Fitch: Chile Tax Reform Highlights Policy Framework Strengths

Tue Apr 1, 2014 11:31am EDT

(The following statement was released by the rating agency) NEW YORK, April 01 (Fitch) Chile's proposed tax reforms highlight a commitment to fiscal responsibility within a strong policy framework, Fitch Ratings says. These factors support the sovereign's 'A+'/Stable rating, although there are risks that the proposed reforms could dent investment and growth prospects. The reform package presented to Congress on Monday by President Michelle Bachelet was in line with campaign pledges made ahead of her election last December. Key measures include cutting the highest rate of personal income tax, increasing the corporate income tax rate, and calculating corporate income tax on an accrual rather than the current cash basis. The reforms are intended to improve tax equality, reduce tax evasion and help fund social spending, particularly education reforms following student protests in recent years. The government is acknowledging popular pressure for better living conditions and social mobility. Its continuing commitment to prudent fiscal management is demonstrated by its attempt to meet the resulting budgetary demands through a comprehensive package of long-term measures, to be phased in over four years, that will increase the tax revenue base. The government wants to eliminate the cyclically adjusted fiscal deficit by 2018, from 0.6% of GDP in 2013. Tax rate increases and new tax categories would help the government increase the tax burden, which remains low relative to 'A' category rating peers. The reform could increase tax collection from large corporations, but its impact on future investment is difficult to predict (the current system of corporate taxation was designed in the 1990s to promote high investment ratios). The reform proposal coincides with a slowdown of the Chilean economy due to falling copper prices and external demand, especially from China, and increasing labour and energy costs in the mining sector (which, by eroding profitability, have reduced mining-related taxation). On Monday Chile's central bank cut its GDP growth forecast for 2014 to 3%-4%, from 3.75%-4.75%, noting the drop in investment in recent quarters. If large Chilean corporates respond to the tax reforms by reducing investment rates, growth prospects could be further affected. But the phasing in of the reforms may reduce this risk. And Chile's sound macroeconomic policy, strong institutional framework, political stability, and business-friendly environment will remain conducive to investment in the mining sector, while the country retains strong capacity to implement counter-cyclical monetary and fiscal policies to cope with external shocks. Moreover, the reform offers investment incentives for SMEs. And even at its increased rate of 25%, Chilean corporate tax will not be especially high compared with other Latin American jurisdictions. Contact: Santiago Mosquera Director Latin America +1 212 908-0271 Fitch Ratings, Inc. One State Street Plaza New York, NY Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.