The South American country is taking firm steps towards greater oversight with its new tax regulations. Meanwhile, neighboring countries such as Peru and Argentina face similar challenges, although with different contexts and figures.

In parallel with the discussion on the Fiscal Pact in Chile, anti-tax evasion and avoidance rules are being discussed too under the Economic Crimes Law. After this, powers of inspection, classification of tax crimes and new penalties would be expanded, according to Víctor Jiménez, founding partner of the tax law firm KC Consulting.

And there seems to be agreement among the political forces to tackle this point. A week ago, the Chamber of Deputies approved a bill-project that seeks to strengthen supervisory institutions, combat drug trafficking and reduce informality.

But will it be enough to discourage the so-called 'white collar crimes'?

Read more in: Will the economic crimes law in Chile be successful?  

As the project goes to a second round of voting, increased tax collection is expected to finance higher pensions and public security investments. It is estimated that the law could generate an extra US$ 1 billion per year in revenue, which, according to the Ministry of Finance, is equivalent to 0.2% of GDP.

For reference, the estimate of recent years by the Chilean Internal Revenue Service (SII) of tax evasion in relation to GDP has been 5.8% in 2021, 5.6% in 2022, and 5.4% in 2023. It should be noted that 1% of GDP is equivalent to approximately US$3.1 billion, which is why it is important to attack tax evasion and avoidance, says the founding partner of KC Consulting.

However, this is not an exclusive concern for Chile, but a global problem that also affects its neighboring countries.

In Peru, tax evasion in relation to GDP stood at 7.7% in 2021, decreasing to 7.5% in 2022 and 7.3% in 2023, with 1% of GDP representing about US$ 2 billion. On the other hand, in Argentina, tax evasion was significantly higher, reaching 30.7% in 2021, falling to 29.9% in 2022 and 29.1% in 2023. In this country, 1% of GDP translates to approximately US$ 4.56 billion.

“The comparison was made mainly because Peru has a remarkably stable tax structure, while Argentina presents more fluctuating economic and tax challenges,” Jiménez explained.

In fact, Peru stands out for having a lower tax burden for companies compared to the other two countries analyzed, Jiménez continued. While in Chile it ranges between 20% and 21%, in Argentina it is close to 30%, but in Peru it is between 14% and 16%.

“This low tax pressure in Peru is due to a smaller number of taxpayers, largely caused by informality in the Peruvian market,” he stated.

To improve this, Peru could simplify its tax regime and facilitate the tax payment process, which would not only increase the number of taxpayers, but also tax collection, said the founding partner of KC Consulting.

When tax reforms or fiscal pacts are discussed, the main objective is usually to increase revenue. However, the success of this depends on factors such as economic growth and investment incentives.

A constant factor that accompanies any tax change is tax evasion, which can manifest itself in two ways: direct evasion, where taxes are omitted, and avoidance, where legal loopholes are taken advantage of to reduce the tax burden. So how can we improve this?

First, according to Víctor Jiménez, tax changes should not be limited only to increase tax rates, but should also be accompanied by incentives for economic growth. And second, he continued, is the need for tax education. When implementing changes, such as increasing rates or more detailed reporting, it is crucial that taxpayers are prepared to apply these changes. This is where tax education plays a vital role.

“Accountants, as specialists in the field, must constantly update their knowledge to offer adequate advice to taxpayers. If the changes are constant, accountants may fall behind in their training, which directly affects taxpayers,” Jiménez said.

Therefore, it is essential to address two key aspects to improve collection: “beyond just increasing rates, we must focus on economic growth, investment incentives and, above all, tax education for both taxpayers and tax professionals.” 

For example, in Chile, during the income tax return process, a report is provided annually to taxpayers that details how government expenses were distributed, including financing for health, education, social issues, and public sector salaries. This allows taxpayers to have clarity about the destination of their resources. If a taxpayer is satisfied with this information, he or she will naturally be more willing to meet his or her tax obligations, which improves tax collection efficiency.

“As governments are transparent in the use of resources and taxpayers perceive it, trust between both will be strengthened,” he added.

The most effective strategy would be to address both aspects: improve the tax structure, promote tax education and generate incentives for economic growth, while implementing control mechanisms to combat evasion and avoidance, concluded Jiménez.