t) Income and Deferred taxes
The Bank and its subsidiaries have recorded income tax expense for each reporting period in accordance with current tax laws in the country where each of its entities and subsidiaries operates (see Note 14 “Income Taxes”).
The tax expense on profit for the period includes the sum of current taxes that result from applying current tax rates to the taxable income for the period and the deferred tax expense recognized in consolidated profit or loss. The Bank and its subsidiaries recognize, when appropriate, deferred tax assets and liabilities for future estimates of tax effects attributable to differences between the book and tax values of assets and liabilities.
Deferred tax assets and liabilities are determined based on the tax rate applicable in the period in which the deferred tax assets and liabilities are expected to be recovered or settled. The effects of future changes in tax legislation or tax rates are recognized in deferred taxes when the tax legislation is enacted or substantially enacted. The effects of deferred taxes for temporary differences between the tax and book basis are recorded on an accrual basis in accordance with IAS 12 “Income Taxes.”
Tax Reforms
a. Chile
As of period end, the deferred taxes of the Bank and its Chilean subsidiaries have been adjusted based on the current corporate income tax rates contained in Law No. 20,780, published on September 29, 2014. The law progressively increases the tax rate to 21% for fiscal year 2014, 22.5% for 2015, 24% for 2016 and 25% for 2017 and beyond for taxpayers applying the Attributed Income System. Taxpayers applying the Partial Credit Imputation Regime will have a rate of 25.5% in 2017 and 27% in 2018 and beyond. The latter applies to the Bank.
It should be pointed out that according to the new Article 14 of Chile’s Income Tax Law as amended by Law No. 20,899 of February 8, 2016, as of 2017, the Bank and Chilean subsidiaries are subject to the Partial Credit Imputation Regime, because public limited companies are subject to this regime, by default and unable to opt for the Attributed Income System.
b. Colombia
On December 29, 2016, Law No. 1,819 was published in Colombia. This law introduced a variety of amendments Colombia’s Tax Statutes, strengthened the role of the Colombian Internal Revenue Service (“DIAN”) and introduced several mechanisms to prevent tax evasion. One of the main amendments reduced the income tax rate for commercial year 2017 to 40%, consisting of a 34% general tax and a 6% surcharge. In 2018, the tax rate will fall to 37%, consisting of a 33% general rate and a 4% surcharge. Finally, from 2019 onwards, the income tax rate will be 33% and there will be no surcharge.
Deferred taxes for the Bank’s Colombian subsidiaries have been adjusted based on the new income tax rates contained in Law No. 1,819, published on December 29, 2016.
c. New York
On December 22, 2017, the United States enacted a tax reform statute that introduced various modifications to the system tax. This reform, among other things, reduced tax rates, modified international tax regulations
and made significant changes in the manner in which tax losses are recovered. One of the main modifications is related to a decrease in the income tax rate from 35% to 21% starting from January 1, 2018.
In light of these modifications, the deferred taxes of Chilean, Colombian and New York companies have been recorded according to the rates in the periods when reversal of each temporary difference is expected.
In consideration of the aforementioned legal changes, the deferred taxes of companies operating in Chile have been recorded at a maximum recovery or settlement rate of 27% for the temporary differences reversed as from 2018. For their part, the deferred taxes of companies operating in Colombia have been recorded at a recovery rate of 33%, for the temporary differences reversed as from 2019. The deferred taxes of New York branch have been recorded at a rate of 21%.