Rich Deducting Groceries in Chile Target of Bachelet Plan: Taxes

Writing off groceries as a corporate expense, a common practice among Chile’s wealthy, will get harder as the government moves to clamp down on tax avoidance to raise revenue needed to pay for social programs.

The month-old administration of President Michelle Bachelet plans to employ 500 more tax inspectors, who will be empowered to review every credit-card expense to see if it is business related. Supermarket spending claimed as a tax deduction will be rejected out of hand, though people can appeal. Tax disputes will go to special courts, eliminating the more informal chats with officials where disagreements now are resolved.

The measures are part of a package of tax changes presented to legislators that aim to raise 3 percent of gross domestic product to finance Bachelet’s election pledges, including free education for all. Approval is expected later this year, with Bachelet’s ruling coalition having a majority in both chambers of the Chilean Congress.

Some tax advisers say the proposals are too draconian for a country with the lowest tax evasion in Latin America, and will lead to an increase in disputes as tax bills mount. Advisers themselves risk fines if regulators deem they’re helping clients avoid taxes.

“This is just what the tax regulator was asking Santa Claus for Christmas: all kind of dictatorial attributions and superpowers,” economist Bernardo Fontaine said in an April 8 presentation to a commission of Chile’s lower house.

Inequality Index

Bachelet’s government is planning to raise taxes and spending to narrow the worst income inequality in the 34-member Organization for Economic Cooperation and Development. Chile’s Gini index, a measure of the income gap in which zero represents perfect equality and 1 complete inequality, is 0.501, compared with 0.38 in the U.S. and 0.466 in Mexico.

Cashiers at supermarkets in Santiago’s wealthier areas typically ask customers if they want a “boleta,” a normal receipt, or “factura,” which allows a discount on Chile’s 19 percent value added tax, the levy collected on goods and services at every step along the production chain.

Supermarket spending will now fall “within the rejected expenses,” the government said in the tax package.

The proposals also include a rule that will allow inspectors to question any operations they deem were established with the sole purpose of reducing tax bills.

“All-Encompassing Powers”

“This gives the regulator all-encompassing powers,” Christian Blanche, a partner at Santiago-based Tax Advisors, said in a phone interview. “Before, an individual or corporation in Chile had the right to choose a less-taxing path; and with the reform, the regulator may force you to take path that leads to higher taxes.”

The new rules will allow regulators to fine advisers or consultants involved in transactions considered inappropriate.

Of the 3 percent of GDP that the revisions seek to raise, 0.5 percent is projected to come from the crackdown on evasion. The other 2.5 percent is to come from other changes, such as an increase in the corporate tax rate to 25 percent from 20 percent.

Opposition lawmakers consider some of the measures an invasion of privacy and constitutional rights, and are preparing to ask Chile’s Constitutional Tribunal to weigh in, Rodrigo Escobar, an adviser to Alejandro Santana, a deputy for the Renovacion Nacional party, said in a phone interview.

Details vs Substance

Members of Bachelet’s Nueva Mayoria ruling alliance are also concerned about the powers given to the regulator and will seek some amendments, said Aldo Cornejo, president of Congress’s lower house and a member of the Christian Democracy party, according to La Tercera.

The government could change is reviewing some of the increased powers for the regulator without altering the substance of the bill, Finance Minister Alberto Arenas said.

“The main points of the reform are very much resolved,” Arenas said, according to a statement from the ministry distributed today. “We’re studying other aspects that have to do with the regulator’s attribution to gain access to different sources of information.”

Chile’s tax collection system is already efficient, compared with the rest of Latin America.

Latin America’s wealthiest nation has a VAT evasion rate of 11 percent, versus 21.2 percent for Argentina, 23.5 percent for Colombia and 20 percent for Mexico, according to a study published in 2012 by the United Nation’s Economic Commission for Latin America, or Eclac.

Tax Evasion

Income tax evasion in Chile rises to 47.4 percent, compared to 49.7 percent for Argentina, 41.6 percent in Mexico and 48.5 percent in Peru, according to the report.

The government defends its tax proposals, saying it is only fair the rich pay more as it seeks to spread the benefits from 30 years of economic growth averaging 5.4 percent.

As a start, Bachelet aims to improve what the Organization for Economic Cooperation and Development classified as the most socially segregated education system among its members.

“We understand that there are minority sectors that oppose” the tax changes, government spokesman Alvaro Elizalde told reporters April 10. “The government will hear all parties, but we will advance in the transformations that Chileans are demanding.”

The measures are broader than any introduced by former President Sebastian Pinera, a billionaire investor and past shareholder of Latin America’s largest airline, Latam Airlines Group. During Pinera’s four-year tenure, fiscal revenue as a percentage of gross domestic product remained flat at about 24 percent, according to data from the International Monetary Fund.

Court Duties

As one of its last acts, Pinera’s government cut the number of employees at the Tax and Customs Courts, saying the demand for its services were less than expected. Bachelet has proposed making the courts responsible for settling major disputes between regulators and taxpayers.

The rule changes are bringing Chile’s tax regulation more in line with global trends, said Claudio Agostini, an economist at Universidad Adolfo Ibanez and member of the Washington D.C.- based National Tax Association.

“What the government is proposing is pretty much the standard with OECD countries,” Agostini said in a phone interview. “In countries with Anglo-Saxon jurisprudence, there are precedents in which a judge has ruled that a transaction has been set up with the sole purpose of avoiding taxes, even if it complies with the letter of the law.”

The government, which won a landslide election victory in December on a platform pledging tax increases, dismisses the criticism of its moves by tax advisers and opposition parties.

“It’s one of the most important instruments the state has to produce conditions that allow us to be a more cohesive, democratic and just society,” Bachelet said in a televised speech April 1. “Those that have more must proportionally provide more. Those that make more money will pay more money.”

Before it's here, it's on the Bloomberg Terminal.