Chile tax reform likely to remain intact despite opposition

SANTIAGO Mon May 12, 2014 4:32pm EDT

Chile's President Michelle Bachelet walks past honour guards as she arrives at the Casa Rosada Presidential Palace for a meeting with Argentina's President Cristina Fernandez de Kirchner in Buenos Aires May 12, 2014. REUTERS/Marcos Brindicci

Chile's President Michelle Bachelet walks past honour guards as she arrives at the Casa Rosada Presidential Palace for a meeting with Argentina's President Cristina Fernandez de Kirchner in Buenos Aires May 12, 2014.

Credit: Reuters/Marcos Brindicci

SANTIAGO (Reuters) - Chile's Congress will likely tweak President Michelle Bachelet's ambitious new tax reform after it moves to the Senate in the coming weeks, but the heart of the bill will remain intact, those close to lawmakers have said this month.

The bill is designed to fund an overhaul of education and healthcare as Bachelet and her Nueva Mayoria coalition government, who took power in March, seek to tackle inequality in the top copper exporter.

The reform is expected to pass the lower house, with minor changes already made, and will then head to the Senate where more changes are expected. It has sparked the ire of opposition politicians and local business leaders, who are demanding significant changes, arguing those already made are not enough to safeguard investment.

The government insists the core of the reform will not change, but they say they are flexible to discussing other aspects of the bill in order to garner consensus despite having enough votes in both chambers of Congress to pass it.

"Today we have a majority (in Congress) and could approve the reform, but by the same token in the future we might not be the majority and I wouldn't like to see this undone," said Nueva Mayoria senator Ricardo Lagos Weber, head of the Senate Finance Committee that will examine the bill and suggest alterations.

"That's why it's important to generate support that goes beyond the Nueva Mayoria," Lagos Weber told Reuters earlier this month, adding that he expects the bill to receive final approval by late August or early September.

COMPANY CONCERNS

Businesses are especially worried about plans to scrap the so-called 'FUT', a mechanism by which companies can gain tax exemptions on part of their profits, claiming that the move will stem investment in an economy that is already stalling.

The chairman of forestry firm Empresas CMPC CAR.SN Eliodoro Matte, one of Chile's wealthiest men, is one of several business leaders who have said the proposed changes will have a negative effect on investment.

After negotiations in the Lower House, lawmakers have already made some concessions on alcohol and diesel vehicle tax rises.

But sources in the government say plans to eliminate the FUT and to raise corporate taxes to 25 percent from 20 percent are key to the goal of raising Chile's tax haul by 3 percent of gross domestic product, or some $8.2 billion, and probably will not be modified.

"Let there be no question about it, we're going to raise 3 percentage points of GDP," said Finance Minister Alberto Arenas at a meeting with journalists last week.

"We are going to make more precise, refine, modify in a way that any cuts will be compensated."

Despite opposition, few alternative proposals have been presented for the most contentious parts of the reform to date.

Still, countermeasures are expected to be presented once the bill reaches the Senate.

"If the (FUT's) elimination is approved, we firmly believe it necessary to incorporate into our tax system other mechanisms that point to the same objective of stimulating investment," Andres Santa Cruz, the head of business umbrella organization CPC, said late last week.

(Reporting and writing by Anthony Esposito, Additional reporting by Antonio de la Jara, Editing by Rosalba O'Brien and Diane Craft)

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