introduction and context - Public health and social costs: - Chile has above average consumption of products known as health hazards: smoking prevalence is the second highest of the world; alcohol consumption is high by international standards (especially heavy episodic drinking by 15+ teenagers); sugar consumption is above WHO recommended levels. - Excisable goods include products with price-inelastic demand, making taxation an effective revenue-raising and behavior-changing tool to address externalities and internalities. - Main excise categories in Chile: - Chile has four main excise taxes: on motor vehicle fuels, tobacco, alcohol and non-alcoholic beverages. - Formally, taxes on alcoholic and non-alcoholic beverages are classified as a special or additional VAT rate, but revenue is reported under excises for OECD consistency. - Comparative revenue context: - Table 14: Excise Tax Revenue (Percent of GDP) - Chile (1): 2010 1.4; 2015 1.5; 2017 1.5 - Argentina: 2010 1.6; 2015 2.0; 2017 1.7 - Brazil: 2010 0.5; 2015 0.3; 2017 0.3 - Colombia: 2010 0.8; 2015 1.1; 2017 1.0 - Ecuador: 2010 0.8; 2015 0.8; 2017 0.9 - Mexico: 2010 0.6; 2015 2.0; 2017 1.7 - Peru: 2010 1.2; 2015 1.0; 2017 0.9 - Uruguay: 2010 2.0; 2015 2.0; 2017 2.1 - L.A. Mean (2): 2010 1.1; 2015 1.3; 2017 1.2 - OECD Mean: 2010 2.7; 2015 2.6; 2017 2.6 - Excise revenue in Chile is relatively low by OECD standards but higher than the average in Latin America; excise revenue has been stable at around 1.5 of GDP. - All excises represent approximately 9.4 percent of Chile’s total tax revenues; about half of the total are from fuels (fuels represent about 0.8 to 0.9 percent of GDP). - Table 15: Chile: Excise Tax Revenue (Percent of total revenue) - 2015 / 2019 - N Alc. beverages 0.50 / 0.42 - Alcohol (Domestic) 0.77 / 0.79 - Alcohol (Imported)* 0.14 / 0.14 - Tobacco 3.55 / 2.82 - Fuels 5.02 / 5.24 - Total excises 9.98 / 9.41 - Source: SII; * estimated by the mission ### B. Fuels — Structure, scope, and base excise rates - Structure and purpose: - Excises on fuels have a dual structure: a fixed (base) component specific per quantity of fuel, and a variable component which adjusts the base tax depending on international price fluctuation (calculated weekly by ENAP). - The purpose of the adjustment is to protect consumers from high fuel price volatility. - Analysis in the chapter focuses on the base component of the tax. - Taxed and exempt fuels: - Taxed: Gasolines, diesel, heavy fuel oil, compressed natural gas (CNG), liquefied petroleum gas (LPG) for motor vehicles. - Exempted: Biofuels, jet fuels and paraffine. - Base rates (UTM-based and recent US$/gallon equivalents): - The base tax rates that apply to gasoline and diesel are 6 and 1.5 times the Unidad Tributaria Mensual (UTM) per M3, respectively; CNG and LPG have lower rates. - The UTM rates of base excises on gasoline and diesel have not changed in a decade. - Table 16: Chile: Base Excise on Motor Fuels (US$/Gallon) - Gasoline: 2007 1.46; 2017 1.63; 2018 1.69; 2019 1.58 - Diesel: 2007 0.37; 2017 0.41; 2018 0.42; 2019 0.40 - Source: Parry & Strand (2011) and IMF mission calculations - Note: 2019 average exchange rate: CHP 702.6/US$1 (Source: BCC). - In 2019, these taxes were US$1.58 and US$ 0.40 per gallon of gasoline and diesel, respectively. - Policy concerns highlighted: - Diesel shows disproportionate per capita consumption in Chile: Diesel 9.2 Barrels/1000 pop; Gasoline 4.3 Barrels/1000 pop (Chile), compared with regional averages (Diesel Average 4.7; Gasoline Average 3.8). - The current structure of the excise, including tax incentives, may contribute to inefficiencies and could worsen economic inefficiencies, particularly in the case of diesel. - Kerosene treatment is briefly considered in the fuels section (detailed discussion not provided here). *IMF staff report content (chapter excerpts).* ### 3.7854 lt/gallon. ### 1chlea2020004 - 3.7854 lt/gallon. ### Fuel prices and excise shares (Chile, 2019) - Average price of premium gasoline (95) in metropolitan region 2019 = CHP 818.2/lt; Retail price diesel = CHP 598.9/lt. - Base excises 2019: gasoline = CHP 293.9/lt; diesel= CHP 73.5/lt. - In 2019, the gasoline excise represented 36 percent of the final price (including VAT), while the diesel tax burden was 12 percent. - Table 17 (IMF mission calculation based on CNE data): - Gasoline: Final price 2007 = 4.27; 2019 = 4.41. Excise 2007 = 1.46; 2019 = 1.58. Percent 2007 = 34.2; 2019 = 35.9. - Diesel: Final price 2007 = 3.17; 2019 = 3.23. Excise 2007 = 0.37; 2019 = 0.40. Percent 2007 = 11.7; 2019 = 12.4. ### Tax design, exemptions, and credits - The diesel tax depends on final use: - Diesel used for industrial purposes, including electricity, is exempt, though the exemption is granted as a credit against the VAT. - All VAT payers and exporters are exempt so long as they use diesel for purposes other than motor vehicles. - Qualifying trucking companies get a credit ranging from 80 to 31 percent of the diesel excise, depending on the turnover of the company. - Passenger transport companies cannot credit the excise and are fully taxed for their consumption of diesel. - Construction companies have a mixed regime (partial credit for diesel used in road transport if formally licensed as a transport company; general credit for that used in the construction site), requiring double apportionment and a special ledger (Decree 311/1986, art 5-2). - Administrative notes: - A UTM is a unit of measure for tax purposes indexed by inflation and published monthly by the SII. In April 2020 an UTM = CHP50,221. The average value of UTM for 2019 was CHP48,988 = (UTMJan + UTMDic)/2. - The variable tax mechanism changed name: until 2014 it was Sistema de protección al contribuyente (SIPCO); since then it changed to Mecanismo de estabilización de precios de los combustibles (MEPCO), which reacts also to changes in the exchange rate. - Excise values adjust monthly according to inflation; values presented are annual averages. ### International comparison - Fuel taxes in Chile are among the lowest among OECD countries. - In 2017, the excise on premium gasoline stood at roughly US$0.45/liter; VAT added another 11 cents (OECD, 2018a). - All in all, the tax burden represented 49 percent of the consumer price in Chile in that comparison; Chile ranked 30th out of 36 reporting OECD countries by tax share of retail gasoline price. - Excises on diesel are especially low: - This tax was 11.7 cents/liter in 2017, and together with VAT represented 28.2 percent of the total price (OECD, 2018a). - Only three OECD countries were below that percentage (including Mexico, which has no specific tax on motor vehicle fuels). - Only two countries had a lower excise on diesel (cents per liter) than Chile (including Mexico) and only one (the U.S.) had a lower final price for diesel, including taxes. ### Economic efficiency and corrective tax estimates - Studies find Chilean fuel taxes economically inefficient; motor vehicle externalities (pollution, congestion, accidents, road damage) suggest corrective taxes should be materially higher. - Parry and Strand (2011) conclusion for 2006: corrective tax for gasoline should have been 60 percent higher than the prevailing rate, while the diesel tax rate should have been almost six times the statutory rate at that time. - Updated calculation with 2017 data found corrective taxes should have been: - Gasoline: US$2.90/gallon corrective tax (statutory was US$1.63/gallon in 2017). - Diesel: US$2.80/gallon corrective tax (statutory was US$0.41/gallon in 2017). - Table 18. Chile: Statutory and Corrective Taxes on Motor Fuels (US$/Gallon): - Gasoline 2007: Statutory 1.46; Corrective 1.82. - Diesel 2007: Statutory 0.37; Corrective 1.69. - Gasoline 2017: Statutory 1.63; Corrective 2.90. - Diesel 2017: Statutory 0.41; Corrective 2.80. ### The special fiscal case of diesel and tax expenditure estimates - Diesel excise base rate is a quarter of the tax on gasoline, though diesel is more polluting. - Credits and exemptions effectively lower or eliminate diesel excise for many non-transport and commercial uses, creating differentiation in tax treatment for the same fuel. - Recognized tax expenditure: - Diesel tax credit to trucking companies is recognized as a tax expenditure and amounted to CHP 66 billion (US$ 93.9 million) or 0.03 percent of GDP in 2019. - Unrecognized but significant credit: - Credit for industrial uses amounted to CHP 379.4 billion (US$540 million) or 0.14 percent of GDP in 2019; this could arguably be recognized as a tax expenditure as it implies a revenue loss. - Policy context: - The entry into force in Chile of a green tax (Law 21,210/2020) levies emissions from stationary sources of combustion, including industrial combustion of diesel. The green tax applies when fixed combustion sources emit 100 or more annual tons of PM or 25,000 or more annual tons of CO2; if thresholds are exceeded, the tax applies to total emissions. - Overall implication: - Credits and exemptions represent a potential revenue loss from a very low benchmark, since the diesel excise is already only a fraction of the analogous gasoline tax and far smaller than the economically efficient level. *Source: IMF country chapter content (1chlea2020004 - 3.7854 lt/gallon).* ### Box 4. Tax Credits for Diesel Excises ### Box 4. Tax Credits for Diesel Excises ### Diesel tax credit regime - Law 20.658 (2013) established that a proportion of the diesel tax paid by trucking companies can be credited against VAT. The proportion depends on the annual sales of the company, measured in Unidades de Fomento (UF): - 80 percent if lower than 2.400 UF (approx. US$83,000) - 70 percent if between 2.400 UF and 6,000 UF (approx. US$260,000) - 52.5 percent if between 6.000 UF and 20,000 UF (approx. US$690,000) - 31 percent if above 20,000 UF - The tax credit was to expire in 2014, but it was extended for 4 years until 2018 (Law 20.809). Then it was extended again for 4 more years (Law 21.139). - Excises on diesel used for industrial purposes are fully creditable against the VAT (Law 18.502, art 7, first par.). - There is no credit for diesel used for the transport of passengers or consumers not subject to VAT. - Note: The UF is a Chilean unit of account, indexed to inflation. 1 UF = CH$ 34.4 April 30th, 2020. ### Policy options for eliminating distortions and raising revenues from fuel excises — overview - Four potential measures considered (estimated separately; can be cumulative): - Including excises in the base of VAT on fuels - Eliminating the credit for the excise on motor vehicle diesel - Increasing the excise on motor vehicle diesel to equal the excise on gasoline - Increasing excises to the point where fuel prices reach their efficiency level ### Adjusting the VAT base on motor vehicle fuels - Current practice: VAT base on fuels does not include the excise (exceptional internationally). - Estimated price effects if excises included in VAT base: - Motor vehicle retail gasoline prices increase by 6.8 percent - Motor vehicle retail diesel prices increase by 2.3 percent - Revenue effect (assuming average fuel demand elasticity of -0.5): approximately US$420 million, or 0.15 percent of GDP. ### Eliminating the diesel credit - Rationale: difficult to justify tax credit given negative externalities of diesel; industrial diesel enjoys full credit; trucking sector partial credit. - Green tax since 2017 covers stationary sources; green tax collected in 2019 from all fixed sources of emissions was US$185.6 million (CHP130.4 billion), which is 34 percent of the general diesel credit given to the industrial sector. - Green tax collected from diesel combustion alone in 2019: CHP7.8 billion (6 percent of the total), which represents 2 percent of the general credit on the industrial use of diesel. - In 2019, trucking-sector diesel credit amounted to CHP 65.9 billion; this represented on average about 53 percent of the excise paid by the trucking business (source SII). - Eliminating the trucking diesel credit would imply a 6.5 percent rise in the cost of diesel for that sector. - Fiscal impact (assuming fuel demand elasticity of -0.5): recoup close to CHP 62 billion for the budget, (US$88 million) or 0.03 percent of GDP. ### Adjusting the diesel tax to equal the gasoline tax - Proposal: increase excise on motor vehicle diesel to match gasoline excise (fourfold increase). - Current and proposed levels: - From US$.40 per gallon to US$1.58 per gallon - Raises retail price of diesel by close to 30 percent, to CHP 819.3 per liter, or US$4.41 per gallon. - 2019 diesel price = CHP598.9/lt. Excise on diesel CHP 73.5/lt; excise on gasoline CHP293.9/lt; increase in diesel tax CHP220.4/lt; New diesel retail price CHP 819.3/lt. - Revenue effect (assuming price elasticity -0.4 and simultaneous elimination of diesel tax credit): net increase in potential tax revenue of nearly US$1.5 billion, or 0.5 percent of GDP. ### Raising fuel taxes to full corrective (efficiency) levels - Gasoline: - Updated full corrective base (2017 data): US$2.90 per gallon (close to 80 percent increase compared with current tax of US$1.58 per gallon, average 2019). - Imposing this tax would represent a 30 percent increase in the retail price of gasoline, excluding the excise from the VAT base. - Assuming price elasticity -0.4, revenue impact approximately US$1.2 billion, or 0.44 percent of GDP. - Diesel: - Updated corrective level (2017 data): US$2.80 per gallon (much steeper increase given low prevailing tax). - This would imply a final price increase of approximately 75 percent. - Assuming price elasticity -03, net revenue increase nearly US$2.6 billion, or 0.91 percent of GDP. - Combined impact of raising excises to corrective level: US$3,832.6 million, or 1.51 percent of GDP (see Table 20). ### Kerosene taxation - Kerosene is tax exempt. Almost 20 percent of households in Chile use kerosene for home heating; kerosene accounts for less than three percent of total residential energy consumption. - Kerosene is not subject to the green tax, unlike other fuels. - Kerosene emissions factor in Chile is 2.76 kgCO2/liter (similar to Diesel 2.7 and Gasoline 2.4). - Residential kerosene consumption in 2018: 143.4 million liters. - A tax of US$5 per ton of CO2, given an emission factor of 2.8 kgCO2/liter, would yield a revenue close to US$2 million, assuming no adjustment in consumption. - Recommendation: apply the green tax to kerosene consumption; revenue would be small but would align pricing of fuels by emissions factors; distributional considerations may warrant a lower kerosene tax if disproportionately used by low-income households. ### Revenue impact summary (Table 20 figures in US$ millions) - Eliminating trucking diesel credit: Diesel 87.7; Total 87.7; Percent GDP 0.03 - Including excise in the base of VAT: Gasoline 352.3; Diesel 83.3; Total 435.6; Percent GDP 0.15 - Increasing diesel tax to equal gasoline's: Diesel 1461.4; Total 1461.4; Percent GDP 0.52 - Raising excises to corrective level: Gasoline 1247.3; Diesel 2585.3; Total 3832.6; Percent GDP 1.51 - IMF mission calculations based on USEIA, EIA, SII, CNE and BCC data. ### Context and additional findings - Chile’s revenue from fuel excises is below the OECD average by about ½ percentage point of GDP: Chile 0.9 vs OECD average 1.39 in 2017. - The largest shortfall is the diesel tax, driven by social and political pressures to keep transport costs low, which runs counter to Pigouvian tax objectives. - The carbon tax in Chile is low by international standards; efficient tax estimated at US$130 per CO2/ton (citation in source). The Paris Agreement mitigation estimate referenced: a US$75 carbon tax could potentially decrease CO2 emissions in Chile by 31 percent by 2030 (IMF/WB (2020) cited). ### Recommendations (gradual and long-term outlook) - Apply the green tax to kerosene consumption - Increase the global pollution levy component of the green tax (the carbon tax) - Include excise in base of VAT on fuels - Eliminate the trucking diesel tax credit - Close gap between diesel and gasoline excises - Move both motor vehicle fuel excises closer to efficiency levels *Source: Box 4. Tax Credits for Diesel Excises, 1chlea2020004* ### Box 5. Comparative Tax Rates on Beer ### Box 5. Comparative Tax Rates on Beer ### Conversion of Chile’s ad valorem excise to specific-equivalent measures - The 20.5 percent ad valorem excise on a 24 pack of Cristal beer is 140 pesos per liter of beer (June 2020), on a base price which excludes the VAT. - Given Cristal’s alcohol content of 4.6 percent per liter, the tax amounts to 3,039 pesos per hectoliter (the standard unit for measuring the specific tax). - The specific tax equivalent to the Chilean ad valorem estimated in Table 23 ranges, in US dollars, from approximately US$4 to US$8, depending on the beer brand; the alcoholic content of cheaper (domestic) beers, as expected, is taxed less with the ad valorem rates. ### International comparisons of specific beer excises - European specific tax per alcohol by volume (hectoliter of product) varies greatly: - Low end: US$2.2 in Germany. - High end: almost US$40 in Finland (OECD, 2018). - Average: nearly US$11 per abv (Average10.9 as reported). - Premium beers in Chile are subject to a specific-equivalent excise closer to the European average; overall, a tentative approximation indicates that Chile’s tax rate on beer is on the low side. ### Cross-beverage context and analogues - Wines are commonly taxed per hectoliter of product; Chile’s 20.5 percent ad valorem yields specific-equivalent excises spanning from around US$100 per hectoliter for relatively cheap wine to US$600 for super-premium wine (Box 6). - Liquors/spirits are most often taxed as a specific rate per hectoliter of pure alcohol; OECD 2016 examples: around US$1,200 per hectoliter of pure alcohol on the low end (Czech Rep., Hungary, Italy) and up to US$9,200 in Norway. - Chile’s ad valorem rate for liquors (31.5 percent) is characterized as low for international standards; the unweighted ad valorem equivalent average for the Anderson (2020) sample is 74.8 percent for an equally priced liquor bottle. ### Revenue potential and behavioral elasticities - One illustrative scenario: raise the ad valorem excise on liquor to the international average (33 percent higher than the current Chilean ad valorem rate). - The new rate would reach 42 percent. - Using a demand elasticity for spirits of -0.14 (Araya et al, 2018), the potential increase in excise revenue would be approximately 21 million pesos, about 0.06 percent of GDP. - Beer demand elasticity estimated at -0.93 (Araya et al, 2018); such high elasticity would reduce the revenue impact of a rate increase due to a fall in consumption. - Wine consumption elasticity estimated at -0.77 (Araya et al, 2018), implying a small additional revenue potential from wine excise increases and a strong consumption response. - An increase in the tax on beer and spirits would have a significant effect in reducing consumption and public health costs given the relatively high negative elasticities. ### Policy recommendations (as stated) - Re-estimate and regularly release the total excise revenue from alcoholic drinks, including the tax levied on imports. - Adopt an ‘ad valorem with specific floor taxation system’ for alcoholic beverages, at least for beer and liquor. - The base for the specific tax for beer and liquor should be on alcohol by volume. - Consider a combination tax system for wine where the base of the specific tax (to be a floor for the ad valorem) is on volume of product. - In general, the rate of the additional specific excise should be higher than the specific equivalent to the current ad valorem for relatively cheap but high alcohol content beverages. - Include the excise in the base of the VAT. - Adopt a higher ad valorem for liquors. *Source: Box 5, “Comparative Tax Rates on Beer,” mission calculations and cited OECD and Anderson sources as presented in the chapter.* ### Box 7. E-Cigarettes and Heated Tobacco Products ### Box 7. E-Cigarettes and Heated Tobacco Products ### E-cigarettes and Heated Tobacco Products (HTP): characteristics and health considerations - E-cigarettes are electronic devices that heat liquid containing nicotine (often with added flavors) in a refillable or disposable cartridge. The delivery of nicotine is through vapor, not smoke. - Strictly, it is not a tobacco product, although the nicotine it delivers is an extract from tobacco. - Arguably, e-cigarettes are less harmful than tobacco smoking, since fewer toxic chemicals are inhaled in the absence of combustion. - They are a health hazard because of the addictive nicotine, and other chemicals, including in particular related to flavoring (WBG, 2019). - E-cigarettes were marketed first in 2006 and have grown in popularity since. - HTP are tobacco products in which the cigarette is heated, not burned, with an electronic device; in the absence of combustion, fewer toxic elements are inhaled. ### Tax design and international practice for e-cigarettes and HTP - Many countries now tax e-cigarettes, given their negative health impact. - In Europe e-cigarettes are typically taxed, although there is no common approach. - In the US, 23 states plus DC tax e-cigarettes; the structure and level of rates vary considerably (NCSL, 2020). - The most common tax design is a flat levy per unit of fluid in the device. - In the European Union the rates vary from EUR0.30 to EUR0.08 per ml. - Others apply a tax per mgs of nicotine content. - In the US, some states impose ad valorem tax on the sale price (60 percent in DC, for example). - The most common rate is 5 cents per ml of fluid. - Some states have a hybrid excise, combining a specific with an ad valorem rate (NCSL, 2020). - Advocates argue e-cigarettes help smokers quit and therefore should not be taxed; however, there is no conclusive evidence that they are effective in aiding to quit tobacco smoking (WBG, 2019), although recent studies based mostly on US data indicate that e-cigarettes and traditional cigarettes are in fact substitutes (Cotti et al, 2020). ### Chile: current tobacco tax mix and international context - Currently, the mix of specific and ad valorem taxes on cigarettes in Chile is 55/45percent. - This mix stands close to the mid-point between the averages in Latin America and Europe: - In Latin America, specific taxes represent 62 percent of the total excise tax burden on cigarettes. - In Europe, 38 percent of the burden arises from specific taxation, the remainder is from ad valorem. ### Revenues: recent trends and levels (Chile) - Tobacco tax revenues increased significantly the year after the 2014 reform, but after that they have stagnated or declined. - In nominal terms, revenues peaked in 2016 at slightly above 1 trillion pesos. - The growth rate of tobacco tax revenue had dropped significantly before the reform. - 2015 sees a considerable but short-lived jump in revenue; the longer-term trend resumes, reaching a nominal decline in revenue of 3 percent in 2017. - The growth rate is again negative in 2019, when revenues reached only CHP 973 billion. - Tobacco tax revenue has lost a third of its share in total tax revenue in the last ten years, to a decade low of 2.8 percent in 2019. - Table (annual series, SII source) key figures: - 2009: CHP 556,651 -- 4.1 7% - 2010: CHP 647,637 16.3 3.6 8% - 2011: CHP 741,654 14.5 3.5 1% - 2012: CHP 783,995 5.7 3.4 4% - 2013: CHP 815,991 4.1 3.5 6% - 2014: CHP 856,595 5.0 3.5 0% - 2015: CHP 981,422 14.6 3.5 5% - 2016: CHP 1,009,034 2.8 3.4 8% - 2017: CHP 978,696 -3.0 3.1 8% - 2018: CHP 981,456 0.3 2.8 6% - 2019: CHP 973,336 -0.8 2.8 1% ### International comparative: tobacco tax revenue and tax burden - Chile’s revenue from tobacco excises as a percentage of GDP ranks internationally very close to the average (Average 0.50 percent of GDP; Chile 0.51 percent of GDP, OECD-based table). - The total tax burden on cigarettes in Chile is above 80 percent of the retail price, which ranks high for international standards. - Sum of excises plus VAT represent a tax burden among the top ten in the world (WHO data). - In the American region, taxes are on average (unweighted) around 62 percent of the final price of the most sold pack of 20 cigarettes; this is 20 percentage points below Chile’s case. - Selected 2018 retail price and tax burdens (examples from WHO table): - Chile: Retail price US$ 4.23; Specific 36.4; Ad valorem 30.0; VAT/sales 16.0; Total tax burden 82.4 (percent) - Canada: Retail price US$ 9.07; Specific 55.3; Ad valorem 0; VAT/sales 9.0; Total tax burden 64.4 - USA: Retail price US$ 6.86; Specific 37.8; Ad valorem 0; VAT/sales 5.2; Total tax burden 43.0 - Paraguay: Retail price US$ 0.35; Specific 0; Ad valorem 8.3; VAT/sales 9.1; Total tax burden 17.4 - Regional averages: - American region average retail price US$ 2.98; average total tax burden 61.6 percent - European sample average total tax burden 76.8 percent ### Prices and regional competitiveness - The price of the most sold pack of cigarettes in Chile (around US$4.2 a pack in 2017) is roughly twice the prices in Argentina and Bolivia. - Particularly concerning is Paraguay, where the equivalent pack is worth only US$0.35; Paraguay is a large manufacturer and exporter of cigarettes and a source of contraband. - Regional price differentials limit how much excises may rise without provoking erosion of the domestic market from contraband. ### Illicit cigarette trade in Chile - Chile’s borders are porous to contraband despite difficult geography. - A recent survey (MIDE UC, 2019) finds that approximately 25 percent of all cigarette consumption in Chile is illicit (smuggled from abroad without paying any tax). - In 2012 illicit cigarettes were only 3.6 percent of the Chilean market (Observatorio del Comercio Ilícito, 2017). - Most contraband originates from Paraguay. - Over 14 million packs of cigarettes were seized by Chilean authorities in 2019, doubling the amount recorded in 2016 (Aduana Informa, December 27, 2019). - The potential excise revenue forgone from seized cigarettes represent only about 3 percent of tobacco total revenue—pointing to a large gap between seizures and estimated illicit market share. - The Chilean government has presented an initiative to increase penalties against smuggling of tobacco products; the initiative would single out cigarette smuggling with heavier fines. - Administrative steps adopted recently include traceability of legally produced or imported cigarettes through stamping with ink readable only by instruments used by authorities (operational since 2018). ### Policy considerations specific to Chile - Chile has the second highest percentage of prevalence of cigarette smokers in the world. - Taxation is one instrument among others: smoke free zone regulations, mass media, health warnings (labelling), advertising bans. - Chile scores well in many non-tax fronts, including a high tax burden that has made cigarettes less affordable; however, smoking prevalence remains high. - Increasing excises further may push consumers toward illicit products or other nicotine-based products subject to lower or no taxation, possibly reducing tax revenue. - Previous research found Chile’s tax burden on cigarettes (including VAT) was very close to the top of the Laffer curve (Agostini 2010); the maximum effective tax burden was estimated at 78-83 percent ad valorem, and at the time the rate stood at 76.4 percent. - Factors suggesting caution before another tax increase: - The tax burden on cigarettes is one of the highest in the world - The combination of specific and ad valorem excises seems appropriately balanced - Tobacco tax revenue has decreased in nominal terms despite recent rate increases - A large and growing portion of the market is seemingly supplied by illicit cigarettes - Increasing hauls of illegal cigarettes have been seized annually by Chilean authorities - Price elasticity of demand for tobacco is large in Chile (Agostini (2010) estimates price elasticity in the range of -1.94 to -1.46; other estimates: Debrott (2006) short-run -0.22 and long-run -0.45) ### Taxation of e-cigarettes and HTP: proposed approach for Chile - Novel nicotine products are a health hazard though arguably less than burning tobacco products. - These products should also be taxed. - The tax base should be specific to the nicotine content or per stick in the case of heated tobacco cigarettes. - Given fewer negative externalities and possible substitution with traditional cigarettes, the tax should preferably be kept low relative to tobacco products. ### Recommendations (tobacco, e-cigarettes, HTP) - Do not increase existing tax rates on tobacco products - Maintain the balance between specific and ad valorem excises - Strengthen administrative control of illicit tobacco trade prior to considering raising excises - Raise penalties on smuggling of tobacco products - Verify independently studies financed by private sector on illicit cigarette trade in Chile - Tax e-cigarettes and HTP by the content of nicotine or per unit of fluid *Source: IMF staff synthesis of Box 7. E-Cigarettes and Heated Tobacco Products (excerpt).* ### Appendix I. Selected PIT Tax Expenditures Across Five OECD ### Appendix I. Selected PIT Tax Expenditures Across Five OECD Countries ### Notes and benchmark conventions - Legend and codes used in table: "TE" tax expenditure that is measured; "NM" TE that is listed but not measured due to insufficient data; "NA" type of concession that is not available in the country's tax system; "Not a TE" concession that exists but it is not considered a TE; "NA/ Not a TE" concession that it is not considered a TE but that it was not verified whether it exists or not in the country under study; "NEG TE" negative TE. - Footnotes: - 1 The Canadian TE report includes a measure of the revenue forgone associated to the Basic Personal Amount (a tax credit that can be claimed by all individuals) but states that this measure is considered part of the benchmark tax system, and therefore is not a tax expenditure. - 2 The Australian Tax Expenditures Statement uses a comprehensive income tax benchmark to estimate the value of tax expenditures on savings, including superannuation. However, in a special chapter that focuses exclusively on pension saving it also provides estimates under an expenditure benchmark. - 3 Employee social contributions are deducted in Australia but are taxed at a reduced tax rate when they are in the fund. - Countries in the table (column order and labels preserved): AustraliaCanadaFranceItalyUnited States ### Benchmark approaches applied by country - Australia: Attempt to apply consistent treatment to similar taxpayers. This is informed by long standing features of the tax system. - Canada: Broad approach in which the benchmark tax structure is characterized only by the most fundamental aspects of the tax system. - France: Reference law. - Italy: Reference law. - United States: Normal tax and reference law baselines. ### Personal Income Tax (PIT) — Employment income - Zero-rating (employment income): - Australia: Not a TE - Canada: Not a TE - France: 1 - Italy: Not a TE - United States: Not a TE - Exemption of certain income support benefits, pensions or allowances: - Australia: TE - Canada: TE - France: TE - Italy: NA/ Not a TE - United States: (entry shows combined "NA/ Not a TE" in table; preserve as presented) NA/ Not a TE ### PIT — Capital income (exemptions, deductions, deferrals, reduced rates) - Exemptions / exclusions: - Exclusion of imputed rental income: - Australia: NA/ Not a TE - Canada: Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA/ Not a TE - Exclusion of rental income under certain conditions: - Australia: NA/ Not a TE - Canada: Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA/ Not a TE - Exemption of capital gains from certain stocks: - Australia: NA - Canada: TE - France: TE - Italy: NM - United States: NA - Exclusion on capital gains on certain home sales: - Australia: NA - Canada: TE - France: NA/ Not a TE - Italy: TE - United States: (entry: E) E - Exclusion of certain interest: - Australia: TE - Canada: TE - France: NA/ Not a TE - Italy: TE - United States: E - Exclusion of certain dividends: - Australia: NA - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA - Foreign income exemption for temporary residents: - Australia: TE - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: Not a TE - Deductions: - Deductibility of imputed rental income for main residence: - Australia: NA - Canada: NA - France: NA - Italy: TE - United States: NA - Deductibility of mortgage interest expense on owner occupied residences: - Australia: NA - Canada: NA/ Not a TE - France: TE - Italy: TE - United States: TE - Deductibility of other taxes: - Australia: NA - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deduction for property taxes on real property: - Australia: NA - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deferrals: - Deferral of interest: - Australia: NA - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deferral of tax on realised capital gains: - Australia: NA - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deferral of tax on unrealised capital gains: - Australia: Not a TE - Canada: TE - France: Not a TE - Italy: NA/ Not a TE - United States: Not a TE - Reduced tax rates: - Reduced tax rates for certain capital gains: - Australia: NA - Canada: Not a TE - France: TE - Italy: NA/ Not a TE - United States: TE - Reduced rate for certain types of interest: - Australia: NA/ Not a TE - Canada: Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: Not a TE ### PIT — Pension savings (exemptions, deductions, deferrals, reduced rates, negative TEs) - Exemptions: - Exemption on certain retirement account withdrawals and certain pensions: - Australia: TE - Canada: NA/ Not a TE - France: Not a TE - Italy: NA/ Not a TE - United States: TE - Exclusion of employee contributions to social security: - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Exemption of earnings from individual retirement accounts: - Australia: TE - Canada: NA/ Not a TE - France: Not a TE - Italy: TE - United States: TE - Deductions: - Deduction of voluntary contributions to social security: - Australia: NA - Canada: NA - France: NA - Italy: TE - United States: NA - Deferrals: - Deferral of pension funds returns: - Australia: TE - Canada: 2 - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deferral of tax on contributions to a pension or annuity: - Australia: TE - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Reduced tax rates: - Reduced rate for employer and employee retirement contributions up to a cap: - Australia: TE - Canada: 3 - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA - Reduced rate for pension funds returns (accumulation phase): - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: NA - United States: NA/ Not a TE - Reduced rate for returns on capital gains from retirement saving funds: - Australia: TE - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA - Negative tax expenditures (taxation of retirement savings): - Taxation of retirement savings withdrawn at retirement age: - Australia: NEG TE - Canada: NEG TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA/ Not a TE - Taxation of retirement savings withdrawn in-advance: - Australia: NEG TE - Canada: NEG TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA/ Not a TE ### PIT — Health and other social security provisions (exemptions, deductions, credits) - Exemptions: - Exclusion of employer contributions for medical insurance premiums and medical care from employee gross income: - Australia: NA - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Exemption of distribution from retirement plans for premiums for health and long term care insurance: - Australia: NA/ Not a TE - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Exemption of the private health insurance rebates: - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA - Medicare levy exemption for residents with taxable income below the low-income threshold: - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: NA - Exclusion of premiums on accident and disability insurance: - Australia: TE - Canada: NA/ Not a TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deductions: - Deduction of mandatory unemployment insurance contributions: - Australia: NA/ Not a TE - Canada: NA - France: Not a TE - Italy: NA/ Not a TE - United States: NA/ Not a TE - Deduction of mandatory health insurance contributions: - Australia: NA - Canada: NA - France: NA/ Not a TE - Italy: NA - United States: NA - Deduction of complementary health insurance contributions: - Australia: NA - Canada: NA - France: Not a TE - Italy: NA/ Not a TE - United States: NA - Deduction of self employed medical insurance premiums: - Australia: NA - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Deduction of contributions to health savings accounts: - Australia: NA - Canada: NA/ Not a TE - France: TE - Italy: NA/ Not a TE - United States: TE - Deduction of certain medical expenses: - Australia: NA - Canada: NA/ Not a TE - France: Not a TE - Italy: TE - United States: TE - Deduction of life and disability insurance premiums: - Australia: TE - Canada: NA/ Not a TE - France: TE - Italy: NA/ Not a TE - United States: NA - Credits: - Tax credit for employment insurance premiums paid: - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: NA/ Not a TE - United States: TE - Medical expense tax credit: - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: TE - United States: NA/ Not a TE - Disability tax credit: - Australia: NA/ Not a TE - Canada: TE - France: NA/ Not a TE - Italy: TE - United States: NA/ Not a TE *Appendix I. 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