Tax Expenditures and Corrective Taxes in Chile: a Joint IMF/OECD Assessment
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FOR OFFICIAL USE ONLY CHILE Tax Expenditures and Corrective Taxes in Chile: A joint IMF/OECD Assessment Bert Brys, Ruud de Mooij, Gioia de Melo, Shafik Hebous, Sean Kennedy, Roberto Schatan, and Charles Vellutini Technical Report October 2020 TABLE OF CONTENTS ACRONYMS ___________________________________________________________________________________ 5 PREFACE ______________________________________________________________________________________ 6 PRINCIPALES CONCLUSIONES Y RECOMENDACIONES ____________________________________ 7 RESUMEN EJECUTIVO ________________________________________________________________________ 9 KEY FINDINGS AND RECOMMENDATIONS _______________________________________________ 20 EXECUTIVE SUMMARY ______________________________________________________________________ 22 I. INTRODUCTION ________________________________________________________________________ 31 II. GENERAL INTRODUCTION TO TAX EXPENDITURES __________________________________ 32 A. What Are Tax Expenditures? _____________________________________________________________ 32 B. The Benchmark Tax System ______________________________________________________________ 33 C. Measuring Tax Expenditures _____________________________________________________________ 37 D. Tax Expenditure Reporting _______________________________________________________________ 41 E. Impact Evaluation ________________________________________________________________________ 43 F. Tax Expenditure Definitions Across Selected OECD Countries ___________________________ 45 III. AN ASSESSMENT OF TAX EXPENDITURES IN CHILE __________________________________ 49 A. Defining the Benchmark Tax System for Chile ___________________________________________ 50 B. Tax Expenditure Analysis in the Corporate Income Tax __________________________________ 55 C. Tax Expenditure Analysis in the Personal Income Tax ____________________________________ 68 D. Tax Expenditure Analysis in the Value-Added Tax ________________________________________ 96 IV. EXCISES ________________________________________________________________________________ 102 A. Introduction _____________________________________________________________________________ 102 B. Fuels _____________________________________________________________________________________ 104 C. Alcohol __________________________________________________________________________________ 114 D. Tobacco _________________________________________________________________________________ 123 E. Sugary Drinks ___________________________________________________________________________ 131 BOXES 1. Comprehensive Income Versus Broad-Based Consumption Tax Benchmarks _____________ 36 2. Maximizing the Use of Data for Improving the Accuracy of TE Estimates__________________ 63 3. Exempt Bracket/ Basic PIT Allowance ______________________________________________________ 75 4. Tax Credits for Diesel Excises _____________________________________________________________ 108 5. Comparative Tax Rates on Beer ___________________________________________________________ 120 2 6. Specific Tax Equivalent per Hectoliter of Wine ____________________________________________ 121 7. E-Cigarettes and Heated Tobacco Products ______________________________________________ 126 FIGURES 1. Number of Taxpayers by Increasing Sales Brackets and Activities (2019) __________________ 59 2. Taxes as a Share of Final Retail Gasoline Price, OECD Countries __________________________ 107 3. Taxes as a Share of Final Diesel Price, OECD Countries ___________________________________ 107 4. Normalized Specific Tax Equivalent on Liquor in Selected Countries, 2018 _______________ 122 TABLES 1. Assessment of the Chilean TE Report in Term of Best Practices ___________________________ 49 2. Sample TE Estimates for Four Cooperatives (Amounts in Peso Millions) ___________________ 62 3. Reduced CIT Rate and Full Dividend Imputation TE _______________________________________ 69 4. Value of the Revenue Forgone Associated to the Concessional Treatment of Capital Gains from the Disposal of Real Estate, Million Pesos ________________________________________ 75 5. Revenue Forgone in 2018 from Standard Basic Allowance ________________________________ 76 6. Value of the Deduction of Voluntary Contributions TEs, in Million Pesos __________________ 80 7. TE Estimation of Exemption on Rental Income from DFL2 Properties, in Million Pesos ____ 88 8. Treatment of Housing Provisions in TE Reports for Selected Countries ____________________ 91 9. Value of the Revenue Forgone Associated to the Deduction of Interest on Mortgages, Million Pesos ___________________________________________________________________________ 92 10. Value of the Revenue Forgone Associated to the Deduction of Mortgages Payments, Millions of Pesos _______________________________________________________________________ 93 11. Revenue Forgone from the Deduction of 30 Percent of Independent Workers’ Gross Fees as a Presumptive Expense, Millions of Pesos ___________________________________________ 95 12. Main VAT TEs, Million Pesos ______________________________________________________________ 98 13. Consumption of Fuels in Latin America __________________________________________________ 102 14. Excise Tax Revenue ______________________________________________________________________ 103 15. Chile: Excise Tax Revenue ________________________________________________________________ 104 16. Chile: Base Excise on Motor Fuels _______________________________________________________ 105 17. Chile: Excises and Fuel Prices ____________________________________________________________ 105 18. Chile: Statutory and Corrective Taxes on Motor Fuels ___________________________________ 108 19. Carbon Tax: International Comparison __________________________________________________ 111 20. Chile: Taxes on Fuels, Revenue Effect of Different Policy Options _______________________ 113 21. Alcohol per Capita Consumption (2016) _________________________________________________ 115 22. Chile: Revenue from Taxation of Alcoholic Beverages ___________________________________ 117 23. Specific Excise Equivalent of Chile’s Ad Valorem Tax on Popular Beer Brands ___________ 120 24. Specific Beer Excise per Hectoliter per Percent ABV _____________________________________ 120 25. Chile: Specific Excise Equivalent to Current Ad Valorem on Wine _______________________ 121 26. Prevalence of Daily Tobacco Smoking Percent of Population Age 15+ _________________ 124 27. Tobacco Excise Revenue _________________________________________________________________ 127 28. Tobacco Tax Revenue ___________________________________________________________________ 127 3 29. Taxation of Cigarettes in Selected Countries ____________________________________________ 128 30. Year of Adoption of Tax on Sugar Sweetened Drinks ___________________________________ 132 31. Chile: Specific Tax Equivalent of the Current Ad Valorem Excise per Gram of Sugar of Coca Cola _____________________________________________________________________________ 135 APPENDICES 1. Selected PIT Tax Expenditures Across Five OECD Countries ______________________________ 137 2. Selected Tax Expenditures Associate to CIT and International Tax Provisions Across Five OECD Countries _______________________________________________________________________ 138 3. VAT Base Broadening to Include Fuel Excises (2019) _____________________________________ 139 4. The Diesel Tax Credit to Trucking Companies ____________________________________________ 140 5. Equalizing Diesel to Gasoline Base Excise at Current Level _______________________________ 141 6. Adjusting Gasoline Excise to Account for Negative Externalities __________________________ 142 7. Adjusting Diesel Excise to Account for Negative Externalities ____________________________ 143 8. Imported Alcoholic Drinks and Estimated Excise Revenue ________________________________ 144 References __________________________________________________________________________________ 145 4 ACRONYMS ABV Alcohol by Volume ASF Ad Valorem with Specific Floor Taxation CFC Combined Federal Campaign CHP Chilean Peso CIT Corporate Income Tax CNE Comisión Nacional de Energía CNG Compressed Natural Gas DFL2 Decreto con Fuerza de Ley 2 ENAP Empresa Nacional de Petróleo FAD Fiscal Affairs Department GDP Gross Domestic Product HED Heavy Episodic Drinking HTP Heated Tobacco Products IEA International Energy Agency IMF International Monetary Fund ITL Income Tax Law LPG Liquified Petroleum Gas OECD Organisation for Economic Co-operation and Development NPV Net Present Value PIT Personal Income Tax R&D Research and Development SII Servicio de Impuestos Internos SME Small and Medium-Sized Enterprises TE Tax Expenditure USEIA United States Energy Information Administration UF Unidad de Fomento UTA Annual Tax Unit (1 UTA is approximately $608.088) UTM Unidad Tributaria Mensual VAT Value Added Tax WHO World Health Organization 5 PREFACE In response to a request from Mr. Ignacio Briones Rojas, Minister of Finance of Chile, a remote mission was conducted by a joint team of staff from the International Monetary Fund (IMF) and the secretariat of the Organisation for Economic Co-operation and Development (OECD) during April – October 2020. The mission’s main purpose was to assist the Minister of Finance with technical support to review Chile’s tax expenditure methodology and its corrective excise taxes. The present report reflects the findings of the mission. This report was written jointly by the IMF and the OECD, with the IMF team