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AN ANALYSIS OF THE CHILEAN TAX SYSTEM ANNEX 1 I. Taxes of Fiscal Destination -1997
Source: Division of Studies of the SII Note:
II. Municipal Taxes - 1997
Source: Division of Studies of the SII Division of Studies of the SII Notes:
Acronyms Utilized: AF: Appraisal Fiscal UTM: Unit Tax Monthly (value of December 1997: Ch$24,708) UTA: Unit Tax Annual, whose value equivalent to 12 times the UTM of the month of December of the respective year FUT: Fund of Taxable Profits Rejected Expenses: Corresponds to expenses that are not recognized as such by the income tax law and as such are subject to taxation CIF: Value including cost, insurance, and freight cc: Capacity of the vehicle in cubic centimeters kg: kilograms f: factor established by law ANNEX 2 METHODOLOGICAL NOTES FOR ESTIMATION OF THE FAMILY AVERAGE INCOME TAX RATE I Introduction The family average tax rate has been estimated after an analysis of primary rules of taxation that the tax systems apply to corporate and personal income. These rules can be defined in two essential elements: the determination of the taxable base considering the corresponding deductions, and the determination of the final tax, after considering the respective credits. For every country the determination of the family average tax rate has considered the application of the most general rules and features of taxation. For this reason, many particular situations undoubtedly not will be reflected in this analysis. Next we will describe the main assumptions utilized in arriving at this estimation. II Socioeconomic assumptions It is considered a resident family in the country. It is composed of a married couple and two children, and with income of domestic origin only. The children are students, minors for tax purposes, and do not aid the family in any way financially. In relation to family tax liability, it is assumed that the family situation in every case meets all requirements for all for invoking the credits and deductions that correspond to it. II.1 Employees In respect to the parents in scenarios 1 and 2 it is considered that the family gross income is earned by only one of the parents and that 100% of the income corresponds to a cash salary obtained as an employee. Scenarios 3, 4, and 5, consider that 75% of the family gross income is earned by the principal taxpayer. 88% of the income of the main taxpayer is earned in the form of a cash salary as an employee. 9% comes from ordinary banking interests and the remaining 3% comes from capital gains or investments favored by some sort of tax deduction. The secondary taxpayer that earns 25% of the family income does so in the form of a cash salary as an employee. II.2 Sole proprietor In respect to the parents in scenarios 1 and 2 it is considered that the gross family income is earned by only one of the parents and that 100% of the income corresponds to the gross profit obtained by the business. Scenarios 3, 4, and 5 consider that 75% of the gross family income is earned by the main taxpayer. 88% of the income of the main taxpayer corresponds to gross profit earned by the business. 9% comes from ordinary banking interests and the remaining 3% comes from capital gains or investments favored by some sort of tax deduction. The secondary wage earner that earns 25% of the family income does so in the form of a cash salary as an employee. II.3 Partner and/or Stockholder In respect to the parents in scenarios 1 and 2 it is considered that the family gross income is earned by only one of the parents and that 100% of the income corresponds to a gross dividend from the business or partnership in which they participate. Scenarios 3, 4, and 5 consider that 75% of the family gross income is earned by the main taxpayer. 88% of the income of the main taxpayer corresponds to a gross dividend from the business or partnership. 9% comes from ordinary banking interests and the remaining 3% comes from capital gains or investments favored by some sort of tax deduction. The secondary wage earner that earns 25% of the family income does so in the form of a cash salary as an employee. III Specific Assumptions. Incomes: The gross monthly income (before social security contributions) that the family earns is US$500; US$2,500; US$5,000; US$10,000; and US$15,000; in scenarios 1, 2, 3, 4, and 5, respectively. For each country these amounts have been converted into domestic currency according to the exchange rate in force in December 1995. The family annual gross income corresponds to 12 times the monthly income in the case of employees. The income is submitted to the tax structure in force in 1996. It is considered in scenarios 1, 2, 3, 4, and 5 that the taxpayers can select between declaring separately or jointly according to what would bring the lower rate. This only considers the countries permitting this selection. Expenses: For the purpose of applying deductions and credits related with family expenses we consider the patterns of expenses of the average family per quintile in Chile (IV Survey of Family Budgets 1988, National Statistics Institute). We use this in the three most common items susceptible to deductions and/or credit: Percentage of Gross Annual Income Life Insurance Payments 0.16 Contributions to Charitable Institution 0.04 General Medical Expenses 3.96 Another item generally susceptible to certain deductions in some countries is the costs associated with the residence of the taxpayers. For example mortgage interest. Before the impossibility of estimate the average cost of this we omitted it in the computation of the average family income tax rate. In the case of the USA this deduction would not be applied because the exercise supposes that the taxpayer invokes a standard deduction that substitutes the itemized deductions inside of these is the mortgage interest. Other countries that eventually would permit this operation are: France, Argentina, Malaysia and Singapore. These countries apply certain limits and requirements to invoke the deductions as a tax reduction. In the way of an example: if the home expenses reach 2% of the family income the average rate calculated in scenario 3 would reduce in less than 7 decimal points in the case of Malaysia and Spain and in some less than 5 decimal points in France, Argentina, and Singapore. Residence: In relation to the computation of the total tax paid by the family, the federal income as well as the local income taxes have been considered. This point is important in the cases of the USA and Canada. In Canada it is assumed that the family lives in Ontario and is submitted to the corresponding provincial taxation (all the provinces apply personal rates, Ontario exhibits rates in turn in the average of these). For the case of the USA it is assumed that the family lives in New York State. This being one of the most populous states in the country (most of the states impose local income taxes). In the case of sole proprietors and stockholder/partner taxpayers it is assumed that family residence coincided with the location of the business and therefore the business finds itself submitted to the corresponding local corporate tax. Businesses: For the computation of corporate taxes it has been assumed that the gross profit is affect in its totality and that the business owner takes out or receives 100% of these profits. In the case of partners/ stockholders it is assumed that the gross profit is obtained by a ‘model business’ defined as a business with profits equivalent to the lower limit of the highest corporate tax bracket in the USA, that corresponds to some US$ 18.3 million. This assumption is irrelevant in the case of countries that apply proportional rates to business income. Besides, in the particular case of the sole proprietor in Paraguay where there is a special business tax for businesses with sales under a certain level (US$19,450 annually) it is supposed that there is a profit margin 30% over sales. Family Average Tax Rate: It has been defined as the percentage that represents the total tax paid -without considering social security contributions- over the family gross income (income before any discounts). ANNEX 3 METHODOLOGICAL NOTES FOR THE ESTIMATION OF THE EMPLOYEES TAX BURDEN IN CHILE We consider six Chilean salary scenarios with the following gross incomes: Scenario 1: Ch$ 100,000 Scenario 2: Ch$ 200,000 Scenario 3: Ch$ 500,000 Scenario 4: Ch$ 1,000,000 Scenario 5: Ch$ 2,000,000 Scenario 6: Ch$ 4,000,000 It is assumed that each time a consumer buys a good or service that they pay all the taxes that are due in the transaction. For the purpose of this exercise only taxpayers whose incomes are Ch$2,000,000 and Ch$4,000,000 save voluntarily. They save 10% and 20% of their incomes, respectively. Besides these taxpayers also take advantage of the tax rebates of Article 57 bis of the Income Tax Law. In this case are permitted to deduct from the taxable base 50% of the income coming from capital gains. In closing it is considered that each worker follows a pattern of expenses similar to the average per quintile of the Survey of Family Budgets, that serves as a base for the calculation of the IPC (Consumer Price Index). |
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