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Treasury Management in Chile: Maturity and Sophistication
by Florent Michel, Managing Partner, Latina Finance & Co
Chile is and always has been a country unlike others in the region. It has been for many years a sort of isolated, stable and prosperous island surrounded by economically unstable neighbours. It is the only South American country to be rated investment grade until recently and is now the one that has the strongest rating in the region, with a AA by Moody’s since June 2010. It is also, apart from Mexico, the only South American country to have joined the OECD (January 2010). This rewarded 20 years of democracy and rigorous economic and fiscal policies during which the country has grown at an average rate of 5% per year. Chile has very little debt and became a net creditor in 2007. Its strong economy is totally export-oriented (copper, pulp and paper, fish and wine among others). It has a strong reputation for seriousness and reliability and also a corruption index close to zero. The country is small in terms of size with a population of 15 million, but remains the region’s economic role model. A recent illustration of Chilean success is the acquisition by its national airline LAN, certainly the best airline in South America, of the Brazilian company TAM to form Latam Airlines which will be the third largest airline company in the world. The country has favoured a liberal open economy model which makes it a very competitive environment for business. Local business is tough and margins are small. The financial sector is no exception to this.
Flexible accounts management
Like Peru and Uruguay, Chile allows current accounts to be held in USD and euros as well as in pesos (CLP). They can be used for liquidity management, hedging, or even for clearing deposits. Current accounts in CLP can pay interest but not those in USD or euros. Resident and non resident local accounts are available in USD, euros and CLP. There are no foreign exchange restrictions and funds in USD and euros can be easily moved in and out of the country. The only real restriction is that CLP offshore accounts are prohibited.
For collections, cheques remain a key instrument
Most payments are made by cheque, meaning that treasurers have to face the cumbersome process of managing this type of collection instrument. Cheques can be denominated in CLP and USD. New means of payment via the internet or procurement cards are however progressing. The postal service may be better than in other countries of the region but even so the cheque collection process can take as long as ten days, especially when collecting outside the Santiago area. The collection system is manual and suppliers pick up their cheques from the offices of their customers and send or deposit them at their banks for payment. Given the time consumption and administrative burden to manage this process, corporates usually use a number of specialised financial firms to outsource their cheque collections. Local collection companies such as Servipag, Fastco and Recuperos cover more than 250 locations in the country. They usually have an agreement with banks and can provide end-to-end solutions. Payment terms in Chile are usually from 30 to 60 days but can go up to 180 days in some cases, so getting your collection process up and running smoothly is essential.
As far as transfer payments are concerned, banks usually work on D+1 value date for transfers from abroad. Banks can also manage cheques in foreign currencies from abroad and will credit any account in London or NY. However, it is better to avoid this type of payment as it can lead to delays and sometimes uncontrolled foreign exchange costs. On domestic transfers banks will also apply a D+1 value date. Domestic transfers can be made not only in CLP but also in US$.
Tax environment - not the worst in the region
Chile was rated in September 2010 as Latin America’s best country in terms of tax by the Latin Business Chronicle (Brazil being the worst). All in all, the tax regime is relatively favourable and attractive for investors. There is a corporate tax of 17%.
Withholding taxes are 35% on interest from offshore loans but can be reduced to 4% if the loan is granted by a foreign financial institution or an international bank (a corporate in-house bank would qualify for that purpose). On technical assistance the tax rate ranges from 15 to 20% depending on the status of the provider (parent company or pure third party).
Chile was rated in September 2010 as Latin America's best country in terms of tax by the Latin Business Chronicle.
There is also a withholding tax of 35% payable on services rendered abroad but there are some sectorial exemptions to consider. Royalties are also subject to WHT ranging from 15 to 35% depending on the underlying licence or patent. There is no WHT on domestic inter-company dividend payments but on outbound dividend payments there is a 35% WHT (which can be offset against a certain percentage of the corporate tax paid). At the same time companies which are resident in Chile are taxed subject to their worldwide income taxation.
There are a number of double tax treaties in place including a special dual taxation avoidance treaty signed with Argentina. Some are worth considering as they could represent an advantage, such as those with Spain, Sweden and Denmark, but unfortunately they are not always particularly attractive.