Bloomberg News

Chile to Raise Corporate Taxes as Students Reignite Protests

April 27, 2012

Chile’s President Sebastian Pinera will raise corporate taxes to fund education as he looks to head off a repeat of last year’s students protests that shuttered schools and led to weekly confrontations with police.

The government will increase the corporate tax rate to 20 percent from 18.5 percent, while reducing income taxes and the stamp duty on loans, Pinera said in a televised address to the nation last night. The state will also cut fuel costs through a sliding tax rate and increase taxes on hard liquor. The measures will raise as much as $1 billion a year, Pinera said.

The government decided to overhaul the tax system after students led seven months of demonstrations last year to pressure authorities to increase spending on education. Protests resumed this week with at least 48,000 students marching through Santiago, the biggest demonstration in seven months, according to police estimates.

“Our entire society is making an enormous effort to finance this educational reform,” Pinera said. “We all must commit ourselves to this. That being said, the success of this education reform basically depends on the goodwill, effort and commitment of our students.”

Pinera’s administration will fast-track legislation in Congress to reduce interest rates on student loans to 2 percent from 6 percent, Education Minister Harald Beyer told reporters in Santiago this week. Students will start repaying the loan once they enter the workforce, paying no more than 10 percent of their salaries. The government will also guarantee merit-based scholarships for 60 percent of the poorest students, he said.

Taxes on Loans

The tax on bank loans would fall from 0.6 percent to 0.2 percent under the proposed changes, benefiting 2.8 million people. The amount paid by households for income tax will decline as much as 15 percent and families will be able to deduct a portion of their spending on education, Pinera said.

The changes don’t go far enough to reduce the cost and increase access to schooling, Santiago-based newspaper El Mercurio quoted student leader Gabriel Boric as saying in its online edition last night.

“They are reducing taxes for those who earn the most,” Boric said in reference to income tax cuts. “Demonstrations must continue.”

Green Taxes

Other proposed changes include implementing “green” taxes and subsidies for recycling, Finance Minister Felipe Larrain told reporters in Santiago today. The state gradually will eliminate import tariffs by 2015 from today’s 6 percent, he said.

The Pinera administration will work to reduce corporate tax evasion by eliminating legal loopholes, preventing companies from reducing their tax burden by transferring funds to offshore havens, Larrain said.

The changes are appropriate even though they will reduce the amount of money companies have to invest, Eliodoro Matte, chairman of Chile’s second-biggest forestry company Empresas CMPC SA (CMPC), told reporters in Santiago after a shareholder meeting today.

“Given what it will be used for, I’m in agreement with it,” he said.

In addition to funding education initiatives, the changes will reduce inequality while sustaining economic growth that was 6 percent last year and 6.1 percent in 2010 -- the fastest expansion in more than a decade, Larrain said.

Ability to Grow

“In a world rocked by crisis,” Pinera said last night, “Chile has retained its ability to grow, to create jobs.” The government “will continue with a serious and responsible economic policy.”

Chile has the highest level of income inequality among the 34 members of the Organization for Economic Cooperation and Development. The country’s Gini coefficient, an index of the income gap where 0 represents complete equality and 1 complete inequality, is 0.497 compared with 0.476 in Mexico and 0.378 in the U.S., according to the Paris-based organization.

Also according to the OECD, Chilean households pay for 39 percent of their total education bill -- the highest level in the Paris-based group. By comparison, households in the U.S. finance 21 percent of their schooling.

“We want to improve education and equality, but without sacrificing our ability to grow and create jobs,” Larrain said. “This is the tax reform that Chile needs.”

Third Change

This will be the third time that Pinera’s government has altered the tax regime since entering office in March 2010.

The government in 2010 temporarily raised corporate taxes from 17 percent to 20 percent to help finance reconstruction following the 8.8-magnitude earthquake that struck southern Chile the month before Pinera assumed office. The corporate rate fell to 18.5 percent in 2012 and would have declined to 17 percent next year.

Pinera also temporarily increased taxes on mining companies in 2010 in a bid to raise funds for rebuilding as well as social and education programs.

Raising corporate taxes to 20 percent would reduce Banco Santander SA (SAN)’s price estimate for Chile’s IPSA Index (IPSA) of stocks by 2.5 percent, with builder Salfacorp SA (SALFACOR) and power producer Colbun SA (COLBUN) suffering the greatest reductions, Francisco Errandonea, an analyst with the bank in Santiago, wrote in a March 13 note to investors.

The IPSA was down 0.1 percent to 4554.94 at 12:48 p.m. local time from yesterday.

The government on April 30 will introduce the new tax legislation to Congress, Pinera said last night.

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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