SME Regime (Original Reform)
The tax reform establishes a new preferential framework for taxation for SMEs.
The law defines small companies as those with average annual income not exceeding UF 25,000 (USD 1.1 mm approx.), and medium enterprises as those with average annual income not exceeding UF 100,000 (USD 4.3 mm approx.).
Currently, the preferential regime of Article 14 ter can only be used by companies that, in addition to other requirements, are VAT taxpayers, are organized as companies or an individual’s enterprise, and have an average annual income of less than approximately UF 9,000. The Tax reform would extend the universe of small companies that could benefit from this preferential regime of Article 14 ter, incorporating businesses that develop activities exempt or not subject to VAT, organized as any type of entity, and with less than UF 25,000 of average annual income.
This limit of average annual income will be doubled from 25,000 UF to 50.000 UF.
Besides, the Protocol suggests that amendments would avoid that small fluctuations of the annual income (up to 20%) will carry the exclusion of this regime.
The preferential treatment of Article 14 ter consists mainly in the possibility of using simplified accounting based on income and disbursements, paying taxes only on the positive difference. In other words, instead of being taxed on profits on an accrual basis, it allows for the payment of taxes to some extent on the available free cash flow generated by the company. In practical terms, Article 14 ter allows for the deferral of income tax on profits reinvested in almost any asset class. However, a notable exception is the investment in working capital, which is non-deductible.
The Protocol confirms that the SMEs will be levied over their received income, and their paid expenses. For PPM calculation, inco
ime would also be considered on a received basis.
As counterbalance, the tax reform eliminates preferential tax regimes found in Articles 14 bis and 14 quarter, which, although more limited in the number of potential recipients, allowed for broader tax exemptions.
SMEs subject to these special regimes at the time of the enforcement of the law would be allowed to maintain its status until December 31, 2016.
Small businesses eligible for Article 14 ter will be able to access the reduced rate of PPM (Provisional Monthly Payments) of 0.25% of gross monthly income. Also, if shareholders are individuals residing in Chile, they may choose to determine the rate of PPM based on the effective rate of Global Complementary Tax that affects shareholders.
Currently, investment in new fixed assets entitles a credit against the First Category Tax of 4% of the asset value. The reform increases the credit to 6% for small companies.
Small businesses that do not access Article 14 ter may depreciate investments in new or used fixed assets using a useful life of one year.
Currently, investment in new fixed assets entitles the taxpayer to a credit against the First Category Tax of 4% of the asset value. For medium-sized businesses, the credit increases to between 4% and 6%, in a proportion inverse to the size of the company (the higher the income, the lower credit).
The Tax Reform would allow for a super accelerated depreciation of investments in new fixed assets of mid-sized companies, considering effectiveness of one-tenth of the normal useful life of the asset.
The Protocol also proposes the following new benefits for the SMEs:
1) Withholding Tax exemption for advertising services and use and subscription to internet services platforms.
2) The term for paying the VAT is increased to two months.
3) The sanction for the first infraction to any tax law might be to attend to training courses.
4) Supermarket related expenses are accepted up to 5 UTM (instead of 1 UTM, as originally proposed). In the case of expenses that surpass said limit, there is no longer need to ask the IRS for an authorization, as it is allowed to declare an informative statement.
5) Incentives for saving and reinvesting: expense deductibility of a percentage of the reinvestment capped at 4.000 UF, determined based on the elected regime: (i) 20% for “attributed income regime” versus (ii) 50% for “partially integrated regime”, without the corporate tax credit (65% of said tax) in the reinvested portion.
6) According to the Tax Reform Bill, taxpayers that want to be subject to the SMEs’ regime in the same year that they initiate their activities could not have a tax equity higher tan 30.000 UF. The Protocol suggests to increase this limit up to 60.000 UF.