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Chilean withholding tax of 35% on outbound payments for video games

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Bearing in mind that nowadays more than half of the population of the US plays video games and that live gaming events have been watched more than the NBA finals, the importance of the video game industry and its impact on the market has increased substantially during recent years.

Nearly 80% of the transactions in certain mobile app markets relate to video games.

It would be reasonable to expect, therefore, that governments would begin to show more interest in the taxation of the video game industry, which may, as we have mentioned, represent an important income flow for a country's treasury.

As regards the Chilean tax framework, the tax on an outbound payment in relation to video games depends on its qualification for legal purposes. Until now, the majority of local tax professionals were of the opinion that such a payment should be characterised as a payment for the use of standard software, which is exempted from Chilean withholding tax.

As far as standard software license is concerned, it is defined according to the usage rights that are provided, limiting them to only the relevant rights necessary for the use of the software program and not for other purposes, for example for the program's commercial exploitation, reproduction or modification.

However, a recent ruling of the Chilean Internal Revenue Service (IRS) stated the tax administration's opinion on the matter, establishing that the standard software exemption does not apply to payments sent overseas in relation to video games. This opinion was provided in the context of video games that are obtained from the internet, that can be used either by connecting to the internet or by downloading the games, with payment being made through a periodical subscription or through in-game payments in the context of free to play games.

In the IRS' view, video games consist of a set of instructions, images and sounds, with the purpose of obtaining entertainment and recreation, for use on computers or other devices. The IRS recognised that video games require a software support, but also deemed that the real nature of the transaction was not limited simply to an item of software. Rather, the IRS viewed it as a complex piece of work that involved artistic creation including concepts of an environment, characters, and history, with the intention of communicating ideas and allowing the interaction of the user with the virtual world and other users.

Hence, the IRS concluded that the payment for the provision of a video game should qualify as a payment for an entertainment and recreation service, falling under the generic taxable event of 'services rendered abroad', and subject to a 35% withholding tax. The foreign beneficiary of the payment and the local withholding agent are responsible for the payment of the said tax obligation.

The criterion on which the IRS based its ruling on this matter was not well received by the video game industry or by tax specialists. The fact that a video game could be considered as a service rather than as an intangible asset involving standard software appears rather outdated and not in line with prevailing views within the technology industry.

We do not expect that this discussion on the qualification of these and similar digital products will end any time soon. This is just a demonstration that technology moves faster than our local legislation, and there is still a lot of work to do in adapting the Chilean tax rules to the reality of this industry.

Astrid Schudeck and Gregorio Martínez

PwC

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