Announcement on new tax
On June 21 2018, the Chilean finance minister announced that
the government was intending to apply a tax on the DE. He
stated: "We have decided to include the taxation of
the digital economy in our tax modernisation. We believe that
companies … will be taxed, contributing to the
development of Chile and levelling the 'playing field' with
regard to their competitors."
The minister mentioned that specific details of the
government's bill would be provided in September. However, he
said that the government was studying what other OECD members
had done in this regard, adding: "We are analysing an indirect
taxation alternative like charging a tax on transactions."
Finally, we cannot ignore the finance minister's comment
that "digital economy companies do not pay taxes (in
Local and international tax systems were designed based on
physical activity in a determined jurisdiction. In this sense,
important tax challenges arise from the DE, which are being
scrutinised by the OECD.
In 2015, the OECD delivered its final report containing 15
actions for addressing BEPS issues. The DE was tackled in
particular in Action 1 (Addressing the tax challenges of the
digital economy) and partially in Action 7 (Preventing the
artificial avoidance of permanent establishment status).
In this sense, Action 1 agreed on:
- Modifying the definition of permanent
establishment (PE): It was also agreed to modify the
definition of PE to address circumstances in which artificial
arrangements relating to the sale of goods or services of one
company in a multinational group effectively resulted in the
conclusion of contracts, such that the sales should be
treated as if they had been made by that company;
- Reducing exemptions to the definitions of
PE: It was agreed to modify the list of exceptions to the
definition of PE to ensure that each of the exceptions
included therein is restricted to activities that are
otherwise of a preparatory or auxiliary character, and to
introduce a new anti-fragmentation rule to ensure that it is
not possible to benefit from these exceptions through the
fragmentation of business activities among closely related
However, it is quite evident that the above actions are not
sufficient, and that they do not include DE companies, which
have no physical presence in a determined jurisdiction.
Likewise, the OECD mentioned that these measures combined
with other BEPS actions would substantially address the BEPS
issues exacerbated by the DE. However, it acknowledged that the
DE raises tax challenges that go beyond BEPS, in particular for
direct tax purposes: (i) nexus; (ii) data; and (iii)
In this regard, Action 1 analysed (i) a new nexus in the
form of a substantial economic presence; (ii) a withholding tax
on certain types of digital transactions; and (iii) an
It is important to bear in mind that when issuing the Action
1 report of 2015, none of the three options mentioned above
were recommended. However, the OECD is engaging in a further
study of the issue, committing to deliver a final report in
Tax challenges arising from digitalisation –
interim report 2018 (OECD)
As we mentioned, a final report will be issued in 2020
however, an interim report was delivered in 2018. The interim
report acknowledges that the OECD needs to gather more input
and to monitor the evolution of the DE in order to have
consensus-based solutions by 2020.
Additionally the OECD is concerned about uncoordinated and
unilateral measures being used before the release of the final
report. In this sense, since some countries are taking interim
measures, they should take into account the following
considerations: (i) be compliant with a country's international
obligations; (ii) be temporary; (iii) be targeted; (iv)
minimise over-taxation; (v) minimise the impact on start-ups,
business creation and small businesses more generally; and (vi)
minimise cost and complexity.
In this regard, the report considers an interim measure in
the form of 'an excise tax on the supply of certain e-services
within the jurisdiction that would apply to the gross
consideration paid for the supply of such
European Union (EU)
The EU is considering short-term and medium-to-long term
The short-term measure would be interim until a final
solution was found, and it proposes an excise tax over the
gross revenues generated by some digital services in which the
value is created through interaction with users on the
On the other hand, the medium-to-long term measures consider
a new PE concept deriving from the 'significant digital
presence' tax proposal; in this sense, it would be fundamental
to identify the jurisdiction where the users operate.
Additionally, the significant digital presence proposal
would require that transfer pricing provisions were adapted to
this new concept.
Finally, it is important to bear in mind that the EU
acknowledges the possibility that the medium-to-long term
measures would affect double tax treaties, thus the latter
would need to be amended.
Status in Chile
For income tax purposes, Chilean sourced income is defined
as being derived from: (i) goods located in Chile; or (ii)
activities developed in Chile.
Additionally, Chilean law also considers the concept of
'payment source' in order to apply withholding taxes to some
payments going abroad.
Permanent establishments are not defined by Chilean law, but
only by certain jurisprudence under which an agent has the
authority to sign binding contracts (or preparatory
documentation) on behalf of its head office. Additionally,
under both this interpretation and the country's double tax
treaties, DE companies usually fall below the threshold of
activity to be considered a PE.
In this sense, a significant digital presence does not
trigger a permanent establishment.
- Payments overseas for commissions are
exempted. By 'commissions', the law is referring to any
payment related to a commercial mandate.
- The scope of exemption is quite broad, for
instance, DE transportation, hospitality and retail companies
could benefit from this exemption.
- Article 7 of all the double taxation
treaties that Chile has entered into: since many of the
services of these companies are rendered completely from
abroad without triggering a PE, they are exempt from taxation
- Therefore, DE companies whose services
cannot be characterised as a commercial mandate might be
subject to double tax treaty exemption under Article 7.
Moreover, most services provided by DE companies might fall
into this category.
- Small and medium-sized enterprises are
exempt from withholding tax.
- Non-customised software: standard software
and related services that are considered indispensable for
its use are exempt.
What happens with services that do not fall within any of
the above mentioned exemptions?
If services cannot be characterised under any of the
exemptions mentioned above, they could either be subject to a
general rate of 35%, or 30% in the case of certain royalties,
or 15% in the case of certain patents, utility models and
software. However, in cases where there is a double tax treaty
in force and services are characterised as royalties as per the
treaty, reduced rates might be available.
Additionally, despite the fact that under Chilean income tax
law the taxpayer of the withholding tax is the non-resident
taxpayer (that is, the DE company), the law provides that the
liability in the first instance for withholding the relevant
tax falls to the Chilean resident payer.
In order to avoid the double taxation of withholding taxes
and VAT, the law provides that services are exempt from VAT
payments subject to withholding tax unless: (i) the services
are rendered from Chile; and (ii) they are exempt from
withholding tax due to an internal provision or a double tax
The above means that payments are exempt, unless both of the
two circumstances mentioned above are met. However, in the case
of DE companies, the first of the circumstances mentioned, that
is, that services are rendered from Chile, is usually not met,
since their services are almost always rendered abroad.
In this sense, under Chilean legislation, DE companies are
not only exempt from withholding taxes but also from VAT.
Additionally, there are exemptions in place for the
importing of goods below certain amounts.
Challenges for Chilean legislation
The government has only recently made these announcements,
and no accurate related information has been provided as
However, the 'indirect taxation alternative of tax over the
transaction' would be in line with OECD's
guidelines on interim measures, including: 'an excise tax on
the gross consideration paid for the supply of such
e-services'. Moreover, this alternative would be
outside the scope of the double tax treaties signed by Chile
since it is not referred to as an income tax.
Even supposing the incorporation of this new tax, Chilean
legislation would still be obsolete for DE purposes, especially
regarding the nexus and PE concepts. In this sense, a more
comprehensive reform would be needed, incorporating a PE for
significant digital presences, or to include the PE concept
within the law. There is also a need for new source rules
regarding digital services to be issued, both from a VAT and
income tax perspective.
Finally, further changes might require that Chile amends its
double tax treaties. In this sense, in our opinion it would be
advisable to wait for the OECD's final report in 2020 before
taking further action, since is possible that any actions
needed would require a multinational effort.
Tel: +56 2 2940 0155
Rodrigo Winter Salgado joined PwC Chile in 2009 and
became a partner in 2016.
He graduated with a law degree from Pontifical
Catholic University and has an LLM in international
taxation from the University of Florida and an LLM in
tax law from the University of Chile.
Raul Fuentes Ugalde joined PwC Chile in 2016.
He graduated with a law degree from Pontifical
Catholic University and is studying for an LLM in
taxation at the same university.