Capital Allowances: A Barrier to Growth
In fewer than four months, Chile will usher in its new president, José Antonio Kast, as part of ongoing economic reforms. Both he and his opponent, Evelyn Matthei, have called for a reduction of the corporate tax rate from 27% to 23%, aiming to stimulate growth. But merely lowering the headline rate will not address more profound issues embedded in Chile's tax system. A critical examination reveals that Chilean companies grapple with the harshest capital allowances in developed countries, alongside a worldwide tax system that puts them at a competitive disadvantage on the global stage.
The Impact of Weak Depreciation Allowances
Chilean firms are burdened by restrictions that limit their ability to recover investment costs through depreciation deductions. Currently, businesses can only claim a fraction of their costs; for example, they may deduct a mere 70.6% of machinery investments. This compares unfavorably to the OECD average of 85.7%, revealing a structural weakness that discourages robust capital investment crucial for long-term economic health.
Worldwide Taxation: A Systemic Challenge
Additionally, the persistence of a worldwide tax system is another barrier. Unlike most OECD countries, which have shifted toward territorial tax systems that exclude foreign income from domestic taxation, Chilean firms must navigate a complex tax landscape that includes foreign-earned income. This outdated model forces Chilean companies to contend with higher taxes than their international counterparts, further stunting their competitiveness abroad.
Reforms for a Competitive Tomorrow
To truly enhance economic growth, Chile must consider radical reform—returning to full capital expensing and adopting a territorial tax system. Full expensing would grant companies the ability to immediately deduct investments, thereby relieving capital cost burdens that inhibit growth. Meanwhile, transitioning to a territorial system would help level the playing field for Chilean companies competing in foreign markets.
Predictable Pathways to Progress
The transition to a modernized tax system is a critical opportunity for Chile’s incoming administration. By enacting reforms that prioritize efficient capital cost recovery and competitiveness, the government could transform an outdated system into a springboard for economic revitalization.
As the world watches, Chile's pending reforms could steer the nation toward a more prosperous future, one where innovation and investment are not stifled, but inspired.
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