Chile proposes tax reform to fund education overhaul

Chile's government on Thursday proposed a sweeping tax reform that raises levies on companies to help fund an education overhaul, as it seeks to quell social protests ahead of local elections seen as a litmus test for the 2013 presidential race.

Center-right President Sebastian Piñera said his tax reform bill, which still needs congressional approval, would raise the income tax rate for companies to 20 percent, lower stamp duty on credit and increase the annual tax take by $700 million to $1 billion.

The bill, to be presented to Congress on Monday, also seeks to eliminate tax distortions, incorporate green taxes on polluting goods and includes a variable tax rate mechanism to cushion consumers from oil price swings.

"We're going to ask for an additional effort from companies by increasing their income tax rate from 17 percent to 20 percent," Piñera said in a national televised address.

"Additionally, a series of tax exemptions or distortions that have been reducing the tax take and aren't justified, will be corrected or eliminated."

Chile was hit in 2011 by a surge of protests demanding better and free education, stricter environmental regulation and greater economic equality, helping yank down Piñera's approval rating to a paltry 29 percent in March according to pollster Adimark -- making him the most unpopular leader since General Augusto Pinochet's dictatorship ended in 1990.

"We inherited a poor financing system for higher education ... Tax reform will allow us to finance (education reform) in a serious and sustainable way," Piñera added. "One hundred percent of the additional revenue collected by this reform will be destined to finance educational reform."

Piñera has said large companies have to make a greater contribution to a more equitable tax system that will seek to foster the growth of smaller and medium-sized companies.

Investor-friendly Chile's corporate tax rate would still remain well below Latin America's average rate of 25.06 percent in 2011, according to a report by consultancy KPMG.

While Chile's economy grew 6 percent last year, it was rated the most economically unequal country of the 34-member state Organization for Economic Cooperation and Development, or OECD.

Additionally, the bill would reduce stamp duty on credit to 0.2 percent from 0.6 percent to help small and mid-sized firms, Piñera said, adding taxes on hard liquor would rise.

The government hiked royalties on mining companies in 2010 and raised a host of taxes to help finance reconstruction after the earthquake.