Chile: VAT reform on exempted services

Sandra Benedetto		Sharoni Rosenberg

Law N° 20.630, passed last year, is considered the biggest Chilean tax reform in years , which as such contemplated several changes in the income tax regime, introduced transfer pricing regulations, and modified stamp tax rates, among others.

Regarding VAT, it modified Article 12, letter E, N°7 of Decree Law No. 825. Previous to the amendment, such rule established that income subject to additional tax under article 59 of the Income Tax Law, were exempted of VAT. In particular, in case of services, it mainly referred to services provided abroad along with engineering or technical work and professional and technical assistance, irrespective of the place where they were provided.

These remunerations were usually levied with additional tax as withholding in Chile. Even though they referred to different kind of taxes, the spirit of the exemption was to avoid that the same payment made to abroad was levied with both, withholding tax and VAT.

The tax reform modified the VAT exemption by establishing that the remuneration of those services contained under article 59 of the Income Tax Law that because of the application of a Double Tax Convention or the law, were exempted of withholding tax, will not enjoy the VAT exemption, as long as such services are rendered in Chile.

The fact that these services should be rendered in Chile is a matter of much discussion because Article 59 of the Income Tax Law refers, as a general rule, to services that are rendered abroad. The only services that, under such article, could be rendered in Chile are those of technical nature.

Therefore, if we follow the strict wording of the new text of the VAT exemption, it would only restrict its application to engineering or technical work and professional and technical assistance that are rendered within the Chilean territory.

Consequently, if the spirit of this tax modification was to apply VAT in all those situations where the withholding tax is not applicable, such purpose was not successfully achieved.

The application of the exemption will surely be a matter of the pronouncements of the Chilean Internal Revenue Service regarding the tax reform, in the near future.

Sandra Benedetto (sandra.benedetto@cl.pwc.com) and Sharoni Rosenberg (sharoni.rosenberg@cl.pwc.com)
PwC
Tel: +56 2 29400155

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