## Chile: Report on Observance of Standards and Codes—Fiscal Transparency Module—Update

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### Introduction
- Update to the original fiscal ROSC issued in July, 2003; completed on July 13, 2005.
- Purpose: review developments since 2003 in Chile’s observance of fiscal transparency practices and describe implementation of earlier ROSC recommendations.
- May 2005 FAD mission reviewed relevant developments.

### Developments since original ROSC
- Migration to GFSM 2001:
  - Chile completed the first stage of migration of fiscal statistics to the IMF’s Government Finance Statistics Manual (GFSM 2001).
  - Main result: production of the operating statement (flow transactions) for the central government, the general government and the consolidated public enterprises.
  - Treatment of interest payments on inflation-indexed bonds and on debt owed to the central bank differs from GFSM 2001.
  - Reform of budgetary classification and introduction of a new functional classification of expenditures in line with GFSM 2001.
  - Second stage (ongoing): developing estimates of consumption of fixed capital and fully consistent opening and closing balance sheets; preliminary versions of these balance sheets could be ready by end-2005.
- Extrabudgetary transactions and stabilization funds:
  - Increased provision of information on extrabudgetary transactions, including publication of data going back to 1987 in GFSM 2001 format, both separately and consolidated with central government budgetary accounts.
  - As a result, fiscal statistics now show more clearly the evolution of flows into and out of the copper and oil stabilization funds.
- Transfers from CODELCO and military-related operations:
  - Since October 2003, transfers from the state copper company (CODELCO) earmarked for the military have been shown as extrabudgetary operations.
  - Official data provided show amounts transferred and their use to cover primary and interest expenditures, amortization payments, and net additions to related cash balances.
  - Data on the stock of military debt associated with the Reserved Copper Law continue to be unavailable.
- Structural balance methodology and fiscal rule:
  - Adoption of GFSM 2001 permits a simpler procedure to derive the structural balance from the GFSM 2001-based official balance.
  - The government has been targeting a structural surplus of 1 percent of GDP; this rule has had an informal character to date.
  - As of preparation of this update, authorities were considering whether to incorporate some aspects of the rule in a draft law, but no decision had been made.
- Public Finance Reports, tax expenditures, and contingent liabilities:
  - The Report on the Public Finances (accompanying the budget submission to Congress) included chapters on tax expenditures and contingent liabilities in 2003 and 2004.
  - Publication of tax expenditures estimates is a constitutional obligation.
  - Chapters on contingent liabilities include annual projections of the cost of minimum pension guarantees and estimates of the present value of the expected fiscal costs of the future operation of all public-private partnerships (“concessions”) in place as of the date of publication, with a brief description of the methodology.
  - The Report for 2005 featured a thorough analysis of fiscal risks, using internationally accepted methodologies, including severe stress tests.
  - Submission to the legislature of this report, which should include medium term projections, is required by the State’s Financial Management Law.
- Treasury balances and Banco Estado:
  - Government discontinued maintaining idle treasury balances at Banco Estado.
  - Treasury balances kept at Banco Estado now receive a fair yield based on policy of investing in liquid instruments traded in the secondary market.
  - Banco Estado developed new products and services that have been profitable, helping offset loss of implicit subsidy.
  - Government has been amortizing ahead of schedule its debt to the Central Bank.
- Financial information management system (SIGFE):
  - Implementation is quite advanced: installed and tested in 75 percent of the entities that make up the central government.
  - Full deployment expected for early 2006 (a small delay relative to original plans).
  - SIGFE will allow close monitoring of expenditure commitments.
  - SIGFE modules: budget, program execution, commitment, accounting, and treasury.
- Tax administration developments:
  - Coverage of electronic filing for income taxes reached 96 percent during the 2005 filing season.
  - Internal Tax Service launched the “electronic invoice”, integrating VAT more closely with business-to-business transactions.
  - Draft law establishing first-round appeal tribunals independent of tax agencies had not been approved as of preparation of this update.

### IMF Staff Commentary
- Overall assessment:
  - Chile has achieved a high degree of transparency in its fiscal operations and has continued to make significant improvements since the original ROSC.
- Notable advances highlighted:
  - Introduction of GFSM 2001.
  - Disclosure of certain extrabudgetary transactions related to military spending financed by transfers from the state copper company.
  - Advances in implementation of the financial management system (SIGFE).
  - Reduction in quasi-fiscal activity related to Banco Estado.
  - Continuing efforts to facilitate taxpayer compliance (high electronic filing coverage and electronic invoicing).
- Outstanding issue:
  - Disclosure of information on defense-related debt under the Reserved Copper Law remains unresolved.

*IMF staff team; update completed on July 13, 2005.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05262.pdf_