Published: January 01, 2000
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.
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.
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$.
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.[[[PAGE]]]
Chile also has a thin capitalisation ruling in place which limits the amount of borrowing. The rule is 3:1 debt to equity and includes back-to-back loans.
Chile has a rather more complex payment and clearing system than its neighbours. There are three different clearing houses for electronic transfers.
High value payments
The first one, LBTR (Liquidacion Bruta en Tiempo Real) is controlled by the central bank. It provides RTGS systems that clear interbank transfers and it is also where other clearing houses ultimately settle their transactions. The platform also clears securities and repos. Commercial banks must subscribe to the service. It is the only platform that the central bank provides. There is no guarantee as to the settlement of transactions. This platform is relatively recent. The banks can also pre-clear high value transactions directly through CCAV, which is a bank-operated platform which ultimately clears its transactions via LBTR.
Low value payments
There are two separate low value clearing houses: firstly CCA (Centro de Compensacion Automatizado) which is a private system providing for ACH payments owned by three banks: Banco de Chile, Banco Santander and Banco de Crédito e Inversiones. CCA ultimately settles all these transactions with LBTR. Secondly, COMBANC, in operation since 2005, which is also a private system and is owned by most of the Chilean banks. It clears interbank transactions. Unlike the other two clearing houses it has a loss-sharing agreement and applies the BIS (Bank for International Settlements) governance rules. CCA and COMBANC settle their transactions with LBTR.
As regards cheque settlement, there is a specific clearing house called SINACOFI which is run by the Chilean banks under the Chilean Banking Association, and ultimately supervised by the central bank. Most cheques are cleared electronically in the Santiago area; in the provinces they are still in many cases cleared manually, so that clearing can take as long as three days. Banks participating in SINACOFI have regional responsibilities and share the clearing process.
Cheques still represent a large percentage of payment transactions in Chile and have only been decreasing slowly from 284 million cheques processed in 2004 to 223 million in 2009. At the same time electronic transfers are increasing and should represent 268 million transactions in 2009 but four times the value of cheque transactions (source: Banco Central de Chile).Banks also provide online electronic banking platforms for payroll, tax (VAT, income tax) and social security payments.
Chile has 26 banks including one public bank: Banco del Estado de Chile (compared with 55 banks in total in 1980). Five are branches of foreign banks. The main participants in commercial and corporate banking in Chile are Banco Santander Chile, Banco de Crédito e Inversiones (BCI), Banco de Chile (Citibank), Banco Internacional, Scotiabank Sud Americano, Corpbanca, Banco Bice, HSBC Bank Chile, Banco Security, Banco Falabella, Deutsche Bank Chile, Banco Ripley, HNS Banco, Banco Monex, Banco Penta, Banco Paris, Banco Bilbao Vizcaya Argentaria Chile (BBVA), Banco do Brasil S.A., Itau, J.P. Morgan Chase Bank N.A., Banco de la Nación Argentina and The Bank of Tokyo-Mitsubishi Ltd. The most important moves in the last five years have been the acquisition of Banco de Chile by Citigroup, Banco de Desarolllo by Scotiabank and finally Itau from Brazil which bought Bank Boston. All of the large national banks have nation-wide branch networks and are members of the SWIFT communications network. The five largest banks together hold more than 70% of total banking assets. At the same time foreign-controlled banks (13 in total) have more than 40% of the assets (apart from Citi/Banco de Chile). The market has seen the recent arrival of new players competing with banks in the retail and cards business, which are some of the major Chilean distribution conglomerates such as Ripley, Falabella and Almaneces Paris.[[[PAGE]]]
The foreign exchange market is relatively regulated. While there are no foreign exchange restrictions in terms of moving funds in and out of the country, there are some rules as regards the execution of foreign exchange and derivative transactions whether spot, forward or exotic. Before making investments in the Chilean market (by buying equity participation), foreign investors need to obtain approvals and have to conclude their transaction in the official FX market with banks. The transaction needs to be central bank registered. Besides this official formal market there is an informal market where FX transactions can be executed without registration but it concerns FX for regular business, not for specific transactions (import and export settlements, foreign investments).
The FX and interest rate market is sophisticated and one can execute nearly all types of hedge transaction.
The FX and interest rate market is sophisticated and one can execute nearly all types of hedge transaction. There is no need for prior approval to trade on the market. The market is relatively deep and long for the region. The average daily size in the spot market is around US$600m and around US$500m for the forward market. The benchmark FX rate is called the Dollar Observado which is set by the central bank on a daily basis. In the swap market transactions for up to US$300m and for tenors up to 20 years can be executed. FX options including structured options are available too. More complex instruments such as interest rate options and exotic cross-currency swaps are also traded. Contingent swaps (credit) and contingent derivatives (M&A deal context) are also possible.
In-country local zero balancing is available for same currencies. There is no tax on financial transactions. The Chilean financial market offers a good range of products to manage liquidity. The market is very competitive. However, even though the Ministry of Finance raised interest rates from 0.5% in January 2010 to 2.5% in September 2010 they remain relatively low and conservative placement products unfortunately do not provide miraculous yields.
Some of the placement products available are government bonds issued by the central bank for short tenors. They are zero coupon bills denominated in CLP, and are liquid instruments that can be easily traded. Besides this short-term market, Chile has a long-term domestic bond market. A number of local entities are issuers of long-term bonds: the central bank, state and other pension funds and also concession companies. These can go up to 30-year tenors, and can be denominated in CLP or US$.There is also a commercial paper market, Efectos de Comercio, for corporate and for different types of short-term tenors. They are zero coupon instruments. Banks also offer interest-bearing accounts and savings accounts. Time deposits are also available in COP and in US$.
One can also buy repos, which are issued by the central bank. At the same time the country has seen a strong development of mutual funds. The corporate bond market is very mature and provides a large panel of signatures. Banks also issue bonds and asset-backed securities, especially on mortgage portfolios and there is an active convertible bond market.
Most if not all the instruments mentioned above are dematerialised and can be traded on electronic platforms. Net net the Chilean capital market is certainly one of the most developed and sophisticated in the region together with Mexico, Brazil and Peru.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
