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Chile: Tax treatment for cloud computing services provided without a license

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In June 2016, the Chilean tax authority (IRS) issued a private ruling for the first time regarding payments for the provision of cloud computing services that are not offered by granting a license.

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Elizabeth Paya Escobar

Natalia Núñez Henríquez

Previously, the IRS had decided that the territory where the provision of software as a service (SaaS) takes place is where the copyright owner was domiciled. However, uncertainty remained about how the criteria could also be applied to cloud computing services that don't imply the transfer of any right to use intellectual property, e.g. advertising, hosting, or database access, among others. As this issue may impact both income tax and VAT, several topics where analysed by the IRS, which reached the following conclusions:

Income tax treatment of services provided through foreign servers

The IRS indicated that payments received by a Chilean company that provides services including network technical assistance and technical support, with the occasion of hosting services or using software installed in a cloud that operates in servers outside the country, are eligible for an income tax credit (ITC).

This statement means that because the ITC is granted to taxpayers domiciled or resident in Chile for all incomes regarding the cession of the right to use brands, patents, formulas, technical advice and other similar provisions obtained from abroad, there is no relevance in determining the territory of where the server is located.

Similarly, if there is an agreement for the avoidance of double taxation (DTA) in force between Chile and the payer's country, even if the server where the software is installed is located in a third country, the payment will still be eligible for an ITC.

VAT treatment of international payments relating to digital services

On VAT, the IRS said that payments made from Chile for digital services – that are not licensed – provided abroad, but used in the country, are subject to VAT according to general rules, i.e. if they are included among activities listed in Articles 20, No. 3 and 4 of the Income Tax Law (ITL).

However, VAT will not apply if those incomes are already subject to withholding tax as defined in the ITL, or exempt from withholding tax in line with domestic laws, or an effective DTA, on condition that services are not provided in Chile.

Similarly, the exportation of cloud computing services that are provided without granting a license will be subject to VAT if they are developed or provided in Chile and are included among activities listed in Articles 20, No. 3 and 4 of the ITL. However, VAT exemption will apply if the activities qualify as a service exportation by the Chilean Customs Service.

In conclusion, even though the IRS has provided some guidance on the subject, it still neglected to determine how to define the place where the service is provided when there is no license involved. Therefore, there is still some uncertainty on the matter that needs to be resolved in the future.

Elizabeth Paya Escobar (elizabeth.paya@cl.pwc.com) and Natalia Núñez Henríquez (natalia.nunez@cl.pwc.com)

PwC

Website: www.pwc.cl

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