How could Boric’s tax reform affect the infrastructure sector?

The upcoming tax reform being drafted by Chile's new government is expected to eliminate VAT credits for construction companies involved in housing projects, and although this would not affect other infrastructure projects, such as concessions contracts, it could lead to higher costs for social housing. 

At present, firms are allowed to deduct from their provisional monthly payments (payments made in advance of the annual corporate income tax) 65% of the VAT applied to housing sales whose value does not exceed 2,000 UF (development unit, around US$75,570) per unit, with a cap of 225 UF, as well as 12.35% of the value of sales of VAT-exempt housing units acquired by beneficiaries of housing subsidies.

While the draft of President Gabriel Boric’s tax reform is not expected to be ready until mid-year, it is likely to eliminate these exemptions, as they were seen as unjustified by experts and policymakers, Nicolás Brancoli, international tax and transaction services partner at Ernst & Young (EY), explained.

“Some important voices from the industry have raised the point that this would trigger higher prices for social housing, so the government should probably address this through subsidies or other benefits,” he told BNamericas when asked about the effects of this measure on construction contracts. 

Brancoli made these comments during a webinar held by the law firm analyzing the perspectives for Chinese investments under the new government.

He also said that, because the VAT credit rule is limited to housing, Chinese firms that have been awarded large infrastructure contracts in Chile should not be affected for now, as they have so far not been involved in housing projects. 

Some of the more important infrastructure contracts awarded to Chinese firms in Chile include the construction of one section of line No. 7 of the Santiago metro system, and the concessions for the Maule hospital network (US$261mn) and the Talca-Chillán section of the route 5 highway (US$757mn). 

Other sectors that EY highlighted as attractive for Chinese investors in Chile include technological services, mining and renewable energies. It also pointed out that Boric does not plan to hike corporate taxes.

REFORM IN TWO STEPS.

EY does not expect Boric’s administration to attempt to pass the whole tax reform in a single legislative package and would opt instead for a phased approach where an initial push would entail measures with high levels of support in congress, such as strengthening tax watchdog SII and closing evasion loopholes. 

A second phase would include more comprehensive changes, such as mining royalties, green taxes and higher income taxes.

Boric’s team expects to collect the equivalent to 5% of GDP in four years with these reforms, although Brancoli pointed out that this is an outlook he considers “quite optimistic.”