Chile2005 INVESTMENT CLIMATE STATEMENT -- CHILE
Openness to Foreign Investment
For the last three decades, Chile has made foreign direct investment (FDI) an essential part of its national development strategy. Chile’s sound, market-oriented policies have created significant opportunities for foreign capital to participate in the country’s impressive economic growth. Chile’s business climate is generally straightforward and transparent; corruption is rare. Foreign investors receive national treatment in nearly all sectors. A broad political consensus on the advantages of foreign investment means that Chile’s policies towards FDI are unlikely to change in the foreseeable future.
Chile’s welcoming attitude toward foreign direct investment is embodied in the country’s 1974 foreign investment statute, known as DL (Decree Law) 600. DL 600 has been the main regulatory norm for foreign direct investment in Chile during the last 30 years, due to the benefits and assurances that it establishes. Under DL 600, a foreign investor may sign a contract with the Chilean State. The Foreign Investment Committee (FIC) of the Chilean Government, the entity responsible for administering DL 600, establishes the terms and conditions of the investment. Applications are typically approved within a matter of days and almost always within a month. The authority of the Foreign Investment Committee to reject a foreign investment is severely limited by the Chilean Constitution. The Foreign Investment Committee’s decision can be appealed if an investor believes he/she has been discriminated against.
The contract may not be modified unilaterally by the Chilean State or by the enactment of any legal regulations after it has been signed. Any foreign individual or foreign legal entity, as well as Chilean individuals with residence abroad, can invest in Chile through DL 600. The contract acknowledges as foreign investment:
-- freely convertible currency;
-- capital goods;
-- technology.
The general regulations, terms, interest and other modalities of foreign credit contracts, as well as surcharges related to total costs to be paid by the debtor, including commissions, taxes and expenses, must, in addition, be authorized by the Central Bank of Chile. The investor can, under DL 600, increase the capital of his/her investment through both the capitalization of credits made under Chapter XIV of Central Bank regulations and the obligations derived from current imports and pending payments. DL 600 allows capital increases through the capitalization of transferable profits.
Foreign investors may request a maximum of three years to implement their investment. Investments of more than US$50 million for industrial or non-mining extractive projects can request a time limit of up to eight years. In the case of mining projects, the time limit is eight years, but if previous exploration is required, the FIC is empowered to extend it to up to twelve years. In the event that more favorable regulations than those in the contract are subsequently enacted, the investor will have the right to request an amendment.
The contracts also give investors the following rights:
-- to receive non-discriminatory treatment; On June 6, 2003, the FIC raised the minimum investment under DL 600 to $5 million per investor, and increased it to $250,000 in the case of fixed assets, technology, debt capitalization, and profit reinvestments after that date. Capital investments below the new minimum level can be channeled through Chapter XIV of the Central Bank’s Compendium of Foreign Exchange Regulations.
Title I, Chapter XIV of the Chilean Central Bank’s Compendium of Foreign Exchange Regulations is another mechanism provided for transferring foreign capital into Chile. Chapter XIV establishes regulations applicable to investors that govern foreign exchange operations related to credits, deposits, investments and capital contributions originating abroad. The procedure is applied to operations whenever the amount involved is greater than $10,000 or its equivalent in other foreign currencies.
In November 2002, the Chilean Government launched an Investment Platform initiative aimed at attracting international operations headquarters for the region to Chile. As part of this initiative:
-- A company that is set up exclusively as a platform for investments abroad and in Chile is exempt from Chilean earnings tax on the profits that overseas shareholders derive from its investments outside Chile. These platform companies can be either publicly or privately-held, but in the latter case must submit to the same regulation as public companies;
-- Up to 75 percent of the platform company’s shareholders may be resident in Chile; non-resident shareholders may not reside in tax havens;
-- Shareholders in the platform company can contribute capital either in the form of shares or equity in other companies, as well as in foreign currency;
-- If a platform company invests in Chilean assets, it must pay tax on profits derived from these investments. Similarly, the earnings of the platform company paid to Chilean shareholders are liable for the same tax (and have the same right to tax credits) as an investment abroad that repatriates profits to Chile;
-- Platform companies that invest in Chile must distribute earnings in the order in which they were obtained, starting with the oldest. As a result, separate accounting is required for earnings from investments abroad and on assets in Chile;
-- There are no restrictions on domestic borrowing by a platform company, but its overseas debt cannot exceed the value of the capital contributed by overseas shareholders;
-- The platform company may not invest in tax havens;
-- Platform companies are not entitled to bank secrecy;
By exempting platform companies from Chilean tax on overseas earnings, the initiative addresses the problem of three-way taxation and provides foreign investors with additional incentive to invest in Chile. This initiative is expected to foster regional joint ventures between foreign investors and Chilean partners. Also, in order to facilitate the entry of foreign capital into Chile, the initiative allows companies that are already established in the region to move their operation centers to Chile without incurring the transaction costs involved in selling and re-buying assets.
For most of the 1990s, the Chilean economy attracted large inflows of foreign capital, particularly direct investment, especially in the mining sector. Chile’s total stock of foreign direct investment between 1974 and 2003 reached $64.4 billion. Since 1990, multinational companies have committed more than $55 billion to Chile, an extremely significant amount for an economy in which GDP reached $72 billion in 2004. Today more than 3,000 companies from 60 countries have operations in Chile. These figures represent the largest stock of FDI per capita and the highest FDI to GDP ratio of the major economies in Latin America.
According to a report by the GOC’s Foreign Investment Committee, FDI in Chile totaled $6.48 billion for the first three quarters of 2004. This is a 219 percent increased over the same period in 2003. FDI during the first three quarters on 2004 was divided as follows:
Energy (electricity, gas and hydropower) 44.7 percent Spain 81.3 percent The figures for Spain reflect large investments by the energy company Endesa Espana, which invested in the Chilean energy company Grupo Enersis, and the mobile phone company Telefonica Moviles, which purchased a subsidiary of Telefonia CTC Chile.
Although Chile encourages foreign investment, some barriers do exist. Foreigners may not invest in Chilean fishing companies or media unless their country has a reciprocity arrangement with Chile. The European Union signed such an agreement in 2002 with regard to commercial fishing companies. There are no restrictions on foreign investment in telecommunications, but investors must acquire a license, and the number of licenses available is limited in some new sectors of the industry. Certain types of investment projects require additional authorization beyond that of the FIC. For example, projects in the mining sector require the Chilean Copper Commission’s authorization; for investments in the fishing sector, projects require the approval of the Undersecretariat of Fishing; authorization from the Bank and Financial Institutions Regulatory Agency is required to operate in the banking sector, and the Securities and Exchange Commission for activities in insurance and investment funds. Other authorizations are required from the Pension Funds and Private Health Insurance regulatory agencies to participate in those sectors. For projects with a potential environmental impact, authorization is required from the National Environmental Commission (CONAMA) or the Regional Environmental Commission (COREMA), depending on the case.
The United States and Chile signed a Free Trade Agreement (FTA), which entered into force on January 1, 2004. The chapter on investment is modeled on the standards found in agreements throughout the world: the NAFTA investment chapter, the investment chapters in Chile’s FTAs with Mexico and Canada, U.S. bilateral investment treaties, and customary international law. It incorporates innovations and improvements based on the experiences of both countries in implementing investment agreements, and responds to new U.S. objectives set forth in the Trade Promotion Act (TPA) of 2002. The main objective of this chapter is to provide stability and security to investors. The chapter provides six basic forms of protection: -- Non-discriminatory treatment, based on national treatment and most-favored-nation-treatment, relative to domestic and third party investors; Conversion and Transfer Policies
In the late 1980s and early 1990s, the Government of Chile imposed strict controls on short-term capital inflows. In May 2000, the Central Bank lifted the one-year withholding period requirement for foreign capital entering Chile under Chapter XIV. This type of investment capital may now be repatriated immediately without penalty.
A second major move in 2000 was the virtual elimination of the “encaje” or lock-in, which required foreign investors to deposit a percentage of foreign-sourced loan funds and portfolio investment with the Central Bank in a non-interest-bearing account for up to two years. In response to pressures on current account and international financial crises since 1997, the Central Bank reduced the “encaje” rate by late 1998 to zero. The Central Bank retains the power to re-impose the “encaje” mechanism in the future, if circumstances warrant.
Additional reforms in 2001 and 2002 eliminated controls on flows of foreign capital into Chilean debt and equity markets and freed outflows associated with capital returns, dividends, and other investments from the need for Central Bank approval. In June 2003, the GOC sent to Congress a package of incentives for the development of local venture capital. This measure is still pending approval.
Pursuant to recent changes in regulations governing foreign exchange, investors, importers, and others are guaranteed access to foreign exchange in the official inter-bank currency market without restriction.
The Central Bank reserves the right to deny access to the inter-bank currency market for royalty payments in excess of five percent of sales. The same restriction applies to payments for the use of patents that exceed five percent of sales. In such cases, firms would have access to the informal market. The Chilean tax service reserves the right to prevent royalties of over five percent of sales from being counted as expenses for domestic tax purpose.
Under the Investment Chapter of the FTA, each government must allow transfers of covered investment to be made freely and without delay into and out of its territory. These include transfers of profits, royalties, sales proceeds, and other remittances related to the investment. However, for certain types of short-term capital flows, the chapter allows Chile to impose transfer restrictions for 12 months, as long as those restrictions do not substantially impede transfers. If restrictions are found to substantially impede transfers, damages accrue from the date of the initiation of the measure.
Expropriation and Compensation
Chilean law grants the government authority to expropriate property, including property of foreign investors, only for public or national interests, on a non-discriminatory basis and in accordance with the due process of law. The law requires the payment of compensation without delay at fair market value, in addition to any applicable interest. The 1973-1990 military regime and the three subsequent democratically-elected governments have not nationalized any private firm, and nothing suggests that any expropriation is likely in the foreseeable future.
Dispute Settlement
Except for U.S. investment covered by Overseas Private Investment Corporation (OPIC) Insurance, disputes involving U.S. investors have been typically settled in negotiations between the investor and the concerned government entity. Any dispute not resolved in this way has been referred to local courts for adjudication, although the time required may have made this an unattractive option for foreign investors. Accordingly, litigants often chose to settle out of court. Suit may be brought under expedited procedures in cases involving the abrogation of constitutional rights.
Chile has signed several bilateral investment protection agreements with other countries allowing for binding international arbitration. Different agreements contain varying procedures; some allow the investor to choose either the host country’s legal system or international arbitration but not both, while others specify that disputes must pass through the host country’s legal system before recourse to international arbitration. Chile joined the International Center for Settlement of Investment Disputes (ICSID) in 1991.
Although the U.S. and Chile do not have a bilateral investment treaty (BIT), many issues normally covered in a BIT are addressed in the FTA. Section C of the Investment Chapter provides a mechanism for investors to pursue a claim against a host government that is in breach of the FTA’s investment obligations, an investment agreement, or an investment authorization. Investment authorizations under D.L. 600 are not subject to this mechanism, and only agreements signed beginning 2 years from the date on which the treaty enters into force may make use of this dispute settlement mechanism. Under this section, the investor pursuing a claim may choose an arbitral forum - including the International Center for Settlement of Investment Disputes (ICSID), the Additional Facility of the Center - under the UNCITRAL arbitration rules, or any other mutually agreed upon arbitral institution. The rules chosen will govern the proceedings except to the extent modified by the FTA. An investor may initiate a proceeding up to 6 months after the event which gave rise to the claim, and all claims must be brought within 3 years of the date the claimant acquired knowledge of the breach and/or injury.
The chapter on investments encourages consultations or negotiations before recourse to dispute the settlement mechanisms. If the parties fail to resolve the matter, a claim for arbitration can be submitted by the investor. Arbitration must be by mutual consent. Provisions in Section C ensure that the proceedings are transparent by requiring that all documents submitted to or issued by the tribunal be available to the public, and by stipulating that proceedings be public. The tribunal must also accept amicus curiae submissions. The section establishes clear and specific terms for making proceedings more efficient and avoiding frivolous claims. Domestic law is to be applied to all contracts. However, arbitral tribunals decide disputes in accordance with FTA obligations and applicable international law.
The judicial system in Chile is generally transparent and independent. The likelihood of government intervention in court cases is low. If a state-dependent firm is involved in the dispute, the Government of Chile may become involved through the Defense Council of the State (Consejo de Defensa del Estado). In cases where courts determine a firm is bankrupt, a receiver is named to distribute the debtor’s assets to the creditors.
Performance Requirements and Incentives
The Foreign Investment Committee does not apply performance requirements in its review of projects. The Investment Chapter in the FTA establishes the rules prohibiting performance requirements that apply to all investments, whether by third party or domestic investors. The chapter also regulates the use of mandatory performance requirements as a condition for receiving incentives, and explicitly states relevant exceptions. These include: government procurement, qualifications for export and foreign aid programs, and non-discriminatory health, safety and environmental requirements.
Chile does not subsidize foreign investment nor does it offer any special tax exemptions. There are, however, some regional incentives linked to isolated geographical zones and to the information technology sector. These benefits relate to co-financing of feasibility studies as well as to incentives for the purchase of land in industrial zones, the hiring of local labor and facilitation of project financing. Other important incentives include accelerated depreciation accounting for tax purposes, special tax treatment for retained earnings, and legal guarantees for remitting profits and capital.
Right to Private Ownership and Establishment
Except for the fisheries and media sectors noted above, Chile does not restrict the right to private ownership or establishment.
Protection of Property Rights
Protection of intellectual property rights in Chile is inadequate in several important respects. Shortcomings have kept Chile on the U.S. Trade Representative’s Special 301 Watch List of countries with deficient intellectual property rights protection regimes since 1989.
Chile, as a member of the WTO, chose to qualify as a developing country for meeting its obligations as a TRIPS signatory. As a result, the final deadline for harmonizing national legislation to the multilateral organization’s norms was January 1, 2000. Chile’s Congress finally approved the Miscellaneous Law in November 2003 to bring the country into compliance with TRIPS copyright obligations and address some concerns about copyrights and authors rights. U.S. industry representatives have stated that the law continues to fall short of those obligations. Chile signed the World Intellectual Property Organization (WIPO) Treaties on Copyright and Performances and Phonograms in April 2001. Chile did not approve legislation to bring the country into compliance with TRIPS obligations related to industrial property until December 2004. To implement this new law, the GOC is expected to publish regulations in May 2005. The FTA seeks to strengthen Chile’s legal framework for protection of copyrights. For example, the agreement increases the period of protection for copyrights and related rights to 70 years. The FTA also criminalizes end-user piracy and mandates both statutory and actual damages for IPR violations. Provisions of the agreement provide state-of-the-art protection for digital products and penalize tampering with anti-piracy technology. Chile enacted legislation to implement its FTA commitments on copyright protection in November 2003. In relation to internet domain names, the U.S. and Chile committed to making a system available for the resolution of disputes, following international standards with respect to problems such as the cyber-piracy of brands and trademarks for higher level country domain names. Furthermore, both countries committed to creating a database containing information on individuals who have registered higher-level domain names. This database will protect the personal data of those who have registered.The U.S.-Chile FTA significantly strengthens patent protection under pre-existing Chilean law. For example, the FTA provides for the extension of the protection period for patents when there are unjustified delays in the patenting process. The Agreement also requires parties to protect confidential information provided to authorities in order to obtain marketing or health permits for pharmaceutical products and agricultural chemicals. In addition, the FTA establishes the obligation to undertake reasonable efforts to extend patent rights to qualifying plants. The Institute of Public Health (ISP in Spanish), Chile’s version of the U.S. FDA, is the agency charged with granting marketing approval to new drugs. The ISP has issued health approvals -- which have effectively constituted marketing approval -- for unauthorized copies of patented products as well as of products whose patent application is in process or whose period of data exclusivity has not yet expired. U.S. firms have been obligated to defend their patent rights in costly court proceedings that take several years. Chilean authorities have not established an effective link between the actions of the ISP and the Ministry of Economy’s Industrial Property Department, Chile’s patent and trademark office, to prevent this undermining of effective patent protection. The FTA addresses this issue, which remains a major area of concern for the U.S. Government. Chile's trademark law is generally consistent with international standards, but contains some deficiencies addressed by the FTA. Some U.S. trademark holders have complained of inadequate enforcement of trademark rights in Chile. The FTA requires government involvement in dispute resolution between trademarks and Internet domain names in order to prevent "cyber-squatting" of trademarked domain names. The FTA also applies the principle of "first in-time, first-in-right" to trademarks and geographical indicators (place-names). Several U.S. nurseries have complained of violations of patented plant varieties in the fruit sector. They claim that in some cases, Chilean fruit produced from patented U.S. genetic stock has entered the U.S. market without paying the appropriate royalties. Transparency of the Regulatory System Chilean regulatory systems tend to be transparent, and government regulators generally have little discretion. While rulemaking processes do not generally include formal provisions for public hearing or comment, opening a business is easier in Chile than in many other Latin American countries. The FTA creates some additional obligations for transparency in regulatory processes. Efficient Capital Markets and Portfolio Investment Chile’s capital markets are well developed and open to foreign portfolio investors. Credit is allocated on market terms and is available to foreigners, although the Central Publicly traded Chilean companies attract substantial international investment. In late 2000, the Chilean Congress approved legislation (known as the OPA law) on public stock tenders that provides greater legal protection of minority shareholder rights. In November 2001, the core measures in a far-reaching reform of Chile's capital markets came into force. Among other things, the reform created an agricultural commodities exchange. In another modification, rules governing Chile’s private pension fund industry now allow fund administrators (AFPs) to operate various funds with different risk-return profiles instead of the single fund for all affiliated workers. Capital market reforms have leveled the playing field for foreign investors in the local market and those who invest through Chilean bonds abroad. This has slowly increased demand for local debt instruments among new foreign investors. The reforms also eliminated discrimination that affected commercial paper issues related to stamp taxes, and created a new tax exemption for cross-border bank lending that will allow foreign banks to compete on more equal terms. The reforms increased incentives for personal savings through tax-deductible contributions to private pension funds administered by traditional AFPs and other financial service companies. The package also eliminated capital gains taxes related to short selling of shares and offered a capital gains tax exemption on the sale of widely-traded equities purchased after April 19, 2001. The new law created an emerging markets stock grouping whereby investors can claim exemption from capital gains taxes for the first three years after a company’s initial offering, or until 2006. Under the U.S.-Chile FTA, U.S. insurance firms will now have full rights to establish subsidiaries or joint ventures for all insurance sectors, with limited exceptions. Chile also committed to phase in insurance branching rights and to modify its legislation to open cross-border supply of key insurance sectors such as marine, aviation and transport (MAT) insurance, and insurance brokerage of reinsurance. U.S. banks and securities firms will be allowed to establish branches and subsidiaries and may invest in local firms without restriction, except under very limited circumstances. U.S. financial institutions will also be able to offer financial services to citizens participating in Chile's privatized voluntary saving plans and they will gain some increased market access to Chile's mandatory social security system. Chile will allow U.S. based firms to offer services to Chileans in areas such as financial information, data processing and financial advisory services, with limited exceptions. Chilean mutual funds will be permitted to use foreign-based portfolio managers. The main institutional investors and suppliers of capital to local companies are the pension fund administrators, life insurance companies, and mutual funds. They manage a total investment portfolio of about $60.8 billion, financing Chilean companies directly through $4.2 billion in corporate bonds, $8.9 billion in stock and $48.1 billion in bank deposits. The Government sent a second capital market reform package to Congress in June 2003. This package proposes a set of legal initiatives and norms to encourage the development of a more robust venture capital industry, reduce transaction costs, improve corporate administration regimes, improve supervision mechanisms, and promote alternative voluntary pension plans (including one that mirrors the U.S. 401K option). The Chilean banking system is sound and competitive and meets Basel standards. There are currently 26 banks, of which 12 are foreign-owned. Foreign banks can compete on the same terms as their domestic rivals. There is one state-owned bank, Banco Estado, which is the nation’s second largest. Private banks manage most corporate business. Six large, high-volume banks control roughly 68 percent of the market. The banking system has become aggressively consumer-oriented, diversifying from basic functions such as home loans and big business credit into fund management, leasing, factoring, insurance brokerage, credit cards, etc. Chilean banks have also established a presence in regional markets, such as Argentina, Costa Rica, Peru and Venezuela. The Chilean banking industry is characterized by the quality of its loan portfolio, due partly to strict limits on lending to a single debtor or group of related companies. This is capped at 5 percent of the capital and reserves of a bank for collateral free loans, and at 25 percent for collateral loans (fixed assets). Summary of Chilean Banking System (November 2004) (US$ Million) Total Loans 64,067 In a bid to increase competition within the banking sector, the capital market reforms have also introduced some liberalizing changes in banking regulations regarding minimum capitalization requirements and controlling shareholders obligations and have permitted local banks to participate in international loan syndicates. The legislation on public stock tenders, known as the "OPA" law, regulates public offers and acquisitions of shares, and establishes a regime for corporate governance. According to the law, any individual or group that intends to take direct or indirect control of a corporation that has publicly listed shares must inform the general public prior to the action. Title XXV of the law indicates that a public offer for share acquisition must be made when the purchase stake would allow the buyer to take control of a corporation, or when the purchase target controls another corporation which represents 75 percent or more of the target's consolidate assets. With the exception of fishing companies or the media (as already mentioned), there are no restrictions or prohibitions against foreign direct investment or control. The foreign exchange market is quite deep for spot operations and short-term currency forwards (up to 360 days). Daily trading on these markets is estimated at around $800 million and $600 million, respectively.
General Information on the Financial Market (November 2004) Political Violence
Chile is considered a low threat country. Over the last ten years there have been relatively few incidents of politically motivated attacks on projects or installations. Anti-American sentiment, civil disorder, and terrorism are rare, and there have been no incidents involving international terrorist groups. However, some violent incidents have occurred in forestry plantations and farms in the south of Chile. These incidents are related to the land claims of indigenous people in the VIII and IX Regions. Other such incidents involving indigenous groups and environmental advocates took place where a privately-owned electrical power company built a dam and power plant in Region VIII.
Corruption
Corruption in Chile has always been limited, although a number of cases have occurred in recent years. The GOC responded with vigor in 2003 to a succession of uncharacteristic public and financial sector scandals related to corruption and influence peddling in the government’s domestic development agency (CORFO), the Ministry of Public Works (MOP) and the Central Bank. In the wake of the scandals, the GOC, the courts and Congress enacted a number of legal and administrative reforms. These include: rules that clarify and modernize the way public employees are paid, new campaign finance legislation, the establishment of a permanent budget commission to oversee government spending, simplified administrative procedures, the establishment of ethical guidelines for civil servants, and reforms to the manner by which the MOP awards government contracts. There is general agreement that the measures, along with the financial market reforms, have further improved Chile’s transparency.
Chile has signed and ratified the Organization of American States (OAS) Convention against Corruption. Chile is also a signatory to the Organization for Economic cooperation and Development (OECD) Convention on Combating Bribery, which was ratified in March 2001. Chilean law has not yet been modified to make bribing a foreign official a criminal act, but a wide range of bribery acts are punishable as crimes under the penal code. Investigating all forms of bribery is the responsibility of the Inspector General.
There is a chapter of Transparency International in Chile, and the country ranked 20th on the organization’s corruption index in 2004, while the U.S. ranked 16th.
Bilateral Investment Agreements
In 1991, Chile became a signatory of the Washington Convention of 1965 that created the International Center for Settlement of Investment Disputes (ICSID). Since then, Chile has negotiated Bilateral Investment Treaties (BITs), agreements through which Chile provides additional protection both to inward and outward foreign investment flows. As of January 2004, Chile has negotiated 52 BITs, of which 38 are in force, including agreements with Spain, Germany, Switzerland, France, the United Kingdom, Australia, Malaysia, China, Argentina, Brazil, Cuba and Venezuela. The Government of Chile has begun bilateral investment protection agreements negotiations with 15 others countries, including India, Morocco, Russia, Israel and Thailand.
OPIC and Other Investment Insurance Programs
A Bilateral Investment Agreement with the Overseas Private investment Corporation (OPIC) took effect in 1984.
Chile is a party to the convention of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).
Labor
Chile has enjoyed generally calm labor relations over the last decade, and strikes have been relatively infrequent. Strikes and public protests have been concentrated in the health, education, transportation, communication, and civil service sectors.
Union membership is voluntary, and approximately 12 percent of the workforce is unionized. Multiple unions exist in many companies, and management can negotiate collective agreements with any of the unions or with ad hoc groups of workers. Unions can form confederations or nationwide labor centrals and can affiliate with international labor federations. Contracts are normally negotiated at the company level; multi-company bargaining is permitted on a voluntary basis. Minimum wage, working hours, overtime, paid annual vacations and holidays are established by law. Women are entitled to state-funded maternity leave for a period of 6 weeks before and 12 weeks after childbirth. Layoffs are not permitted between conception and one year after the female employee has returned from maternity leave.
Chilean workers have a reputation for discipline and moderately low labor costs. Top executive salaries are on a par with European countries, although well below those in the U.S. Chile’s low additional wage costs, such as social security contributions, are also an important factor in the competitiveness of Chilean labor. Chile allows companies to deduct set training costs (up to 1 percent of annual payroll) from corporate tax payments. A company can also use 10 percent of the rebate to finance a diagnosis of its training needs, and 15 percent to run a training department.
On January 1, 2005, the maximum number of labor hours per week was reduced to 45 from 48 without any loss of salary to the employees.
Foreign Trade Zones and Free Ports
Chile has two tax-free zones, one is in the northern port of Iquique (Region I) and the other in the southern city of Punta Arenas (Region XII). Merchants and manufacturers in these zones are exempt from corporate tax and from VAT and customs duties. Goods can be re-exported without paying taxes, but products that are sold within Chile must pay VAT and import duties upon leaving the zone (except to immediate geographical area in which a lower tax rate applies). The same exemptions also apply to manufacturers in the Chacalluta and Las Americas Industrial Park in Arica (Region I).
Foreign Investment
Between 1974 and 2003, US$86.7 billion in foreign direct investment was authorized under Chile’s DL 600 and projects worth US$53.3 billion were implemented. Almost 87 percent of that investment entered the country after 1990. During the 1990s, investment under DL 600 expanded at an average annual rate of 19.7 percent in nominal terms. As a result, by December 2004, over three thousand companies from more than 60 countries had invested in Chile.
Foreign direct investment flows as a percentage of GDP reached a yearly average of 6.4 percent of GDP during the 1990s, rising to 8.3 percent between 1995 and 2000. After reaching an annual record high of $9.9 billion in 1999, foreign investment flows began to drop, falling by 33 percent in 2002 and by an additional 35.5 percent in 2003. Chile’s FIC maintained that this did not reflect a change in Chile’s competitiveness, but rather a sharp downturn in international economic conditions. To some Chilean experts, this downward trend represented a return to reality with more sustainable levels of FDI after the boom of the 1990s.
FDI in Chile totaled $6.48 billion for the first three quarters of 2004, a 219 percent increase over the same period in 2003. The large investments by two Spanish companies account for this jump and are most likely an exception, rather than an indication of a sharp long-term increase in future FDI.
During the first three quarters of 2004, energy projects attracted the most investment at 44.7 percent, overtaking the mining sector, which has attracted just over half of total FDI inflow since 1974.
Between 1974 and 2003, the following sectors accounted for foreign investment materialized through D.L. 600:
Mining 34.9 percent * Within the Services sector, the most important sectors were:
Banking 22.3 percent Regulatory reform in the financial services industries, as well as energy-related industries and the government’s infrastructure concessions program (including road, port and water treatment facilities), has recently helped to attract significant investment beyond the traditional mining, forestry and fishing sectors.
The U.S. remains the single largest direct investor, accounting for 27.4 percent of inflows from 1974 – third quarter 2004. Since 1997, however, FDI from the European Union has surpassed that of the U.S., primarily due to the Spanish acquisitions in the energy and telecommunications sectors mentioned earlier. The following represent the inflows of FDI by country from 1974 – third quarter 2004:
United States 27.4 percent According to Central Bank statistics, total flows of Chilean investment abroad, principally in Mercosur and other neighboring countries, have surpassed $18 billion since 1995. The economic and financial instability in the region prompted Chilean capital to move to more stable markets, however. By 2003, the United States, Canada and Mexico became the most important recipients of Chilean FDI, which reached a total of US$16,863 million through May. Chile’s net investment abroad neared US$3.4 billion through May 2003. During 2002, Chile invested US$1.7 billion abroad.
Statistical Annexes.
Foreign Investment DL 600. Foreign Direct Investment (DL 600) By Year: 1974-2002 Materialized Foreign Investment by Sector Under D.L 600: 1999-2004* Chilean Foreign Direct Investment |
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