Chile rejigs criticized tax reform bill in Congress push

Reuters News
Posted: Aug 02, 2012 6:24 PM
Chile rejigs criticized tax reform bill in Congress push

SANTIAGO (Reuters) - Chile's government on Thursday rejigged a sweeping tax reform bill aimed at helping fund an education overhaul, removing criticized benefits for higher earners as it seeks to help its passage through Congress ahead of key local elections.

Conservative President Sebastian Pinera said the revamped bill would raise the tax take by around $1.2 billion in its first year, up from a previously anticipated annual $700 million to $1 billion in extra revenue.

The changes also included a smaller than originally planned reduction in stamp duty on credit.

Pinera originally unveiled the reform in April following massive student-led protests demanding free education and better distribution of the profits from a long copper boom in Chile, the world's No.1 producer.

The reform's eventual passage is seen taking some political pressure off Pinera, possibly helping his coalition at municipal elections in October and at the presidential election in November next year. Under the constitution, Pinera cannot seek a consecutive term.

"This reform ... consists of raising the tax burden on companies and at the same time giving tax relief to small and mid-sized firms and to middle-class taxpayers," Pinera said during an official ceremony.

Finance Minister Felipe Larrain said the government had simplified the original bill and stripped out elements like incentives for recycling businesses, which will be sent as a separate initiative, and taxes on alcohol to help speed its passage.

"This government does not have a majority in either house of Congress, so we have made an effort to come up with a simpler package which will allow for faster dispatch," Larrain told a news conference.

"It is a balanced tax package which raises resources necessary for education and at the same time will keep our economy growing and generating jobs during difficult times."

The bill, which the government sent to Congress earlier this year, increases the income tax rate on companies to 20 percent from 17 percent.

The government had proposed reducing the top tax rate paid by high earners to 36 percent but has now opted to leave it steady at 40 percent. Tax rates for lower earners drop on a sliding scale.

Stamp duty on credit would now be reduced to 0.4 percent from 0.6 percent, instead of to 0.2 percent as originally planned. The bill also seeks to eliminate tax distortions.

Chile was hit in 2011 by a surge of protests demanding better and free education, stricter environmental regulation and greater economic equality, helping yank down Pinera's approval rating and making him the most unpopular leader since General Augusto Pinochet's dictatorship ended in 1990.

While Chile's economy grew 6 percent last year, it was rated the most economically unequal country of the 34-member-state Organisation for Economic Cooperation and Development, or OECD.

The government hiked royalties on mining companies in 2010 and raised a host of taxes to help finance reconstruction after a devastating earthquake early that year.

(Reporting by Simon Gardner, Antonio de la Jara and Felipe Iturrieta)