Luis Avello

Before January 9 2007, the withholding tax rate applied to services, distinguished between technical assistance and engineering services; and non technical services to determine the tax rate applied. At the time, technical assistance services and engineering services benefited from a lowered withholding tax rate of 20% in comparison with non technical services or non engineering services, which were subject to the general 35% rate. In this sense, the historical interpretation held by the Chilean Internal Revenue Service (SII) regarding technical assistance services was that technical assistance services were technical or professional services that a person with specific knowledge of a science or technique renders throughout a recommendation, report or blueprint (private ruling number 4.587 of 2000).

The criteria used by the SII at the time was that technical assistance included only consulting services rendered through a report, but excluded any activity that went beyond the mere advice, such as any task that include the partial or total execution or implementation of the advice rendered.

In 2007 the income tax law was amended distinguishing between engineering, technical work, professional and technical services and other non technical or non professional services or work. The amendment subjected engineering, technical work, professional and technical services to a 15% rate (or 20% in case service provider and Chilean payer were related entities). The importance of the amendment was that it broadens the scope of services which could benefit from the lowered 15% rate, in comparison with the general rate, including not only the technical services (which were equal to the prior technical assistance) but also professional services and technical work. Therefore, any work or task that has a technical nature, benefited from the lowered rate.

The amendment of the income tax law did not include an amendment of the double taxation and foreign tax credit rules. Before 2007, technical work did not benefit from foreign tax credit, since it was only restricted to technical assistance. The question that arose at the time was, can technical work also benefit from the foreign tax credit?

This situation changed with the issuance of private ruling number 2.808 of 2009. This private ruling states that maintenance or repair of machinery located abroad is comprised in the term "other similar renderings" and as such, can benefit from the tax credit for taxes paid abroad. The importance of this ruling is that it broadens the scope of services which can benefit from the foreign tax credit, including not only technical assistance but also work of technical nature. Therefore, as of this date companies that receive foreign source income from work of a technical nature, can use foreign taxes paid in the country of source as a tax credit in accordance with article 41 A letter C of the income tax law. Now, as an example, it would be possible to obtain foreign tax credit in case of the repair or maintenance of machinery located abroad.

Luis Avello (luis.avello@cl.pwc.com)