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Chile: AFPs calculate the cost of double taxation at US$ 4 billion

26 September, 2013

Source: www.pulso.cl

Despite the fact that there is consensus among experts and stakeholders in the system, double taxation still persists. Changing the situation would entail major fiscal expenditure. Meanwhile, the pension funds miss out on about USD150 million a year.

This issue is not unknown to the stakeholders of the Social Security system or presidential candidates. However, it would appear that little or nothing has been done so far to correct what the Chilean Association of AFPs calls a “tax inequity.” Indeed, the double taxation of pension funds has generated a pension loss to members, which, according to the estimates of the general manager of the Trade Association, Francisco Margozzini, “is close to USD 4 billion, with adjustments.”

The economist Paul Fontaine describes it as “an expropriation without compensation (…) It may even be unconstitutional.” The economist, who is also currently part of the presidential campaign of the candidate of the ruling party, Evelyn Matthei, points out that the idea of correcting this phenomenon is “a proposal that I made in 2009 and discussed with Sebastián Piñera. He understood it and considered it to be fair. I discussed it with Felipe Larraín who also understood it. What I don’t understand is why they didn’t fix it, because it is a tremendous injustice for millions of retirees.”

Even Principal Financial Group – the controller of AFP Cuprum – included this issue in the proposals submitted for perfecting the social security system. The firm’s Country Manager, Pedro Atria, says that “the asymmetry that exists in the tax treatment of dividends obtained from investments in shares of joint-stock companies should be eliminated (…) since it makes no sense to pay taxes twice on the same income.” The company’s calculations of the amount accumulated due to double taxation are similar to those of the Trade Association: USD150 million per year.
But, why does this phenomenon occur? The partner of the legal-tax division of the law firm WMG, Felipe Rossé, points out that “The income generated by a company reaches the AFP, which then distributes it to the final taxpayer. This is where the second taxation occurs, because the taxpayer, i.e., the contributor, receives this income and has to include it in his total gross income, in his global complementary declaration, and has to pay taxes on that income again. It is an income which is taxed twice without the use of credit (tax rebate). “This is what the Association considers unfair, because “any shareholder, either directly or through a mutual or investment fund, can access this tax rebate. The pension funds are the only ones that cannot do so”.

In any case, Margozzini warns that this issue could be even more significant “if the increase in the first category tax from 20% to 25% being proposed by Michelle Bachelet is approved. So much so that the technicians in the candidate’s presidential campaign have pointed out that one of the costs this measure could entail was the disadvantage for the pension funds, adding that they would have to work out a formula for compensating the funds.”


The Association of AFPs says that it requested the last four Ministers of Finance and Presidents of the Republic to make amendments in this area. “We have brought up the subject in each one of the MKI, MKII and MKIII modifications. We also raised it in the famous Marcel Commission, which even in its report said that we were right (…) it is an issue we have pushed in many instances, but even so, it has not been corrected, and it is an initiative of an exclusively presidential or parliamentary nature. We cannot resolve it any other way”, says Francisco Margozzini. According to the Executive “This obviously entails a fiscal cost.” As things stand, Pedro Atria points out that the solution to the double taxation issue has not come to fruition due to a “lack of interest by the AFPs, but because so far no Government has decided to send a bill of law rectifying this situation, since the Treasury would have to put up USD150 million per year.”

What alternatives are there? Fontaine says that ‘the Association and the AFPs should file a class action lawsuit against the Chilean Treasury (…) demanding the return. That would be a true defense of members.” The Trade Association of the AFPs, on the other hand, expects it to be included in the government’s proposal for reforming the pension system, since “it is a just cause.”

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