Chilean government raising corporate taxes to appease students

Chile’s government buckled to student protests on Thursday and agreed to increase spending in education at the expense of higher corporate taxes.

Image courtesy ffuentes: http://www.flickr.com/photos/86598279@N00

The Chilean National Congress building, Valparaíso

Legislation will be submitted to congress that increases corporate taxes to 20% from 18.5% while reducing personal income taxes and interest on student loans. Additionally, taxes on fuel will be reduced with an offsetting increase on hard alcohol taxes.

Despite the generally capital friendly environment, the current administration has proven to be quick to appease populist sentiment by raising corporate taxes, if only temporarily. The current impetus was a seven-month protest by students over education costs and state spending on education. This followed two other incidences in the last two years.

The corporate tax rate was increased from 17% to 20% to help rebuilding efforts after the devastating 2010 earthquake. The rate was lowered earlier this year, but only back to 18.5 percent.

Mining companies were asked to pay temporarily higher taxes in 2010 to pay for increased social programs. Bloomberg estimates the increase to 20% in corporate taxes would bring the valuation of the main index down approximately 2.5%.

Companies without significant sales to the consumer space will have the most to lose with the increase. Shares of consumer goods companies may be able to offset higher corporate taxes with increased revenue from consumer spending.

Beverage maker Compania Cervercerias Unidas (CCU, quote) may be able to withstand higher taxes at its spirits division through higher sales throughout product lines. The company offers both alcoholic and non-alcoholic beverages in Chile, Argentina, the Cayman Islands and Liechtenstein.

It is yet unclear whether the new legislation will also raise taxes on wines along with hard liquor, which would negatively affect Vina Concha Y Toro (VCO, quote) a wine producer and exporter.