WORLD TRADE
ORGANIZATIONG/SCM/N/60/CHL
4 July 2000
(00-2743)
Committee on Subsidies and Countervailing Measures Original:  Spanish
SUBSIDIES
Updating Notification Pursuant to Article XVI.1 of the
GATT 1994 and Article 25 of the SCM Agreement
CHILE
The following communication, dated 21 June 2000, has been received from the Permanent
Mission of Chile.
_______________
TABLE OF CONTENTS
Page
I. Tax credit for investment in the provinces of Arica and Parinacota (Region I) ………. 2II. Exemption from the first category tax under the Income Tax Law on earnings
in the financial years of management companies and users in the free zones in
the cities of Iquique (Region I) and Punta Arenas (Region XII) ……………………… 3
III. Fund for the Promotion and Development of Remote Areas 
1 ………………………... 4
IV. Simplified system of refunds from minor exports …………………………………….. 6V. System of deferred payment of customs duties, tax credit and other tax benefits …….. 7
VI. Motor Vehicle Statute …………………………………………………………………. 9
                                                     
1 The Support Programme for the Management of Export Firms (PREMEX) was abolished by
Production Development Cooperation (CORFO) Resolution No. 853, dated 14 December 1998.G/SCM/N/60/CHL
Page 2
PROGRAMME I
1. Title
Tax Credit for Investment in the Provinces of Arica and Parinacota (Region I)
2. Period
To June 2000.
3. Objectives
To reverse the declining economy of the provinces of Arica and Parinacota, making use both
of their advantageous geographical position for trade purposes and their tourist attractions,
strengthening entrepreneurship and consolidating Arica as an inter-ocean corridor.
4. Background and authority
Background:  Arica and Parinacota, as outlying provinces, are at a disadvantage in relation to
the development of the rest of the country.
Authority:  Law No. 19.420, published in the Official Journal of 23 October 1995, amended
by Laws Nos. 19.478 (Official Journal of 24 October 1996) and 19.669 (Official Journal of
5 May 2000).
5. Form of the subsidy
Tax credit in the form of a tax allowance.
6. To whom and how the subsidy is provided
Taxpayers with investment projects amounting to more than UTM 2,000 (equivalent to
US$104,539 at May 2000 rates) for projects in the province of Arica and more than UTM 1,000(equivalent to US$52,270 at May 2000 rates) for projects in the province of Parinacota.
They are eligible for a tax credit of 30 per cent of the value of certain non-convertible assets,
namely, buildings, machinery and equipment, including immovable property intended primarily for
commercial exploitation for tourist purposes, directly tied in with the production of goods or the
supply of services of the taxpayer's business or activity, purchased new or finished in the financial
year.
For investment operations carried out in Parinacota, the tax credit is 40 per cent.  The same
percentage is applied to investments carried out in Arica in immovable property intended primarily
for commercial exploitation for tourist purposes, and identified as being of particular interest by the
Director of the National Tourism Service.
Taxpayers are also eligible for the credit if they invest in the construction of buildings for use
as offices or dwellings, whether or not they include business premises, car parks or shops, consisting
of more than five units, in places specified in the Law, with a built area of not less than 1,000m
2,
completed or built during the financial year.
The taxes are forgiven by deducting the credit from the first-category tax payable as from the
trading year of the purchase or construction of the property.G/SCM/N/60/CHL
Page 3
7. Amount of the subsidy
In 1999, 27 investors used the tax credit for Ch$2,562 million.
8. Duration
This incentive became effective, retroactively, as from 1 January 1995.  The period for
eligibility is up to 31 December 2007.*
The benefit will apply only in regard to assets  incorporated in the investment project on any
of the above-mentioned dates on which the benefit is still effective, although the credit may be
recovered up to the year 2030*.
9. Statistical data
No data available.
PROGRAMME II
1. Title
Exemption from first-category tax under the Income Tax Law on Earnings in the financial
years of management companies and users in the free zones in the cities of Iquique (Region I) and
Punta Arenas (Region XII)
2. Period
To June 2000.
3. Objectives:
To stimulate the economic development of Region I and Region XII, so as to form an
attractive area for investment, economic activity, settlement, growth and sovereignty.
4. Background and authority
Background:  These areas, because of their location and geographical features, are at a
disadvantage in relation to the development of the rest of the country.
Authority:  Decree Law No. 1055 of 1975 and Decree Law No. 1611 of 1976, which together
with other legislation regulating the free-zone system, were recast in Ministry of Finance Decree
No. 341, published in Official Journal No. 29.775 of 8 June 1977.
5. Form of the subsidy
In practice, the subsidy is a temporary financial benefit.  It is not equal to the overall amount
of the tax exemption.
                                                     
* Law No. 19.669.G/SCM/N/60/CHL
Page 4
Indeed, the 1984 Income Tax Law incorporated first-category tax (on companies) and
second-category tax (on natural persons).  As such, the owners of an enterprise can discount the
amount of first category tax paid (15 per cent on a company's annual earnings) from the amount
payable as second category tax (a graduated tax that represents a percentage of retained earnings2).
Since the companies concerned benefit from first-category tax exemption, the management
companies and users in free zones have nothing to discount from their second-category tax and must
therefore pay the full amount of this tax.  The benefit of the exemption therefore amounts strictly to
the financial cost not incurred for the period between the time when the first-category tax became
payable and the time (or times) when retained earnings are determined and the corresponding second
tax becomes payable.
6. To whom and how the subsidy is provided
This incentive is for management companies and users (all legal persons) in the free zones of
Iquique (Region I) and Punta Arenas (Region XII).  They must meet the requirements established by
the Ministry of Finance and by the Ministry of Economic Affairs, Development and Reconstruction,under contracts containing conditions freely agreed on with the interested party.
These benefits also apply to manufacturing companies which are already established or which
set up in Arica, and manufacturing companies in the Alto Hospicio district in Iquique.
∗
Beneficiaries are exempt from the first category tax under the Income Tax Law on earnings in
their financial years.
7. Amount of the subsidy
There are no official calculations of low tax revenue.
8. Duration
This incentive took effect on 25 June 1975 under Decree Law No. 1055 (Iquique and Punta
Arenas) and on 10 December 1976 under Decree Law No. 1.611 (Arica).  Both are of indefinite
duration.
9. Statistical Data
No statistical calculation has been made to assess the trade effects of the subsidy.
PROGRAMME III3
1. Title
Fund for the Promotion and Development of Remote Areas
                                                     
2 The level of income considered for the second-category tax includes income other than retained
earnings, such as salaries, etc.
∗ Law No. 19.669.
3 The support Programme for the Management of Export Firms (PREMEX) was eliminated by
Resolution No. 853 of 14 December 1998 of the Production Development Corporation.G/SCM/N/60/CHL
Page 5
2. Period
To June 2000.
3. Objectives
To contribute to the development of the disadvantaged regions of Tarapacá, Aysén.
Presidente Carlos Ibáñez del Campo, Magallanes and Antártica Chilena and the provinces of Chiloé
and Palena, by providing assistance to small and medium-sized investors wishing to invest or reinvest
in production in these remote regions.
4. Background and Authority
Background:  Being in outlying regions and provinces, these areas are at a disadvantage in
relation to the development of the rest of the country.
Authority:  This fund was created by virtue of Articles 38 and 39 of Decree Law No. 3.529 of
the Ministry of Finance, published in the Official Journal of 6 December 1980.  Decree No. 15 of the
Ministry of Finance, published in the Official Journal of 20 April 1981, lays down the terms and
conditions of this fund.
5. Form of the subsidy
Direct transfer.
6. To whom and how the subsidy is provided
Funds may only be accorded for investments by small and medium-sized investors, producers
of goods and services in the sectors of construction, machinery, equipment, special animal feed and
small-scale fishing.  The annual amount of individual investment or reinvestment must not exceed
50,000* promotion units (index-adjusted for inflation).  Funds accorded under this programme may
not be accepted together with any other benefit granted by the Government of Chile for the same
goods or services.
This fund makes a contribution of 20 per cent of the cost of the investment or reinvestment in
projects carried out until 31 December 2007.*
7. Amount of the subsidy
The amount paid out by the Treasury in 1999 was 663,411,000 pesos (roughly equivalent to
US$1.28 million at May 2000 values).
8. Duration
This facility is only available until 31 December 2007.*
9. Statistical data
No data available.
                                                     
* Law No. 19.669.G/SCM/N/60/CHL
Page 6
PROGRAMME IV
1. Title
Simplified System of Refunds for Minor Exports
2. Period
To June 2000.
3. Objectives
To simplify the refunding of duties on imported inputs incorporated in minor exports, so as to
avoid the administrative complexities that the overall system may involve for an emerging exporter.
4. Background and authority
Background:  On the date of entry into force of the Law establishing this programme, the
drawback mechanism, in other words, the mechanism for effective recovery of customs duties paid on
imports incorporated in export products, was difficult to use for small exporters starting out in the
export business.  This meant that they were less competitive on international markets.  To overcome
this problem, a mechanism was established as an alternative to the general drawback system and itprovides for a simplified refund of levies affecting the cost of inputs used in minor exports.
Authority:  Law No. 18.480, published in the Official Journal of 19 December 1985, and
Supreme Decree No. 125 of the Ministry of Ec onomic Affairs, Development and Reconstruction,
published in the Official Journal of 18 April 2000, which contains the current schedule of productsexcluded from the scheme.  Law No. 19.589, published in the Official Journal of 14 November 1998,
amending Law No. 18.480.
5. Form of the subsidy
This simplified system does not in itself constitute a subsidy.  The subsidy component would
be in the amounts granted by the tax authorities to exporters in a simplified form, which do not strictlycorrespond to tariffs actually paid on imports incorp orated in exports, owing to the large and continual
reduction of tariffs in Chile.  Accordingly, a subsidy is created in the form of a direct transfer.
6. To whom and how the subsidy is provided
The beneficiaries are exporters of products under tariff headings involving small amounts.
This category covers products for which exports in the 1983-1984 biennium were not more than
US$2.5 million or US$5 million in 1990.
The Law establishes a simplified refund of 8 per cent, 5 per cent or 3 per cent on the f.o.b.
exported value.  The maximum export values for the various rates are updated each year.
The effective amounts for 2000, for tariff items defined as minor exports, are as follows:8 per cent - US$10,350,000
5 per cent - US$15,525,000
3 per cent - US$18,630,000G/SCM/N/60/CHL
Page 7
In addition, the Law entitles the authorities to disqualify products in certain circumstances, for
instance, when the products have not averaged an export increase over the past three calendar years
that is equal to 1.5 times or more the average increase in the gross domestic product.
Law No. 19.589, published in the Official Journal of 14 November 1998, provided for the
gradual alignment of this instrument with the WTO Agreement on Subsidies and Countervailing
Measures.  The subsidy component of this instrument will be eliminated completely at the end of the
year 2002.
Indeed, Law No. 19.589 progressively reduces the percentage of the refund from the current
rates of 8, 5 and 3 per cent to a single rate of 3 per cent.  Besides, as of 1 January 2003, the 3 per cent
simplified refund will be granted exclusively to exports that include at least 50 per cent of importedinputs (Article 5(e), 2(i) of Law No. 19.589).  The result is that the refund will reflect the tariff paid
on imported components (since the single simplified refund of 3 per cent will be less than or equal to
the six per cent tariff paid on 50 per cent or more of imported inputs).  Finally, the refund on inputs
was eliminated on 1 January 1999.
7. Amount of the subsidy
There are no official calculations of the subsidy component of the simplified refund system.
The total amount refunded in 1999 was US$163.6 million, but a large part of that figure is for
drawback within the strict meaning of the term.
In 1999, approximately 12 per cent of Chilean exports used this mechanism.
8. Duration
The Law does not establish a time-limit.  However, as the products reach the ceilings
specified in the Law, they exit the system.  This is  reflected in the schedule of exclusions issued by
the Ministry of Economic Affairs, Developmen t and Reconstruction by 31 March each year.
Additionally, Law No. 19.589, published in the Official Journal of 14 November 1998,
stipulated the gradual alignment of this instrument with the WTO Agreement on Subsidies and
Countervailing Measures, which means that its subsidy component will be eliminated as of1 January 2003.
9. Statistical data
No data available.
PROGRAMME V
1. Title
System of Deferred Payment of Customs Duties, Tax Credit and Other Tax Benefits
2. Period
To June 2000.G/SCM/N/60/CHL
Page 8
3. Objectives
The objective is to promote technological innovation by transfer incorporated in production
investment, stimulating the purchase of capital goods, both imported and locally produced, especially
in the case of export-oriented activities.
4. Background and authority
Background:  Need to encourage technological m odernization by investment in capital goods,
strengthening the production infrastructure for goods and services for the foreign market.
Authority:  Law No. 18.634, published in the Official Journal of 5 August 1987, and the
regulations thereto, Ministry of Finance Supreme Decree No. 1157, published in the Official Journal
of 19 April 1990, and amendments thereto.  Law No. 19.589, published in the Official Journal of
14 November 1998, amending Law No. 18. 634.
5. Form of the subsidy
Deferred payment of tariffs or tax credits do not in themselves constitute subsidies.A subsidy exists only if a debt is partly or wholly forgiven, when the capital goods have been
intended for the production of export goods or services.
6. To whom and how the subsidy is provided
The beneficiaries are producers and exporters (direct and indirect) of goods and services
obtained with capital goods which have been eligible for a deferred payment or for a tax credit.
Capital goods (machinery, vehicles, equipment and tools) eligible for the deferred payment or
tax credit scheme is taken to mean those directly or indirectly intended for the production of goods or
services or the marketing thereof, with an economic life of not less than three years, of a minimum
value of US$3,602.63 (adjustable each year).  In the case of vehicles, the minimum value is
US$4,563.33.
The Law contemplates three instruments.  The first two are not subsidies nor are they specific
programmes.  Although they need not be notified, they are described hereunder only for the purposes
of explaining the third instrument:
The Law establishes that the payment of customs duties on imports of capital goods may be
deferred up to a maximum period of seven years,  payable in three instalments.  The debt is
subject to a (market) interest rate established by the Central Bank of Chile.
Purchasers of Chilean-manufactured capital goods are entitled to a tax credit equivalent to
73 per cent of the current customs duty, on the net invoice value of the goods.  This debt tothe tax authorities is subject to a (market) interest rate established by the Central Bank of
Chile and the beneficiary must repay authorities within a maximum period of seven years.
The subsidy arises where the tax authorities partly or wholly forgive amounts due for deferred
payments of import duties on capital goods or credits granted in the case ofChilean-manufactured capital goods.  This occurs when the exporter has used the capital
goods to produce exports and the debt is written off at 2.5 times the export percentage of total
sales on expiry of the period of the first instalment (100 per cent if 40 per cent or more has
been exported).  For the two remaining instalments, it is written off at 1.66 times the exportG/SCM/N/60/CHL
Page 9
percentage of total sales (100 per cent if 60 per cent or more has been exported).  The period
taken into account for the reduction is the two y ears prior to expiry of each of the instalments.
Land vehicles are not eligible for debt forgiveness, unless they are used for the international
transport of goods.
Article 6 of Law No. 19.589 provided for the elimination of this subsidy (debt reduction) as
of the entry into force of the Law (14 November 1998).
Nevertheless, the first transitional Article of Law No. 19.589 retains the possibility of debt
reductions (the eligible cases) for companies that requested the deferred payment of tariffs or tariff
credits before 14 November 1998 (the principle of non-retroactivity of the Law).
This same transitional provision establishes a special regime for those companies taking
advantage of deferred payment of tariffs or tax credit between 14 November 1998 and
31 December 2002.  Under that regime, only instalments with expiry dates up to 31 December 2005
are eligible for debt reduction.  The same provision lays down special methods of payment.
7. Amount of the subsidy
The debt reduction for deferred payment of tariffs was US$153.4 million in 1999, while the
reduction for tax credits amounted to US$8.1 million during the same period.
8. Duration
The subsidy (debt reduction for exporters) has been gradually eliminated by means of
Law No. 19.589, published in the Official Journal of 14 November 1998.  Reductions will be grantedonly on those instalments with expiry dates prior to 31 December 2005 for debts contracted before
1 January 2003.
9. Statistical data
No data available.
PROGRAMME VI
1. Title
Motor Vehicle Statute
2. Period
To June 2000.
3. Objectives
To turn the automobile sector into a dynamic export sector, based on efficiency, thereby
doing away with the special support it receives at the present time.
4. Background and authority
Background:  To provide a safer transition to the normal regime in other sectors of the
economy.G/SCM/N/60/CHL
Page 10
Authority:  Law No. 18.483, which entered into force on 28 December 1985.
Law No. 19.589, published in the Official Journal of 14 November 1998, amending Law No. 18.483.
5. Form of the subsidy
Tax credits, in form of tax rebates, ended on 31 December 1998, by virtue of the Law itself.
Customs exemption is in the form of a tax allowance.
6. To whom and how the subsidy is provided
End processors that assemble motor vehicles and are entered as such in the appropriate
register and also use minimum percentages of local content established in the Law itself.
Tax credit for local content  and tax credit to promote exports  ended on 31 December 1998.
The only benefit currently available is customs exemption.  Under a programme approved by
the Motor Vehicle Commission, when end processors export local components, CKD and SKDimports will be totally or partially exempt from the payment of an  ad valorem  duty at the general rate
of customs duties payable on foreign goods being imported into the country.
4  This benefit is granted
up to an amount equivalent to local component exports over a period of 12 months.
In all, assembly firms cannot under these arrangements obtain benefits higher than 35 per cent
of the customs value of the finished vehicle.
7. Amount of the subsidy
The amount of the tax credits and the compensatory trade in 1999 was US$2.2 million.
8. Duration
This incentive came into effect on 28 December 1985 and lasted until 31 December 1998 in
the case of tax credits, with no time-limit in the case of customs exemption.  The tax credits have been
abolished, and the customs exemption will be abolished on approval of a draft law which is currently
in Congress, bringing various aspects of Chilean legislation into line with Chile's commitments under
the WTO.  This draft law especially provides for the abolition of the customs exemption.  Once thislaw has been approved, this programme will no longer be notified since the subsidies provided for in
Law No. 18.483 will have been abolished.
9. Statistical data
No data available.
__________
                                                     
4 This percentage is set at 9 per cent for the year 2000 and will be reduced by one percentage point
per year to 6 per cent in the year 2003.  The ad valorem  duty stood at 11 per cent at the end of 1998 (equivalent
to the customs tariff) and was modified along with the programmed tariff reduction provided for inLaw No. 19.589, published in the Official Journal of 14 November 1998.