On-chain Andean (3) | The current situation, changes and market outlook of Chile's crypto tax system

On-chain Andean (3) | The current situation, changes and market outlook of Chile's crypto tax system

[if !supportLists]1. [endif]Introduction

With the development of crypto assets, the Chilean government has gradually realized that the crypto market means innovation and opportunities for financial development, and its attitude towards crypto assets has changed from resolute opposition to inclusive acceptance. At the same time, in order to cope with the potential dangers and challenges of the crypto asset market, the government maintains a cautious attitude and continues to build and improve the system and mechanism. In the field of taxation, the Chilean government has established a tax system for taxing crypto assets based on the country's basic tax system. This article will analyze the basics, current situation and future of Chile's cryptoasset taxation, and discuss the development trend and challenges of Chile's cryptoasset taxation.

2. Main taxes and rates in Chile

2.1 Overview of the general tax system in Chile

Chile is responsible for tax collection by the central government and has a personal tax system. Chile's tax system is unique and different from most countries. Chile's tax-to-GDP ratio is the lowest in the OECD based on a range of different measures, and Chile's tax structure is quite different from that of other countries, due to the difference in the way VAT and personal income tax are levied. For example, in the case of personal income tax, the tax burden on Chilean individuals is much lower due to the narrow personal income tax base and the lower personal income tax income, including capital income. The main taxes in Chile are VAT, first income tax (corporate income tax), second single tax (personal income tax), additional tax, supplementary tax, and a new capital gains tax this year.

2.2 VAT

Value-added tax (VAT) is an indirect tax levied on the added value of goods and services during the production and sale of goods. In Chile, the VAT rate is generally 19%, and there are opportunities for special rates or exemptions for different products or services. For example, imported services provided from abroad are exempt from VAT if their remuneration is subject to withholding tax. VAT registration is mandatory for every Chilean company to file on a monthly basis.

2.3 Income Tax

Chile's Income Tax is a direct tax levied on personal income, including investment income, interest and dividends, wages and salaries, etc. All individuals domiciled in Chile, regardless of whether the source of income is Chilean or abroad, are subject to tax. Individuals who do not have a domicile in Chile are subject to tax on their income derived in Chile, so foreigners residing in Chile are only required to pay income tax on their income earned in Chile during the first three years of their entry into Chile. Income in Chile includes assets or production activities located in Chile, as well as indirect transfers of Chilean companies and other assets located in Chile.

Chilean income tax is levied according to different types of income through different taxes, which are composed of several major taxes, namely: the first category tax (corporate income tax), the second category tax (labor income tax), the supplementary tax, and the global surtax.

Income from assets (enterprises) is taxed under the first category of income tax, and employees' income (salaries) are taxed under the second category of single income tax. In general, income derived by natural persons domiciled or residing in Chile is taxed under the Global Supplementary Tax, and income derived by non-Chilean residents in Chile is taxed under the Additional Tax.

Both the global supplementary tax and the additional tax are considered final taxes, while the first category tax is considered an advance payment of the final tax. In Chile, these final taxes are deducted by the payment of the first category of tax, i.e. in order to avoid dual national economic taxes, the system allows the deduction of the first category of income tax paid on capital income in order to avoid the taxation of the dual national economy. The percentage of income tax deduction mentioned above will depend on the chosen tax regime.

2.3.1 Category 1 Income Tax (Enterprise Income Tax)

This tax includes capital, commercial, industrial, mining and other income, minus expenses based on income accrued or received, and all income from the previous calendar year is declared annually in April. The first type of tax rate depends on the type of tax system chosen by the taxpayer. Chile's 2014 tax reform established a dual taxation system, which came into effect on January 1, 2017, and includes two payment methods: the comprehensive income tax payment method (also known as the distributed income tax system) or the partial credit income tax payment method.

Under the consolidated income tax method, the final tax (i.e., global supplementary tax and surcharge) is payable at the time of capital gains, regardless of whether or not a dividend distribution or profit withdrawal actually occurs. In this case, the company pays the first type of income tax at a rate of 100% that can be used to offset the final tax, so that there are no other taxable items in the event of dividend distribution or profit withdrawal. The first category of income tax in the Consolidated Income Tax Payment Act has a rate of 25% and applies to individual limited liability companies, individual and community groups formed solely by natural persons domiciled or resident in Chile or taxpayers who are not domiciled in Chile and domiciled in Chile or simplified joint-stock companies (SPAs).

In the Partial Credit Income Tax Payment Method, final taxes (i.e., global supplementary and additional taxes) are payable on the distribution of dividends or the withdrawal of profits. In this case, the first type of tax paid on capital gains can be deducted from the additional tax, but only 65% of the first type of income tax (corporate income tax) paid. The rate of Category 1 income tax under the Partial Credit Income Tax Payment Act is 27% from 2018 and applies to joint-stock companies, joint stock companies, and companies with at least one owner, co-owner, partner, or shareholder who is a foreign investor (without paying final tax).

2.3.2 Category II Single Tax (Labor Income Tax)

The second type of unitary tax is a progressive tax levied on work-related income, such as work, pensions and supplementary or supplementary income from the Chilean government. It is levied according to a series of tax levels, which are exempt from the first tier of 0% when the income is less than 1,300,000 Chilean pesos (CLP), 7% when the income is between 1,300,001 and 2,200,000 CLP, 14% when the income is between 2,201,001 and 3,500,000 CLP, 27% when the income is greater than 3,500,000 CLP, and 35% when the last level is taxed. Social insurance and health insurance are deducted from the wages or salaries of the work, which are withheld and paid by the relevant employer or payer of the income each month.

2.3.3 Global Supplementary Tax

The Global Supplementary Tax is a final tax levied on natural persons who have a domicile or residence in Chile. The taxable income is determined according to the income tax rules of the first and second categories and is levied on an annual basis according to the calculation basis. The tax is levied on a series of tax levels, ranging from the first level of exemption to the last level of 35%. Declared and paid in April of the year following the year after the income is obtained (the tax rate and level are the same as the second type of income tax, but calculated on an annual basis). If the company has paid corporate income tax, it can be deducted from the corresponding global supplementary tax.

2.3.4 Additional Taxes

The additional tax is a tax levied on the income obtained in Chile by natural or legal persons who do not have a domicile in Chile or who do not reside in Chile. Annual withholding or annual filing can be made, depending on the type of income involved.

The general rate of surcharge is 35% and is levied on the distribution of dividends, withdrawals of profits and/or repatriation of profits from the permanent establishment of joint-stock companies, partnerships or foreign companies, and is taxed at a lower rate for certain types of income, such as 30% for the use of trademarks and 15% for invention patents.

At the same time, the additional tax, as the final tax, can also be deducted according to the two payment methods after the enterprise has paid the first type of tax.

2.4 Capital Gains Tax

Capital Gains Tax is a temporary tax levied on realized capital gains by taxpayers who do not specialize in the purchase and sale of real estate and securities. Previously, capital gains on securities listed on the Chilean stock market were not taxable, but as of September 1, 2022, Chile has introduced a new capital gains tax on securities at a rate of 10%.

3. Chile's crypto tax system

3.1 The Chilean government's definition and attitude towards cryptocurrencies

Chile's financial regulator, the Commission on Financial Markets, has ruled that cryptocurrencies are not financial securities and are therefore not subject to the rules governing such assets. According to the Central Bank, cryptocurrencies do not qualify as legal tender or foreign currency. The two entities, as well as the Treasury Department's Financial Stability Board, have stated that buying and holding cryptocurrencies are risky due to their volatility and the indirect threat they could pose to financial institutions if derivatives of cryptocurrencies become widespread. The Central Bank has proposed legislation to place such assets under the supervision of the Financial Markets Commission in the same way as other financial securities.

3.2 How Crypto Assets Are Taxed

In Chile, crypto assets are taxed according to the cost method. There are the following ways to acquire crypto assets: 1. Purchase in cash or its equivalent; 2. Provision of goods or services to obtain; 3. Obtained by exchanging with other cryptocurrencies. The first and third are based on the cash paid or the monetary value of the exchange as the cost basis of taxation. The second approach needs to take into account the requirements of the revenue recognition standard in relation to the provision of goods or services. The price at which the cryptocurrency is liquidated minus the cost basis is the tax base.

Crypto taxes are usually paid in the following scenarios: converting cryptocurrencies into Chile's national currency and making a profit from them, paying for goods and services with cryptocurrencies with a value higher than the debtor's acquisition costs, and paying wages in cryptocurrency. However, if the holder holds cryptocurrency, there is no tax to pay when transferring cryptocurrency between wallets.

Unlike other jurisdictions, Chile's tax law applies the same income tax regime to gains made through cryptocurrencies and income earned from most other forms of income. The Chilean government therefore levies taxes on gains from cryptoassets, depending on the identity of the taxpayer (natural or legal person), the applicable tax regime, the nature of the transaction (creation, sale, payment, etc.) and the presence or absence of a high value or profit. It is mainly levied through Category 1 Income Tax (Corporate Income Tax), Additional Tax, and Global Supplementary Tax.

[if !supportLists]4. [endif]The history of crypto tax

Prior to 2018, Chile's Supreme Court upheld banks in closing accounts on cryptocurrency exchanges, arguing that cryptocurrencies were not legal tender and did not possess the basic characteristics of being legal tender. In 2018, the IRS issued Proclamation 963, stating that cryptocurrencies represent a new form of digital or virtual assets, ruling out the possibility of imposing VAT on cryptoassets. As a result, proceeds from trading cryptocurrencies are subject to taxes covered by the law, including the first category tax (for businesses) and the Global Supplementary Tax (for individuals) and additional tax (withholding tax paid when remittances), and the cost of buying cryptocurrencies can be discounted as the cost of the proceeds from the sale of cryptocurrencies. As an intangible commodity, cryptocurrencies are not subject to VAT in Chile. However, taxpayers who buy and sell cryptocurrencies must issue invoices and receipts.

In 2019, the IRS issued Notices 36 and 1371 clarifying how income tax and capital gains tax on crypto assets are levied and calculated. Since April 2019, Chilean residents have been subject to cryptocurrency-related taxes, and the Chilean government has included cryptoassets in the tax list. According to the Chilean IRS filing, Chilean residents are required to report income related to cryptocurrency transactions as "other personal income/third-party income." Taxpayers are understood to be all those who own cryptocurrencies, including cryptocurrency traders and miners.

In September 2021, the Chilean government submitted a bill to Congress that aims to regulate the fintech industry. The bill is conceived as a framework to establish regulatory principles, as well as to develop new financial products and services with greater impact. The Act establishes a regulatory framework that replaces trading systems for securities and financial instruments, including invoices, derivatives, virtual financial assets or cryptoassets. Where virtual financial assets are understood as units of value, digital representations of goods or services other than currency, whether in local or foreign currency, which can be digitally transferred, stored or exchanged.

On January 4, 2023, the Fintech Law No. 21.521, a fintech-related bill submitted by the Chilean government in 2021, was enacted. It is currently in the process of entering into force, and the necessary regulations for its implementation are being drafted. Crypto assets are regulated, and the law clearly stipulates a limited number of "fintech services" through innovation and technology in the provision of financial services to promote financial competition and inclusion. Five of these services are of particular relevance to cryptoassets, regulating activities related to cryptoassets as financial instruments and means of payment. The promulgation of this bill gives the central bank more powers and responsibilities, which has a good role in guiding the future development of financial assets such as cryptocurrencies. In addition, the Chilean government is also involved in international cooperation between the OECD and the European Union to improve tax transparency and information exchange on cryptoassets, and to combat tax avoidance and evasion.