Santiago, Chile – In a move signaling the growing convergence of environmental, social, and governance (ESG) principles with fiscal policy, Chile has introduced the novel concept of "tax sustainability" into its legal framework. Enacted as part of Law No. 21.713 in late 2024, this pioneering legislation aims to align taxation with broader ESG considerations, compelling Chilean companies to embrace greater transparency and cooperation with tax authorities.
The introduction of "tax sustainability" reflects a global trend where the tax function is no longer viewed as a purely technical and confidential matter. Heightened public awareness, fueled by social media and an increasing focus on corporate responsibility, has brought tax practices under greater scrutiny. This shift has prompted international standard-setting bodies for non-financial reporting to incorporate tax-related disclosures into their frameworks. Notably, the Global Reporting Initiative (GRI) standard 207 has included key tax reporting aspects since 2020, covering areas such as multinational corporations' total tax contributions, the publication of tax strategies, and the role of corporate governance in tax decision-making.
Chile has been proactive in observing these global developments. The inclusion of "tax sustainability" in the recent tax reform underscores the country's commitment to modernizing its fiscal system in line with evolving ESG expectations. Even prior to the law's enactment, the Chilean Internal Revenue Service (IRS) demonstrated its interest by issuing a voluntary "questionnaire on social tax responsibility" to large companies in May 2024. While the initial response was reportedly hesitant due to the questionnaire's extensive nature and lack of prior notice, the IRS subsequently incorporated some of these inquiries into a mandatory sworn statement (Form 1913). These questionnaires probed companies on their adoption of non-financial reporting standards related to tax, their corporate governance structures overseeing taxation, the existence of tax control frameworks, and whether they determined and published their total tax contribution.
The newly enshrined legal provision defines "tax sustainability" around three core elements: the definition itself, the opportunity for taxpayers to obtain certification from authorized independent entities, and the possibility of entering into cooperation agreements with the IRS to foster tax sustainability. The legislation also mandates the creation of a public registry of companies recognized for their commitment to tax sustainability.
While the legal definition emphasizes mutual cooperation and transparency between taxpayers and the IRS, it currently leaves significant room for interpretation regarding its practical implementation. A key aspect that observers have noted as potentially lacking is the provision of clear and effective incentives that would motivate companies to actively pursue tax sustainability.
Despite this ambiguity, the IRS is actively working on fleshing out the details. While a general circular letter outlining the IRS's initial understanding of "tax sustainability" has been issued, more specific administrative interpretations are forthcoming. Crucially, the IRS is expected to release two key resolutions in the coming months concerning the specifics of cooperation agreements and the criteria for tax sustainability certification by independent third parties.
In a proactive move to ensure a robust and practical framework, the IRS has engaged with private sector experts and representatives from large enterprises to gather valuable input. These consultations aim to inform the development of the certification process and identify concrete actions that promote tax sustainability. It is widely anticipated that the upcoming regulations will mandate taxpayers to disclose their tax governance bodies and tax strategies, as well as demonstrate the existence of a comprehensive tax control framework.
Looking ahead, Chilean companies, particularly large enterprises with significant public exposure, will need to carefully consider their approach to tax sustainability. Key decisions will revolve around whether to actively implement tax sustainability measures, pursue independent certification, and/or enter into a cooperation agreement with the IRS. It is expected that these considerations will be elevated to board-level discussions, especially for companies already engaged in broader ESG reporting initiatives.
Industry experts recommend that companies initiate this process by conducting a thorough gap analysis to assess their current standing concerning tax within their existing ESG reporting practices. Furthermore, reviewing their total tax contribution will provide a baseline for future assessments. Staying informed about the IRS's forthcoming regulations will be crucial for Chilean businesses as they navigate this evolving landscape of tax and corporate responsibility.
This pioneering move by Chile positions it at the forefront of integrating tax considerations into the broader ESG agenda. As the details of implementation unfold, the concept of "tax sustainability" has the potential to reshape the relationship between companies and tax authorities, fostering greater transparency and accountability in the fiscal realm.
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