An FCT payer’s net taxable income is calculated by deducting from gross income those expenses incurred to generate it that have not already been deducted as costs.
As a general rule, expenses are not deductible for income tax purpose if they are not incurred to generate taxable income.
Depreciation and depletion
Depreciation rates are calculated based on the asset’s estimated useful life. The normal depreciation terms for new assets are as follows: heavy machinery, 15 years; trucks, 7 years; factory buildings, in general, 20 years to 40 years. At the request of the Foreign Investment Committee or the taxpayer, the Chilean IRS may reduce the normal useful life.
Annual depreciation is calculated based on the straight-line method. However, taxpayers may recover capitalised costs by using the accelerated depreciation method for up to one-third of the normal useful life regarding new or imported fixed assets, provided that the normal period of depreciation is at least three years.
Accelerated depreciation may be used only to reduce the taxable basis of the FCT. For the purpose of the tax applicable to distributions of dividends, accelerated depreciation is not considered.
No conformity is required between book and tax depreciation.
For tax purposes, depletion for natural mineral resources is allowed on a unit-of-production basis.
The Tax Reform, in order to benefit micro and small entities, establishes a faster depreciation method they can use, provided certain requirements are met.
Following a merger, the positive difference between the price paid for the shares of the absorbed entity (i.e. the acquisition cost of the shares) and its tax equity must be allocated proportionately among the non-monetary assets received from the absorbed entity, up to the fair market value (FMV) of those identifiable assets.
Any amount in excess of the FMV of those assets becomes an asset (i.e. goodwill) in the hands of the acquiring/surviving company that cannot be amortised. The change introduced by the recent Tax Reform qualifies this goodwill as an ‘intangible’ asset that can be deducted only upon the liquidation or termination of the company. This renders the goodwill a non-amortisable asset for Chilean tax purposes.
Start-up expenses must be capitalised and considered as an asset for tax purposes. However, they can be amortised over a six-year period counted from the year in which they were incurred or the start-up of commercial activities.
Furthermore, they are usually deducted when the income is generated.
As long as the interest paid meets the general requirements set forth by the Income Tax Law, interest expenses can be deducted.
In general, bad debts are deductible only if (i) they are a consequence of operations related to the business purpose, (ii) they have been timely written off into the accounting records, and (iii) the company has prudentially exhausted all reasonable means to collect them.
Determination of whether the company has prudentially exhausted all reasonable means to collect the bad debts varies according to the total amount of the debts. Consequently, a simple estimation or general provision for bad debts is not allowable.
Charitable contributions may be deducted from gross income, provided they are made to the institutions established by certain laws (i.e. primary and secondary educational institutions, universities, professional or technical education institutions, National Fire Brigade, National Solidarity Fund, etc.).
In case of charitable contributions, the total annual tax deduction for this purpose is limited, as the deductible amount may not exceed 5% of the company's net taxable income.
Fines and penalties
Fines and penalties imposed for breaching the law or a contract are not deductible, although a deduction is usually available for the legal costs incurred in defending such an action.
Taxes imposed by Chilean laws are deductible, provided they are related to the company’s normal activities. However, income taxes and special contributions for promotion or improvement are not deductible.
Net operating losses
An indefinite carryforward of losses is allowed. Consistent with monetary correction, losses carried forward are adjusted by a cost-of-living increase.
As of 1 January 2017, carryback losses are no longer allowed. Previously, they were allowed when the taxpayer had retained tax profits and had a subsequent tax loss.
Payments to foreign affiliates
The deductibility of payments made abroad for the use of trademarks, patents, formulas, and consulting and other similar services is limited to a maximum of 4% of the income derived from sales and services in the corresponding year, unless the royalty is subject to an income tax with a rate of greater than 30% in the country of the beneficiary.
Deduction of payments made to foreign-related parties are allowed in the year in which they are effectively paid by the Chilean entity to the foreign-related party and only if the corresponding Additional WHT (if any) was paid.
Transfer pricing regulations in Chile are in line with general OECD principles (see the Group taxation section).