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Source: Put together by the Division of Studies of the SII, based on "Corporate Taxes. A Worldwide Summary-1996" Price Waterhouse. Put together by the Division of Studies of the SII, based on "Corporate Taxes. A Worldwide Summary-1996" Price Waterhouse.

Notes:

1. The basic rate is 38% except for manufacturing industry in which the rate is 31%. 10% is discounted for provincial taxes. And finally there is a surtax of 4% above federal tax. The typical local rate is 15.5% except for manufacturers in which it is 13.5%.
2. The general rate is 34% except for the following cases: Agriculture and Book Publication (17%), and investments in productive infrastructure (25.5%).
3. The general rate is 30% except for the petroleum industry in which it is 40%.
4. The general rate is 30%, except for agriculture in which it is 25%. Businesses with an annual income of less than US$ 17,330 pay at a rate of 3%.
5. The rate is 16% until W 1,000,000. Over this amount 28% is charged. Also there is a surtax equivalent to 10% of the corporate tax.
6. The federal rate is 15% with a monthly surtax of 10% over profits of RS 240,000. Also businesses pay an 8% social security tax.
7. The rate varies in accord with income between 15% and 35%. The local rates vary according to each state. Some have no corporate taxes while in others have rates up to 12%.
8. The rate varies in accord with income in between 10% and 30%.
9. Businesses pay a rate in accord with their income between 0% and 25%.

In this sense, it should be pointed out that the corporate rate in Chile is around the half of the rate that is applied in countries such as Canada (29.1%), France (33.3%), Malaysia (30%), Argentina (33%), or Mexico (34%).

q Personal Rates: The Case of the Sole Proprietors and the Stockholders or Partners in an Enterprise.

The comparison of preceding section nevertheless, is not totally precise because in Chile the taxes that the businesses pay do not constitute a final tax but take the form of a withholding on account of personal taxes that the business owner will pay. In fact the First Category Income Tax paid by corporations at 15% constitute a credit against the personal income tax that their owners pay. This last tax operates with the same progressive rates as the Second Category Unique Income Tax.

Next we will make a comparison of the income tax paid by a sole proprietor, considering what he pays at the business level as well as what he pays at the individual level. To arrive at this estimate we have done an similar exercise in the case of the employee, calculating the average income tax rate that affects his family group. In this case we have considered two types of business owner. In the first case we will look at the sole proprietor who withdraws the whole of his profits generated from the business (Graph Nº 8a). In scenarios 1 and 2 it is considered that the total of household gross income is earned solely by one of the parents, and that 100% of the income corresponds to gross profits earn by the business. Scenarios 3, 4, and 5 consider that 75% of the household gross income is earned by the main taxpayer whose income consists of 88% of the business profits. The other taxpayer who earns the remaining 25% earns all of it in the form of a salary as an employee. The average income tax rate considers the taxes on income, national as well as local, expressed as a fraction of household gross income.

The second case, that case of a partner or shareholder who receives dividends paid by a ‘model business’ is analyzed (Graph Nº 8b). In scenarios 1 and 2 it is considered that all of the household gross income is earned by only one of the married partners and that 100% of that corresponds to the gross dividend from the business or partnership that he/she participates in. Scenarios 3, 4 and 5 consider that 75% of the household gross income is earned by the main taxpayer whose income is derived 88% from dividends. The other taxpayer who earns the remaining 25% obtains the income in the form of a salary earned as an employee. The methodology and the assumptions in this estimate can be consulted in Annex 2 at the end of this report.

The results indicate that the average rates that affect the sole proprietors -- reflecting the corporate income tax and the personal income tax -- in the majority of countries are higher than those for a employee under the same income scenario. In Chile, the taxes paid by sole proprietors and employees turn out to be relatively similar because they are submitted to the same tax scale. In this case, the difference comes from the pension plan tax deduction and the health insurance available for the employee while the sole proprietor has available to him only the pension plan tax deduction.

Source: Put together by the Division of Studies of SII, based on information given by the tax authorities of the countries and "Corporate Taxes: A Worldwide Summary - 1996", Price Waterhouse. Put together by the Division of Studies of SII, based on information given by the tax authorities of the countries and "Corporate Taxes: A Worldwide Summary - 1996", Price Waterhouse.

Notes:

1. See Annex 2 "Methodological Notes".
1. For each country this value has been converted to domestic currency according to the exchange rate in effect December 31, 1995.
2. With the exception of South Korea, Uruguay and Paraguay, the tax calculations have been verified by authorities and experts of the administrations of each Country.

Consequently, while comparing the average tax rates that apply on sole proprietors in Chile they have a favorable situation in respect to the other countries to that of the employees. In fact, if one considers the scenario of US$ 15,000 per month, the family average rate that a sole proprietor in Chile pays, is 23.5% while the average for all the countries combined is 26.0%.

On the other hand the analysis reveals that stockholders of businesses pay at an even higher rate than sole proprietors and employees for several countries. This is explained in general terms because in various countries sole proprietors pay taxes in a manner similar to that of employees but stockholders are confronted by the corporate rates paid by their business as well as by the personal rates that they are confronted with as dividend receivers. Again, in Chile the integration of taxes causes them to pay taxes similar to those of employees under the same scenario of gross family income tax. Even though at a rate slightly higher, given that stockholders cannot invoke deductions from pension plan or health insurance payments.

Source: Put together by the Division of Studies of the SII, based on information obtained from the tax authorities of each country and from "Corporate Taxes: A Worldwide Summary - 1996", Price Waterhouse. Put together by the Division of Studies of the SII, based on information obtained from the tax authorities of each country and from "Corporate Taxes: A Worldwide Summary - 1996", Price Waterhouse.

Notes:

1. See Annex 2 "Methodological Notes".
1. For each country this value has been converted to domestic currency according to exchange rate of December 31, 1995.
2. With the exception of South Korea, Uruguay, and Paraguay, the tax calculation has been verified by tax authorities and experts in tax administrations in each country.

If one considers the scenario of US$ 15,000 per month, the family average rate that a stockholder in Chile pays is 24.5%. This compares with the average of all the countries at 29.3%

What this exercise shows is that business owners in Chile pay lower taxes than in the majority of the countries considered in this comparison.

Summing up, the analyses of international comparison, it can be pointed out that the average rates for dependent workers in Chile move relatively in line with the international standards, not withstanding that the maximum marginal tax rate appears to be among the most elevated. Nevertheless, in the case of business owners it turns out to be amply evident that they are faced with a tax rate in Chile that is among one of lowest and also they have a very favorable degree of flexibility in their tax payment schedule. When profits are retained in the company they only pay at a rate of 15%, postponing the payment of taxes until the profits are distributed or finally withdrawn.

On this issue, it is important to point out that in the previous exercises the possible mechanisms and loopholes that each tax system offers that would reduce the tax burden are not discussed. In Chile some of these elements that operate in favor of business owners are the following.

• Real estate tax paid by the business is permitted as a credit against the corporate tax paid by the business and a fraction equivalent to 4% of new fixed assets.
• There is a mechanism spelled out in article 14 of the Income Law that exempts from personal income taxes the withdrawal of earnings from the time they are reinvested in other businesses.
• The formulation of investment partnerships that make possible the division of withdrawals that reduce the tax burden for the partners.

4.1. Simplicity

An important characteristic in considering and evaluating all tax systems is their simplicity. Even though this characteristic is difficult to define in quantitative terms it is presumed that the tax systems with the greatest number of different tax types, different rates and exemptions tend to be more complex as much for the taxpayers as for the tax collectors.

In particular, an indicator of simplicity is based in the VAT and can be useful for evaluating this characteristic is the number of exemptions that their legislation contains. Next, in graph No. 9 this information is shown.

Source: Extracted from "Valued Added Tax, International Practice and Problems". Tait, A. IMF-1988. Extracted from "Valued Added Tax, International Practice and Problems". Tait, A. IMF-1988.

Notes:

1 Does not include the treatment of exportations.

2 X= Simple exemption ; Z= Total exemption.

Since 1974 when the VAT was introduced in Chile it has advanced progressively in terms of elimination of special treatments and exemptions. The current situation that coincides with that of 1988 is reflected in the previous graph and it illustrates a reduced number of exemptions in relation to the majority of countries. Moreover, if one considers that in various tax systems these exemptions are superimposed by a number of different rates -- while in Chile there is only one rate -- it can be concluded that the Chilean VAT brings together elements of simplicity from a perspective of international comparison. This is especially relevant because through the VAT 40% of our tax income is collected.

In the case of income tax there are no good comparison indicators available with other countries as in the previous example. Nevertheless, through contact with tax authorities of other countries it has been possible to point out that this  tax shows a level of complexity relatively greater than that of the VAT. The legislation on Income Tax in Chile in its current version is the result of a series of reforms and modifications constantly underway since its publication in 1974. The majority of these modifications have been implemented trying to resolve particular problems of the law which have lost relevance over time and have come to be problematical in terms of simplicity. A revision of these is being considered for the near future.

4.2. Neutrality

The tax system should also be analyzed in terms of neutrality. One principle of neutrality is that taxation should not discriminate in terms of the origin of the income. In the case of business income taxes there is not a special treatment given to different types of businesses, or, to certain economic sectors as in other countries. There are certain exceptions to this principal such as the taxes on an imputed basis to certain taxpayers in agriculture, mining and transportation; the DL 701 in the forestry sector; and the DFL 2, but in the wider context these are not of great importance.

On the other hand the Chilean tax system is neutral in terms of preventing double taxation. The VAT in essence is a system that prevents double taxation, because it deducts credits paid from debited payments. The integration of taxes on business and on business owners other income, the total exemption, of the VAT to exporters, and the relatively low single customs fee (excepting the trade regulated by international treaties), are also elements that point in the direction of preventing double taxation. Recently there have been legal changes brought about tending to authorize as credits the taxes that have been already paid in other countries when profits have been repatriated. In the future this will be an area that our country will continue perfecting legislatively through measures against double taxation.

V EQUITY OF THE TAX STRUCTURE

From the point of view of horizontal equity, as was pointed out in the previous section, the Chilean business income tax is generally implemented on an uniform basis for all taxpayers. On the other hand, the Chilean personal income tax considers as a taxable base all the income received by a taxpayer. It should be pointed out that in both strata of taxpayers, business and personal, the system operates uniformly. Comparing the situation of the employee with the business owner produces some degree of horizontal inequity. In the business income tax case the situation is more flexible as profits are only taxed when withdrawn from the business. In addition, the business income tax constitutes a credit to the business owner. On the other hand, the Chilean VAT, being a tax with few and limited exceptions, also contributes to horizontal equity.

From the point of view of vertical equity the Chilean tax system presents some aspects oriented to not taxing as heavily those taxpayers of lower paying capacity. The structure of the personal income tax has in place a first bracket exempt from payment and a higher bracket with a marginal rate relatively elevated. In the preceding sections we have presented an international comparison of the progressive aspects of the tax income through a comparison exercise of the average income tax rates for households under different income scenarios. Nevertheless taxpayers in Chile not only pay on income but also on transactions of goods and services that are made. Among these taxes are the VAT, the additional taxes to the VAT, the specific taxes, the customs fees, and the real estate taxes. Contrary to income taxes, which are progressive, the majority of these taxes operate with proportional rates. Because of this it is interesting to extend the exercise and quantify the progressive aspect when considering these taxes. In this form we measure the vertical equity of the Chilean tax system in its entirety.

Graph No. 9 compares how much a family in Chile pays in taxes under different tax scenarios. This exercise considers employees that earn all of their salaries in cash form. In the two scenarios of higher income, savings are considered as well as rebates under Article 57 bis. The details of the assumptions and the methodology used in this graph are included in Annex 3 at the end of this report. It can be seen that the tax burden for these taxpayers included in this exercise vary between 15.2%, for those who earn a monthly income of Ch$ 100,000 (US$ 250), and 32.9%, for those with incomes of Ch$4,000,000 (US$ 10,000) monthly. The simple average of these rates is in the range of 20%. But this amount is not representative. Around 4,360,000 individuals (approximately 94%) declare monthly incomes less than Ch$ 500,000 (US$ 1,250) and their burden does not exceed 15%. Only 16,000 individuals ( 0.3% of the total) declares monthly incomes higher than 4 million monthly. Calculating the weighted average tax burden results at around 15.5% of gross income. This amount is slightly lower than the tax burden that is obtained by the aggregated collection of taxes expressed as a fraction of the GNP.

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