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Source: Put together by the Division of Studies of the SII based on Survey of Family Tax Budgets IV INE-1988. Put together by the Division of Studies of the SII based on Survey of Family Tax Budgets IV INE-1988.

1 Expressed in pesos of December 1996. Expressed in pesos of December 1996.

2 Corresponds to a wide approximation calculated on the base of the distribution of all personal income taxpayers including the Second Category Tax and the Total Complimentary Tax by income levels of 1996. Corresponds to a wide approximation calculated on the base of the distribution of all personal income taxpayers including the Second Category Tax and the Total Complimentary Tax by income levels of 1996.

VI TAX EVASION

As was pointed out in the first sections, in the analysis of the tax system the subject of evasion cannot be omitted. An important part of how this system operates in practice is a consequence and at the same time a cause of compliance on the part of taxpayer. Following, we will look at some estimations made to quantify this phenomena in different circumstances. These are made without intending to give an exact account of their dimension but instead permitting the formation of an idea concerning to orders of magnitude. 

6.1 Total Tax Evasion

The general method that has been used to estimate evasion in each type of tax consists of the construction of a theoretical aggregate to the taxable base in agreement with what was established by the legislation. For this, independent sources of information have been utilized (mainly National Accounts) that were appropriate to each tax. Later, the theoretical tax revenue was estimated applying the tax rates in effect on the theoretical base and were compared with the amount actually collected. The result being the amount of estimated evasion. The specific estimation methodology for the two most important taxes, VAT and income tax are described in the following sections. Next, in graph No. 10 we see the results of the estimation of total evasion for 1995.

Source: Put together by the Division of Studies of the SII based on information from the National Accounts of the Central Bank. Put together by the Division of Studies of the SII based on information from the National Accounts of the Central Bank.

Notes:

1 Corresponds to commercial year l995.

2 Includes First Category Income Tax, ‘Global Complementario’ Tax, and Additional Tax.

3 Includes Tobacco and Fuel Taxes.

4 Includes Tax on Legal Documents, Inheritance and Gift taxes, Mine Licenses and Gambling.

5 This amount correspond to illegal reimbursements of VAT and the evasion rate has been estimated as the percentage that represents said amount over the theoretical reimbursement.

Estimation indicates an total evasion amount of the order of US$ 4,000 million. The majority of this is from evasion of VAT and Income Tax. The total rate of evasion reaches 26% of theoretical tax revenue.

6.2 Evasion of VAT

To measure evasion in the case of VAT a procedure is utilized internationally based on the amounts of consumption in national accounts, identifying that each part of the said consumption affects the VAT and calculating in this form the ‘Theoretical VAT’. Comparing this component with the VAT actually collected the proportion of evasion can be determined. Of the total VAT, reimbursements to exporters is discounted with the object of reflecting in the denominator what the tax authorities actually collect.

Graph No.1 shows the 1989-1996 series, demonstrating that over the last years their has been a relatively important reduction in the level of VAT evasion, despite that in this period there has been an increase of 16% to 18% in the VAT rate.

Next in graph No. 11 it can be seen that the rates of compliance in Chile are much higher than in the rest of Latin America. And, also Chile has a higher compliance rate than does Spain. Canada is a special case because the VAT has only been in force a few years. And it is probably a transient figure which in the future probably will be much lower than in this study. Countries such as New Zealand, Israel and Sweden show evasion rates of one digit. Even though exact information is not available in France and England the estimated rates of evasion in these countries are less than 10%. In the USA there is no VAT. But the authorities say that the total rate of evasion is less than 15%.

Source: "Medición del Cumplimiento Tributario y Análisis de sus Determinantes", C. Silvani y J. Brondolo, IMF-CIAT-1993. "Medición del Cumplimiento Tributario y Análisis de sus Determinantes", C. Silvani y J. Brondolo, IMF-CIAT-1993.

1. VAT evasion amounts as percentage of its Theoretical Net Revenue (VAT General plus import VAT).

6.3 Evasion of First Category Income Tax

The theoretical base is estimated after examining the sectorial operation income of national accounts. To estimate the theoretical base the income of the operations corresponding to the exempt sectors are discounted. The effective tax revenue comes from the declared taxable base. The difference estimated between the theoretical revenue and the effective revenue is the amount of evasion. Graph No. 2 presents First Category Income Tax evasion from 1989 to 1995.

It can be observed in the previous graph that there has been an important reduction in the level of evasion in the last few years. It has fallen from a level that was higher than 60% at the start of the decade reaching the level of 43% in 1995. As in the case of the VAT the First Category Income Tax has had a reduction of evasion that has came about despite the increase in the percentage of the tax. Tax Reform of 1990 raised the tax rate from 10% to 15%.

VII TAX ADMINISTRATION AND TAX COMPLIANCE

Within the functions that the tax system administration carries out one of the most important has to do with level of tax compliance. That is, the level at which owed taxes are actually paid due to the efforts of the tax administration. This function is subject to the availability of resources for this purpose and the efficiency of their use. The following graph presents some indicators that permit these two aspects to be considered comparing the use of resources of different internal tax services.

Source: Put together by the Division of Studies of the SII based on information given by each tax administration to the CIAT. Put together by the Division of Studies of the SII based on information given by each tax administration to the CIAT.

Notes:

1. The amounts of personnel and of budget, exclude customs services and the collection function. This last exclusion has been estimated taking into account budgets analogous of the Treasury Service in the administration of the Chilean tax system.
2. The cost of collection includes only operational spending.

The first column of Graph N°12 shows a first indicator that considers the budgetary cost of each tax administration as a percentage of the GNP. As can be seen, Chile appears with one of the lowest percentages of GNP assigned to its internal tax service. It is ranked not only below the more developed nations such as France, USA, Spain, and Canada, but below many Latin America countries whose evasion levels are much higher, such as Argentina and Peru.

The second column of Graph N° 12 shows the average amount of resources spent respectively by each internal tax service to collect an amount of US$ 100. In Chile this level is US$ 0.4 to collect this amount. Mexico spends close to the same amount (US$ 0.3). In the USA the amount is US$ 0.5. All the rest of the countries spend more. Due to lack of information this statistic excludes the administrative cost to the private sector in complying with their tax obligations.

A third relevant indicator is the number of citizens for every functionary of the internal revenue service for the particular country in question. It is estimated that in Chile for every functionary of the SII there are 5,183 citizens. The statistical average for the countries shown is lower than this amount. And, when comparing Chile to the developed countries, where it is presumed that the administrative systems operate in a more efficient manner, there is an even lower level of inhabitants for each functionary.

In sum, what these three indicators  suggest is that the tax system resource average in Chile is below international standards. This aspect has special relevance because though Chile is efficient in evasion control in an Latin American context, it has evasion levels substantially higher than in the developed countries, where, at the same time, the collection budget is proportionally much higher than in Chile. Therefore, it can be concluded that there is an important need for an injection of resources into tax administration so that it can come closer to the levels of compliance that the developed countries register.

In this sense a study recently done by researchers in the University of Chile, analyzing the determinants for tax collection in our country deserves to be mentioned. According to this study, using 1996 as a reference year, for each additional dollar spent that would have been assigned to the SII the collection would have been 40 dollars more.

VIII CONCLUSIONS

The analysis developed in this report permits one to conclude that our tax system, at least when compared with those in the majority of countries satisfies a good combination of desirable economic and administrative factors in a tax system. In fact, the tax burden in Chile reaches a level of 18.7% of the GNP, therefore finding itself in an medium range internationally speaking. Moreover this level of taxation has been accompanied by compliance levels higher than in countries with similar or even higher tax burdens.

On the other hand our tax system exhibits a great emphasis on consumer taxes and a much smaller emphasis on income taxes. In respect to tax rates, business earnings in Chile are taxed at a relatively low rate and their implementation is also integrated with personal income taxation, this permits credit the taxes paid by the businesses against the personal liability. At the same time the progressive personal income taxes are at a moderate level internationally speaking. Nevertheless, in Chile there exists the impression that income taxes are excessively high. This impression is possibly explained by the fact that the marginal maximum rate on income in our country is relatively elevated from a perspective of international comparison, although the average tax rates are moderate.

In regard to tax compliance and evasion, this analysis permits us to conclude that Chile has good levels in these aspects compared with other economies of similar development. At the same time the statistics of resource availability for the Chilean tax system suggest that the work involved in evasion reduction will involve greater budgetary efforts in the coming years with the goals of refining and improving the advances made up until now.

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