[October 13, 2006]

Chile: Investor friendly

(Business Latin America Via Thomson Dialog NewsEdge) A raft of measures for financial services will lower risks and business costs and further spur investment growth

The government of President Michelle Bachelet is attempting to revive a complex reform of Chiles capital-markets with a set of amendments to a reform bill, known as MK2, which has languished in Congress since June 2003.

The original omnibus bill was intended to provide tax incentives to facilitate the development of the countrys risk-capital industry, but was gradually widened to include provisions on banks, brokerages, insurance companies, pension funds, venture-capital firms, securitisation, bond issues and stockmarkets.

In order to improve prospects for the rapid approval of capital market reforms and spur investment growth amendments were introduced in August 2006, and pension fund reforms envisaged under the original MK2 proposal have been withdrawn. Pension reforms will now be treated under separate legislation to be introduced to Congress by the end of 2006.

Important changes

Among the most important changes being proposed by the amended bill is a boost to the seed-capital and venture-capital industry. Proposals include exemptions from income and capital gains taxes by angel investors and risk-capital funds, derived from investments in companies with annual sales of up to US$6m.

The Superintendencia de Valores y Seguros (SVS, the Superintendency of Securities and Insurance) will determine which investments are eligible for tax benefits; and the state development corporation Corfo will be able to buy stakes of up to 40% in these funds to share the risks with private investors.

Reform would also put an end to double-taxation and help the development of the securities industry by exempting securitisations from a stamp tax on credit operations. In addition, it would end government discretion in the granting of licenses to operate banks, AFPs or life-insurance companies by setting clear criteria in the assessment of the solvency and integrity of new prospective players in these industries.

Other changes include reforming the General Banking Law in the following ways:
Changing the definition of technical reserves on sight deposits, replacing the concept of basic capital with effective capital and enabling the investment of this technical reserve in any type of Central Bank or Treasury paper, regardless of maturity;

Creating special offices to deal with client issues, and form a single register of guarantees (registro nico de prendas) that would facilitate refinancings through easy transfers of a clients collateral;

Spurring competition by demutualising Chiles stockmarkets, thereby ending the requirement that brokerages also become shareholders in the local exchanges;

Allowing companies to issue warrants and tighten protections for minority shareholders by banning voting rights to holders of subscribed but unpaid shares. Further, in July 2006 the government sent to Congress a bill to gradually reduce the stamp tax (Impuesto de Timbres y Estampillas), that applies to most credit operations, from the current rate of 1.6% to 1.2% by the year 2009. The tax rate on overdraft facilities without a fixed repayment period will be cut gradually from the current 0.67% to 0.5% by 2009. The bill also creates mechanisms to prevent the stamp tax from being paid two or more times in cases of refinancings or reschedulings.

International rules

The SVS announced in mid-2005 that, given the global convergence towards the International Financial Reporting Standards (IFRS) prepared by the International Accounting Standards Board (IASB), Chile will adopt IFRS from 2009, replacing the local accounting norms. Local banks will move to IFRS from 2007.

SOURCE: Business Latin America

Copyright 2006 Economist Intelligence Unit

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