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UPDATE 2-Opposing Chilean political forces agree tax reform compromise
July 9, 2014 / 7:10 PM / 3 years ago

UPDATE 2-Opposing Chilean political forces agree tax reform compromise

(Adds stock market hitting one-year intraday high, government spokesman’s comments)

By Antonio De la Jara and Anthony Esposito

SANTIAGO, July 9 (Reuters) - After weeks of political wrangling, Chile’s finance minister unveiled changes to a tax reform bill late on Tuesday, including a larger increase in the corporate tax rate in exchange for concessions sought by opposition lawmakers.

The reform, a centerpiece of President Michelle Bachelet’s administration, maintained an overall goal of increasing tax revenue by $8.2 billion, equivalent to 3 percent of gross domestic product.

Corporate taxes will now gradually increase to 27 percent by 2017 from a current 20 percent, according to the agreement between the minister and the Senate’s five-member Finance Committee. In the bill as initially presented to Congress, corporate taxes were to increase to 25 percent.

The Santiago Stock Exchange’s blue-chip IPSA index rose to an over one-year intraday high midday Wednesday as market participants reacted positively to the compromise.

What is fueling local share prices is “mostly the changes to the tax reform because the uncertainty surrounding the bill is starting to dissipate and there is the possibility that we’re on track for a long-term (economic recovery),” said Arturo Curtze, trader at Vantrust Capital in Santiago.

The IPSA was up 1.36 percent to 3,974.09 points at 1400 local time (1800 GMT), its highest intraday level since mid-2013.

“We’ve reached a historic agreement ... we’ve managed to move forward on the most complex and profound tax reform of the last 30 years,” Finance Minister Alberto Arenas said late Tuesday from Congress in the port city of Valparaiso.

With the tax reform “growth will go hand in hand with inclusive development, and companies and individuals will be taxed in a more balanced way,” said Arenas.

The funds raised through the uptick in the tax take will go toward financing an education overhaul and improvements to Chile’s health system.

Bachelet has vowed to address Chile’s rampant income inequality, the worst among the Organization for Economic Co-operation and Development’s 34 member states.

Last week, Arenas said that the government’s target of reducing the fiscal structural deficit to zero by 2018 was conditional on the approval and implementation of the tax reform package.

Plans to scrap the so-called “FUT,” a mechanism by which companies can gain tax exemptions on part of their profits, remained intact after the agreement.

“The heart of the reform remains intact, the FUT will be eliminated and those who make more will pay more,” government spokesman Alvaro Elizalde said on Wednesday.

Businesses and opposition lawmakers have said the move to eliminate the FUT could stem investment in an economy that is already stalling, and especially hurt companies that have scant access to international credit markets.

The new changes to the tax bill also include incentives for investment and saving.

“The system will allow medium and large companies to reinvest part of their profits,” said Senator Ricardo Lagos Weber, who heads the Senate Finance Committee.

The government expects the tax reform to receive final approval from Congress within the next couple of months. (Reporting by Antonio de la Jara and Anthony Esposito; Additional reporting by Felipe Iturrieta; Writing by Anthony Esposito; Editing by Christopher Cushing, John Stonestreet and Lisa Shumaker)

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