tax rate system described above.
5. Foreign Tax Reliefs
Domiciled or resident individuals and business entities are taxed on worldwide income. The general rule is that foreign income taxes incurred in business transactions are allowed as a deductible expense.
Taxes on dividends, capital gains, and profit distributions
received from overseas subsidiaries, as well as income taxes on
branches established abroad, may be credited against first category income tax, provided the investment abroad has been carried out through the Official Exchange Market and registered with the Chilean IRS.
7. Payment of Taxes
Income taxes are paid annually, but estimated partial payments must be paid monthly. The excess, if any, of estimated advanced payments over the corporation final tax liability is reimbursed within the month subsequent to the filing of income tax returns.
8. Other Matters
General Considerations. As a general rule, profits subject to the first category tax reflect a system of accrual basis accounting. In general, worldwide income is subject to tax. However, this rule does not apply to branches or to foreigners during their first three years of Chilean domicile or residence. The profits shown in financial statements are
usually subject to additions and deductions pursuant to the income tax law.
Businesses must keep their accounting records in Chilean currency; however, regional tax commissioners are empowered to authorize accounting in foreign currency if all or most of the capital contributed or business performed is in such a currency.
The assessment of taxable income begins with gross revenue, which includes all revenue received or accrued during the tax period. Direct prime cost (materials and wages) is deductible from gross revenue and factory overhead is generally treated as an expense. All expenses other than cost paid or due during the period are deductible when necessary for the production of income. Provisions for bad debts or contingencies that have not been incurred are not allowed, except in the case of banks and financial institutions according to special rules; for
example, a deduction for bad debts is allowed only when the debt is in fact nonrecoverable and written off. Organizational and start-up expenditures may be deferred and deducted over a period of up to six years, which begins when income is generated.
Inflation Accounting. To offset the effects of inflation, the Income Tax Law has established a comprehensive system of monetary adjustments (correccion monetaria) by which all balance sheet items are expressed in units of constant purchasing power. The procedure is to adjust all non-monetary assets and liabilities existing as of the end of the fiscal year, and the net worth as of the beginning of the year, as well as increases and decreases in net worth, in accordance with a method that restates historical balance sheet items at units of constant purchasing power with offsetting debits or credits to income.
To achieve the above, non-monetary assets and decreases in net worth are adjusted with credit to profit and loss. Non-monetary liabilities, initial net worth, and increases in net worth are adjusted with debit to profit and loss. As a consequence, the balance of monetary adjustments is shown as a profit or a loss, whichever is the case. These monetary adjustments do not apply to companies authorized to keep their accounting records in foreign currency (see above).
INCOME TAXES ON INDIVIDUALS
9. Rates
The income of individuals is subject to progressive tax according to a schedule which is based on an indexed unit called the Annual Tax Unit (ATU). In July 1997, one ATU was equivalent to approximately US$688.
The schedule for 1997 is as follows:
Annual Income
Over Not Over Tax Rate
ATU 0 ATU 10?
10 30 5%
30 50 10
50 70 15
70 90 25
90 120 35
120 45
10. Local Income Taxes
None.
11. Capital Gains Taxes
In general, the capital gains of individuals are subject to the same rules that apply to business entities. However, gains derived from the occasional sale of real estate by an individual are not taxable.
12． Foreign Tax Reliefs
During their first three years in Chile, domiciled or resident
foreigners are taxed only on Chilean-source income.
INCOME TAXES ON NONRESIDE
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