This content is from: Chile

Chile: Chile’s new DTAs in force: Argentina again

Sandra Benedetto BJonatan Israel N

Since the end of 2016, Chile's already wide network of agreements for the avoidance of double taxation (DTAs) adds a couple of new treaties. These include Japan, Czech Republic and Italy, which are effective from January 1 2017. In addition, from November 2016, the Chile-Argentina DTA was also enacted.

The case of Argentina, one of Chile's neighbouring countries and an important commercial ally in the region specifically in what refers to international trade, is particularly picturesque since this is the second DTA Chile has signed and enforced with its neighbour to the east.

The first Chile-Argentina DTA was signed in 1976 and entered into force at the end of 1985. This particular DTA was not under the OECD model tax convention, but under the principle of exclusive taxation at source, more in line with the Andean Agreement model.

After several bilateral meetings to try and update it, including the signing of one modifying protocol, the DTA was terminated by Argentina in 2012. Officially, the Argentinian government at that time argued that the convention was not up-to-date in the most relevant changes to international tax law introduced by the OECD model tax convention. The former Chile-Argentina DTA was lacking, among other things, in what refers to (i) the subjects to whom the DTA would apply to; (ii) the concept of permanent establishment, and; (iii) the non-discrimination clause. On a more specific note, the Argentinean authorities sustained that the convention could have been used to perform tax schemes only aimed to obtain treaty benefits that, according to them, would wind up in the Argentinian Treasury losing millions in tax revenue.

Even though the new Chile-Argentina DTA is based on the OECD's model tax convention, there are certain singularities that set this particular DTA apart.

The new DTA is proof that the contracting states intend to include one of the OECD's recommendations on the prevention of granting improper treaty benefits, as was included in the multilateral convention to implement tax treaty related measures to prevent BEPS (MLI), which in this case means the inclusion of a limitation-on-benefits rule (LOB). In accordance with the recommendations of the BEPS final report on Action 6, the inclusion of LOBs in the model tax convention, accompanied by local general anti-abuse rules, can in certain cases help create a legal framework that prevents the granting of treaty benefits in inappropriate circumstances.

The Chile-Argentina DTA includes the LOB. The approach undertaken in this LOB is mainly based on the US model. Nevertheless, a noticeable change to this particular model is that it includes, in a not so straight-forward manner, a principal purpose test (PPT) clause in paragraph 7 of the referred article. In contrast, the Japan and Italy conventions limit the anti-treaty abuse approach solely by including the PPT clause separately.

This provision is particularly relevant taking into account that according to Chile domestic law, those taxpayers subject to the partially integrated income system can still have a full credit for the taxes paid at the corporate level when distributing profits to abroad as long as they reside in a country with which Chile has a DTA in force and they are beneficiaries of it. If that is the case, their total tax burden will remain at 35% instead of 44.45%.

It remains to be seen how this LOB will be applied by the tax authorities of both countries when needed. It will be particularly interesting to see its interaction with both the Chilean general anti-avoidance rule and the rule for granting credits for the Chilean first category tax (at corporate level) for residents in countries with a signed DTA with Chile. These changes spurred by the BEPS actions have reached Chile and we are constantly watching their development.

Sandra Benedetto B ( and Jonatan Israel N (
PwC Chile

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