CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects the tax reform measures recently proposed by Chilean President Michelle Bachelet to pressure corporate cash flows and dividends, if passed.
Bachelet presented a reform package to Congress on April 1 that was consistent with campaign pledges made prior to her election last December. Essentially, the reform seeks to increase fiscal revenues by increasing the corporate income tax rate, adjusting shareholder taxes to be based on total company earnings instead of only dividends, setting/increasing specific taxes (such as those on non-alcoholic beverages with high sugar content and alcoholic beverages), and reducing tax exemptions and tax evasions. The reform will be subject to congressional debate, and its passage is expected this year.
In Fitch's view, the passing of the reform 'as-is' would affect Chilean companies in one or more of the following ways: decreased cash flow and profitability; pressure on dividend policies; increased working capital needs; potential weakening of debt structure; rising borrowing costs; and discouraging investments in projects.
The depth of these effects and the impact the tax reform will have on Fitch's credit analysis varies by company and industry. While the reform contains measures that will affect the entire corporate spectrum, there are specific measures focused on certain industries. Fitch believes that the impact of the reform on a company's financial profile will greatly depend on its ability to transfer higher costs to the final price. Likewise, management's decisions with respect to dividend policies and debt structure will also be relevant to Fitch's analysis.
Fitch expects the tax reform to have some impact on investment plans; the potential increased costs could lead companies to evaluate new investments. However, Fitch believes this impact will be less significant amongst the larger companies it rates.
The implementation speed of the reform's various measures could dilute the negative impact on credit profiles. A slower implementation would allow entities to make adjustments to their operations and adapt to the changes, thus mitigating the effects on cash flow and profitability.
Fitch will continue to monitor and assess the impact of the tax reform as more details of the final package are available. For more details, please see Fitch's report 'Reforma Tributaria: Empresas Enfrentarian Presiones Sobre Flujo de Caja y Dividendos'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Reforma Tributaria: Empresas Enfrentarian Presiones Sobre Flujo de Caja y Dividendos' (April 9, 2014).
Applicable Criteria and Related Research:
Reforma Tributaria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=745936
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