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Weak Corporate Tax Framework Impedes Chile's Growth
Chile faces significant economic challenges stemming from its outdated corporate tax regulations, particularly concerning capital allowances and its worldwide taxation system. Recently elected President José Antonio Kast is set to take office on March 11, 2026, with both he and rival Evelyn Matthei advocating for a reduction in the corporate tax rate from 27% to 23% as a strategy to stimulate economic growth. However, while a lower tax rate could alleviate some immediate pressures, a deeper assessment reveals that structural changes in the tax code are essential for real progress.
Understanding Capital Allowances
The capital allowance system in Chile is severely limiting. As it stands, Chilean companies operate under the worst capital allowances in the developed world. This systematic incapacity to adequately recover the cost of investments diminishes the appeal of investing domestically. Specifically, firms can only deduct approximately 70.6% of their investments in machinery and 42.3% for industrial buildings—figures that significantly lag behind the OECD averages of 85.7% and 49.9%, respectively. More alarming is that Chile is unique among OECD countries in not permitting deductions for intangible assets such as patents. Current depreciation schedules stretch deductions over lengthy periods, eroding their present value through inflation—essentially a hidden tax on investment.
Worldwide Taxation: A Competitive Disadvantage
Chile stands among a shrinking pool of OECD nations clinging to a worldwide taxation model, which makes it particularly burdensome for local companies striving to compete globally. Under this regime, all corporate incomes—including those generated abroad—are taxed at home. This contradicts the prevailing territorial systems adopted by most countries. Consequently, Chilean companies are hampered by the inability to benefit from more favorable tax treatments prevalent elsewhere, diminishing their competitive edge in foreign markets.
Seeking Sustainable Solutions: Full Expensing and Tax Reform
To truly enhance economic competitiveness, the incoming administration should prioritize tax reforms that extend beyond simple rate reductions. Reinstating full expensing—a tax policy that allows businesses to deduct the full cost of investments during the year in which they are made—could invigorate local investment, enhance worker productivity, and lead to higher wages. This policy approach creates a more attractive environment for investment, while also allowing businesses with temporary losses to outweigh missed opportunities from delayed tax depreciation.
Moving Towards Territorial Taxation
Adopting a territorial tax system would be another significant shift, allowing local firms to exclude foreign-earned income from domestic tax calculations. This change would help Chilean companies compete more effectively on the international stage, enabling them to function on equal footing with firms in jurisdictions that already employ such systems. The status quo restricts Chile's potential for economic growth, and by modernizing these systems, the country can become a more appealing destination for foreign investment.
Opportunities for Economic Growth
The incoming Chilean government holds a crucial opportunity to reform corporate tax policy to foster economic expansion and improve fiscal sustainability. While lowering the corporate tax rate is one avenue to generate capital and cut investment distortions, enhancing capital allowances and shifting to a more competitive worldwide tax system will offer more resilient and long-term benefits. By addressing these foundational issues, Chile can elevate its economic prospects and create a more inviting landscape for domestic and foreign businesses alike.
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