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Chile Plans Capital Market Tax Reforms

Wednesday, August 11, 2010

Chile has scheduled a new bill for Congress this month which aims to clarify the tax treatment of derivative products. It is accompanied by another bill on insurance.

At the inauguration of the seminar "Bicentennial Agenda" organized by the Center for Corporate Governance and Capital Markets at the University of Chile, finance minister, Felipe Larrain, said the current tax provisions deterred investors and smaller-sized companies from hedging their currency risks, and reduced the scope of Chile’s financial markets.

Currently, investors often paid taxes on derivatives, such as interest rate or currency hedges on the basis that they were speculative investments. The bill would determine whether derivative transactions with foreign counterparts are subject to an extra 35% tax on income.

“We want to make sure Chilean companies, especially smaller ones, have access to hedges with the legal certainty that it will be treated as a hedge and not as speculation because they pay different tax rates,” Larrain said. “It’s very important that we clarify this to stimulate the use of derivatives so people can protect themselves from risk.”

At the same seminar, it was mentioned that the central bank was seeking to have the Chilean peso listed with the Euroclear and CLS Bank clearing and settlement systems.

Larrain said his ministry was also working on a review of the current structure of financial supervision, which is currently administered by the Superintendency of Securities and Insurance (SVS) and Banks and Financial Institutions (SBIF).

These initiatives were said to be part of the Bicentennial Capital Market (BKM) agenda which would enable Chile to reduce its dependence on commodities and become a net exporter of financial services.

The strategic objectives of BKM are to “integrate the domestic financial market with the world, create a regulatory framework that encourages innovation and entrepreneurship, adopt international best practice regarding competition, oversight and transparency, and increase productivity, liquidity and access to financial system”.

With regard to the planned integration of the Chilean, Colombian and Peruvian stock markets, Guillermo Tagle, executive director at local investment bank IM Trust this week told the Wall Street Journal there were still many regulatory and tax hurdles to clear.