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Friday, January 17 de 2014

Public debt issuances of up to US$6.0 billion in the local market; treasury bill issuances; and new article 104 of chilean income tax act

  • The Ministry of Finance reports that in 2014, the Republic of Chile will issue bonds and treasury bills in the local market.
  • In addition, the Ministry explains the effects of adjustment to Article 104 of the Chilean Income Tax Act, which governs the tax treatment of gains and losses from fixed-income instrument transactions.

Bond Issuances

The Ministry of Finance announces that in 2014, the Republic of Chile, through the Treasury, will issue bonds in the local market, both in pesos and UFs (unidades de fomento, an inflation-indexed unit of account), for a total amount of up to US$6.0 billion.

The schedule, including auction dates and the corresponding amounts, will be announced once the required legal procedures have been completed.

The above will be executed through the issuance and reopening of the following bonds:

  • Issuance of a 5-year bond in pesos (BTP-5), up to Ch$320 billion (US$0.6 billion).
  • Issuance of a 10-year bond in pesos (BTP-10), up to Ch$630 billion (US$1.2 billion).
  • Issuance of a 20-year bond in pesos (BTP-20), up to Ch$530 billion (US$1.0 billion).
  • Reopening of a 30-year Bond in pesos (BTP-30, issued on 1 January 2013), up to Ch$320 billion (US$0.5 billion).
  • Issuance of a 10-year bond in UF (BTU-10, an inflation-indexed bond), up to UF 27 million (US$1.2 billion).
  • Issuance of a 20-year bond in UF (BTU-20, an inflation-indexed bond), up to UF 22.5 million (US$1.0 billion).
  • Issuance of a 30-year bond in UF (BTU-30, an inflation-indexed bond), up to UF 11.5 million (US$0.5 billion).

This issuance schedule may be subject to modifications in the event of a significant change in market conditions. In that case, the change will be reported in due course.

All issuances will be conducted through monthly auctions beginning in March 2014, or when legal procedures have been completed. The date will be announced in advance.

The Central Bank of Chile will be asked to represent the Treasury in the placement and management of the bonds, acting as fiscal agent.
Treasury Bill Issuance

In 2014, for the first time in the history of Chile, the Ministry of Finance, through the Treasury of the Republic of Chile, will also issue Treasury bills (public debt instruments with a maturity less than one year).

This will contribute to deepening the local short-term market and optimizing the management of the government’s temporary cash surplus, through the efficient funding of peso expenditures. It raises the standards for cash management and short-term liquidity, in line with international best practices.

National budgets have different patterns of behavior and seasonality in fiscal revenues and expenses. The more advanced treasuries of the world issue treasury bills or short-term debt to efficiently and transparently manage these flows, which can be very large relative to the size of the country. These instruments minimize uncertainty and the undesirable effects on capital markets, which is especially necessary in situations of tight liquidity or exchange rate pressure. They thus constitute a valuable tool not only for the Government, but also for the Central Bank for managing the monetary policy.

The Treasury bill auction schedule, including auctions dates and the corresponding amounts, will be announced once the legal procedures have been completed. Announcements will be made periodically according to Government needs.

New Article 104 of the Chilean Income Tax Act

For the first time bonds will be included in the fiscal treatment established under the new Article 104 of the Chilean Income Tax Act, regarding the tax treatment of capital gains and losses deriving from fixed-income instruments. This article was replaced by Act 20,712, the Single Funds Act (Ley Única de Fondos), approved in 2013 and published in the Official Gazette on 7 January 2014. This law simplifies the operation and includes more instruments in the fiscal treatment.

This modification seeks to promote more competition, liquidity and depth in the Chilean fixed-income market, attracting new suppliers of funds, such as foreigner investors, and contributing to a reduction of financing costs for Chilean companies and the Government.

The main changes to Article 104 and related provisions of the Chilean Income Tax Act are the following:

  • The tax treatment specified in this article will be extended to OTC transactions. Currently, it is only available for stock exchange transactions and continuous auctions.
  • Issuers will no longer be required to withhold 4% of the coupon payment for tax purposes. In the case of foreign or nonresident investors, the local agent will be responsible for the tax obligation. For local or resident investors, the tax will be included in the general income tax collection procedure.
  • The tax penalty for issuing below par is eliminated. From now on, income taxes will be calculated on the basis of a fiscal interest rate, equivalent to the yield of issuance for corporate bonds and the coupon rate for Treasury and Central Bank bonds.
  • Treasury and Central Bank instruments issued before 2010 are incorporated under the fiscal treatment. Currently, only bonds issued after 2010 are included.
  • Huaso bonds (debt securities issued by foreign entities in the local market, under SVS Norm 304 of 2011) are eligible for the fiscal treatment of Article 104.
    These modifications will enter into force once the legal procedures have been completed, which will be announced in due course. The main procedures to be completed include the publication of the LUF regulations and a decree from the Ministry of Finance establishing which Central Bank and Treasury instruments will be included under the tax treatment specified in Article 104.

For more information regarding the new Article 104 of the Chilean Income Tax Act, the web page of the Ministry of Finance (http://www.hacienda.cl/english/investor-relations-office/documents/presentations.html) offers a detailed presentation of the changes described above.

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