6.6.4. Fiscal openness and tax exemptions

For what we mentioned before, we propose to create an institution that subjects the tax exceptions to a process as strict as the one applied to budget expenditure programs.

In the last years, the governments of National Unity, in a joint effort with all legislative members have made important advances in efficiency and openness /accountability in the fiscal management. One example of this is the creation of a permanent Special Mixed Committee of Budgets, the implementation of an evaluation system for public programs, the use of indicators and institutional performance goals.

In fact, there is a long way to go, because scopes of the fiscal policy fall behind in terms of good practices of management. One of them, identified by the Finance Committee of the Senate, is the use of tax exceptions as a tool of public policy.

In this regard, a first step oriented to a more efficient use of these franchises is the annual publication as from 2002 of the Tax Expense Report from the Internal Revenue Service (IRS).

This report shows that exemptions are not “gratuitous”, but they are financed with resources from all Chileans, by means of taxes to which the Treasury waives and that might be used with other purposes. In fact, according to the report, this fiscal waiver stands for around 4.0% of the GDP.

The essential next step is to establish a formal institution to which tax holidays may be submitted on a timely basis, to an evaluation process to allow correcting inefficiencies and perfecting instruments.

With the purpose of taking such a step and upon the Senate’s Finance Committee request, an analytical framework following the best international practices in the matter has been submitted. This framework implies answering two main questions. First, if there is a reason for economic efficiency, distributive justice or others of public interest that may give grounds to an exceptional intervention of state.

Second, to test if the tax holiday is the most efficient instrument to achieve the goal desired. Therefore, the only existence of a reason that may justify the state intervention, whatever the scope of activity considered is not enough to support the existence of said exemptions.

This support is only obtained, for a case in particular, if it is demonstrated that tax holidays are effective and relatively more efficient than instruments of alternative intervention, as for example the focused subsidizes. Besides, both the justification of the intervention as well as the relative efficiency among instruments may be subject to contextual variations, so both questions must be answered on a timely basis.

A good example of the foregoing is the case of tax incentives to support extreme zones, in which it is beyond discussion the life of a public policy valid objective that justifies the state intervention, in particular, referred to territory equity and to geopolitical reasons. However, at the same time there are reasonable doubts on the real effectiveness of the tariff benefits associated with a duty-free area in a context of commercial openness and standard and low tariffs throughout the country.