By tax law expert Tomás Vio Lyon

The tax reform announced by the government continues to be the center of public debate in Chile, but how will a reform to the tax system affect agribusiness activity? According to the announcements made, we could mention the following:

How will the tax reform affect the agricultural industry? What aspects are changed? Who are the beneficiaries? In this paper we present an overview of the scope of the reform and aspects related to the activity of the agricultural industry. Each of the concepts will be described with a comparison and comments.

1. Restriction of the application of the Presumptive Income system

Presumptive Income is that which for tax purposes of Tax Law on Income Tax is presumed from certain known acts, such as the tax assessment of agricultural properties. A presumptive percentage is applied to the values mentioned in the law with the purpose of obtaining the base on which the Income Tax is to be applied. For agricultural activities the applicable percentage is 10% for property owners and 4% for renters. Companies or individuals under the system of Presumptive Income pay taxes applying the respective rate on the determined presumption and not according to actual results obtained.

The current requirements to benefit from the system of presumptive Income in agricultural activity are the following: a) legal structure: not being a S.A. or SpA and not being in a partnership with other companies as an associate; b) Sales amount: Sales less than 8,000UTM (CLP330,000,000 or US$600,513). With respect to the sales amount, a standard of control is established to avoid the taxpayer eluding the ceiling by dividing their activity and allocating it to companies controlled by them.

In this regard, the current law requires that the taxpayer consider not only his own sales but also the sales of the companies they have indirect control over. This is known as "agricultural contamination". In this respect, the taxpayer's sales are the total of the taxpayer's sales and that of the company related to him if: i) he is an owner of more than 10% of the equity holdings or corporate shares or is the administrator of the SRL; ii) the company is an S.A. and the person is an owner of 10% of it’s shares;  iii) the person, in accordance with i) and ii), is related to a company and this company is, at the same time, related with another company.

The future requirements to benefit from the system of presumptive income with regard to agricultural activity that will enter into force in the 2015 commercial year, are the following: i) legal structure: reduced only for natural persons who are self-employed, E.I.R.L and associations that originated by succession due to death (and is made up exclusively by natural persons); ii) only for small businesses: those with fewer annual sales than 2,400UF (CLP57,000,000 or US$103,725).

Under the new applicable regulation in accordance with the tax reform proposed by the government, the presumptive income is 10% of the tax assessment of the agricultural property for owners as well as renters. In the legislation currently in force, there is a difference between renters (4%) and owners (10%) of agricultural properties.

At the same time, small companies whose sales are greater than 2,400 UF but do not exceed 25,000 UF, must declare their current income according to complete accounting records, although they maintain the possibility of benefiting from the simplified system of article 14 Ter, that establishes the ability to declare current income with a more simple system which, nevertheless, requires some knowledge of accounting.

In current legislation a special regulation applies to the taxpayer of presumptive income that receives other income affected by the first-category tax for which their current income must be declared according to full accounting (income from renting of the property for example). With the current legislation, these taxpayers may continue under presumptive income provided that it does not surpass 1,000UTM. With the reform, this special protection ends.

2. Net profit from the transfer of agricultural property ownership

Under the current legislation in force, for those companies benefiting from the system of Presumptive Income, the net profit obtained by the seller subject to Presumptive Income for the sale of an agricultural property - when the sale is not habitual, at market price and to a non-related individual - is considered a tax-free income.

Under the new applicable regulation in accordance with the tax reform proposed by the government, the system of presumptive income will be restricted. Thus, any small business that does not qualify as a small business in case of selling their property will be affected by taxes, possibly up to 35%.

Although there is an established standard of transition that allows farmers to register their real estate at the tax valuation or at its duly readjusted acquisition cost, this is most likely bound to produce a difference with the market value affected by taxes.

In 1990 when a relevant tax reform was produced established by the law 18.985, restrictions were established on the benefit of the Presumptive Income for farmers. Without going into details, the application of the system of Presumptive Income was restricted but they protected the rights of the farmer benefiting from Presumptive Income who had acquired their property prior to 1990 and would later sell it under a system of current income. The system of protection was named "the tax exemption of provisional article 5º of the law 18.985", which continues to be in force today.

In this regard, the nº 1 of the reffered article, establishes that the net profit of the property - including the annual inflation adjustment - will be characterized as tax-free income, up to the commercial value of the property. This is not established in the reform proposed by the government.

Under the legislation currently in force, for owners of a real estate property as a natural person - in most cases - the net profit generated by a sale is considered as tax-free income. Under the new applicable regulation in accordance with the tax reform proposed by the government, the net profit generated by a sale of a real estate property by a natural person will most likely (if not always) be affected by income tax unless it is their personal property.

Notaries and registrars will benefit as taxpayers look for a way of selling and repurchasing to increase costs before the reform goes into force.

3. Increase of the tax rate of stamps

Beginning in the 2017 tax year, the rate will increase from 0.33% per month or fraction of month to 0.66% with a maximum per operation of 0.4% to 0.8%.

With respect to all demand operations or those without an end date, the rate will increase from the current 0.166% to 0.332%.

Farmers who require financing to produce fruits and vegetables for exportation will not be affected. Due to an exemption that has been in force for over 10 years, the documents that guarantee the financing operations are exempt from the referred tax. Nevertheless, those farmers who produce fruits and vegetables to be sold at the national level and require financing will be affected.

4. Corrective Taxes on alcohol

Under the legislation currently in force, the sales and imports of these products are affected by an additional tax, regardless of whether or not the operations are habitual.

The tax rate is applied on the same taxable base as that of VAT.  Tax rates are different depending on the alcoholic grade of the alcoholic beverage in question, fluctuating between 15% and 27%.  Examples mentioned of these products include: pisco, whisky, brandy, wine, beer, etcetera.

Under the new applicable regulation in accordance with the tax reform proposed by the government, a fixed rate of 18% will be applied to the beverages for the sole fact that they contain alcohol. An extra 0.5% will also be applied for each alcoholic grade.

In this regard, the sale of pisco is currently levied at 27% and post reform it will be levied at 35.5% for piscos with a grade of 35 and 38% for piscos with a grade of 40%.

If you need more information you may contact attorney Tomás Vio at Tvio@araya.cl

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