Chilean IRS interprets the new VAT rules on digital services

The Chilean Internal Revenue Service (IRS) have published a draft of the Circular Letter containing their interpretation on several matters associated to the new VAT rules on digital services, pursuant to the modifications introduced to the VAT laws by the tax modernisation law.

The draft clarifies the identity of the taxpayer in the applications (apps) market and extends the simplified regime. There is expected to be no deferral of the law’s entry into force. 

Below, the main practical issues that needed to be solved and the strategic approach of the Chilean IRS, are explained in further detail. 

Marketplace obligations

There is no special rule concerning the identity of the taxpayer for VAT on digital services. Pursuant to general VAT rules, the taxpayer is the service renderer. 

Applying such a rule to the business of apps sold through ‘app stores’ - which for these purposes are considered a digital entertainment service rendered by the developer - means that the developer would be the VAT taxpayer.

Compliance by the developers and control by the Chilean IRS would be fairly complicated, considering there are millions of developers all over the world.

In the Circular Letter draft, the Chilean IRS takes a position that would simplify the situation, by interpreting that the marketplace in which the apps are sold appears as the service renderer and collects the price of the service on behalf of the actual service renderer (i.e. the developer), thus, the marketplace becomes the taxpayer and has to charge and pay the corresponding VAT.

Although the interpretation of the Chilean IRS may be questionable from a legal point of view, it is seen as a practical solution.

Cloud computing 

A new taxable event is making software, storage, platform or information technology (IT) infrastructure available.

The Circular Letter draft provides practical examples and explains that this taxable event includes different models of operation of the so-called cloud computing, including software as a service (SaaS), which is understood as the online use of software stored in the cloud, platform as a service (PaaS), which is understood as a platform or environment that allows developers to create applications, and infrastructure as a service (IaaS) which is understood to provide access to digital storage or processing capacity.

Also, it interprets that software licences - standard or not - are included in this taxable event.

Services utilised in Chile 

The VAT law sets forth a presumption of utilisation in Chile regarding all new taxable events when provided in a digital form upon the fulfilment of certain requisites.

The Circular Letter draft establishes that those requisites shall be met either when contracting the service or at the payment, whichever occurs the latest, allowing to request a VAT refund if VAT is charged for initially complying with the presumption but requisites are not met when the latest event occurs.

Exemption of VAT interaction with withholding tax and standard software

The tax modernisation law includes an exemption of withholding tax on digital services in case the beneficiary is an individual who is not a VAT taxpayer.

The Circular Letter draft would confirm such treatment, concluding that in any other case, even if the service beneficiary is a legal entity non-VAT taxpayer, then general rules apply, and therefore, withholding tax applies with preference over VAT.

In this context, the Circular Letter draft confirms that payments made to abroad for standard software licenses are levied with VAT as a consequence of being exempt of withholding tax.

Simplified regime scope

The VAT law sets forth a new simplified regime for VAT compliance, available for non-domiciled or non-residents that carry out operations falling under the new taxable events, either provided or utilised in Chile by individual non-VAT taxpayers.

The law did not set forth a specific VAT compliance regime in case of digital services rendered to an entity non-VAT taxpayer.

In the Circular Letter draft, the Chilean IRS takes the position that the simplified regime is also available for digital services rendered to entities which are non-VAT taxpayers. 

In the same line as above regarding marketplaces, although the interpretation of the Chilean IRS on the scope of the simplified regime may be questionable from a legal point of view, it is seen as a practical solution.

Regarding the registry itself, the Chilean IRS recently issued instructions regarding how systems work, establishing the enrolment process through the Chilean IRS’s website.

Reverse charge

The reverse charge mechanism has also seen changes.

Previously, it was applicable whenever VAT levied a service rendered by a service provider domiciled and resident abroad. Besides that requisite, the service beneficiary needs to be a VAT taxpayer.

Such a change is in line with the Chilean IRS’ interpretation of the application of the simplified regime. Thanks to the extension proposed, there will be a simplified regime when the beneficiary of the digital service is a non-VAT taxpayer (individual or entity) or the reverse charge mechanism when the beneficiary is a VAT taxpayer (individual or entity).

Entrance into force of new rules

The Chilean IRS are set to confirm that there is no deferral, so therefore these modifications will enter into force on June 1 2020.

Regarding the simplified regime, service providers can elect to pay either every month or every quarter. If a quarterly-based compliance is elected, the Chilean IRS has granted the benefit that June 2020 can be complied together with Q3 (four months in total), declaring and paying such VAT in October 2020, instead of July 2020.

Gregorio Martínez

T: +56 2 29400633

E: gregorio.martinez@pwc.com

Gabriela Varas

T: +56 2 29400633

E: gabriela.varas@pwc.com