The Capital Markets reform presented by the Government helps untangle a series of knots in our financial and tax system that prevent us from developing a deeper, more dynamic capital market that is attractive to foreign and domestic investors. It is a positive and necessary first step.
The message sent by the President of the Republic states that the country must "generate the necessary confidence to attract foreign investors" so that "the country becomes a platform that administers and channels capital to the rest of Latin America." Without a doubt an ambitious and commendable goal, which may require deepening some of the proposed measures or incorporating others not contemplated in the bill.
Chile already has some of the most important attributes to be a regional financial center: it has the human capital needed to operate in a highly skilled and competitive sector; we have solid, transparent, and effective institutions in the regulation and oversight of the market; and we have a serious, solvent, and competitive banking and financial industry, with the presence of the world's most relevant banks. So what are we missing? The necessary conditions for capital to flow to and from Chile at known costs that are comparatively competitive at the international level.
Under our current system, if a domestic company receives dividends abroad, it pays taxes...
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The Capital Market reform presented by the Government helps untangle a series of knots in our financial and tax system that prevent us from developing a deeper, more dynamic capital market that is attractive to foreign and domestic investors. It is a positive and necessary first step. The message sent by the President of the Republic states that the country must "generate the necessary confidence to attract foreign investors" so that "the country becomes a platform that administers and channels capital to the rest of Latin America." Without a doubt an ambitious and laudable goal, which may require deepening some of the proposed measures or incorporating others not contemplated in the project. Chile already has some of the most important attributes to be a regional financial center: it has the human capital necessary to operate in a highly qualified and competitive sector; we have a solid, transparent and effective institutional framework in the regulation and oversight of the market; and we have a serious, solvent and competitive banking and financial industry, with the presence of the world's most relevant banks. So what are we missing? The necessary conditions for capital to flow to and from Chile at known and comparatively internationally competitive costs. Under our current system, if a domestic company receives dividends abroad, it pays taxes in the country where the operating activity takes place, and then, upon bringing those dividends to Chile, it is taxed again in our country, making the investment ostentatiously more expensive. Although our country has a system of credits for taxes paid abroad, the complexity and uncertainty that accompany it mean that it is often not possible to use this benefit, making Chile a very unattractive location for investments abroad. An example: a "Family Office" based in Chile that buys and sells shares or bonds of a company listed on the New York Stock Exchange would not pay taxes in the United States on the potential gain from that transaction, but it would in Chile, where, upon bringing in the funds, it would have to pay a rate of 27% (23% after the reform). And if the investor based in Chile is an individual, then that rate will reach 40%. Or a dollar investment in an American bond with a 4% coupon, when taxed in Chile at 40%, turns that investment into a true expropriation, since not even inflation can be recovered. This is one of the reasons for the outflow of funds from Chile abroad that, after paying taxes in our country, seek more efficient places for this type of investment. To be a regional financial center, Chile must offer an internationally comparatively competitive tax structure. This requires, as a starting point, incorporating exemptions ("participation exemption" in many jurisdictions) for dividends from abroad that are received by companies domiciled in our country. In addition, establishing exemption or reduction criteria for taxes on stock market transactions or international financial instruments, setting requirements such as minimum holding periods for shares. Currently, Chile has 37 agreements to avoid double taxation, which facilitates the definition of a universe of countries on which these conditions can operate, which also do not require very disruptive innovations, since the experience of other countries that have chosen to become financial centers is already known, such as Singapore, England, the Netherlands or Ireland, among others, which serve as a reference for adopting similar measures. As for investments in the local financial market, it is positive that the exemption on capital gains is being made more flexible. However, it would be advisable to analyze extending it to all financial instruments and passive income, incorporating debt from smaller companies that often do not have access to local or foreign financing and that consequently are the ones that most need liquidity. While the project is going in the right direction, and the Government's efforts in this matter should be applauded, more can be done so that not only is the tangle untangled, but it is loosened enough to re-weave a system that turns our country into a real global financial platform. By Oscar Hasbún M., Company Director. NEWSLETTEROpinionSaturday, AMTense ideas, opposing views and a clear analysis: elements to reveal the issues that divide opinions and will set the agenda. By subscribing you are accepting the Terms and Conditions and Privacy Policies of La Tercera.