As a general rule, payments from Chile to abroad for services are usually exempted of VAT, as long as certain requirements are met. As reported by PwC Chile in ITR during July 2019, the tax modernisation bill under discussion would bring changes to the VAT exemption applicable on payments to abroad, by modifying the requirements for the exemption to proceed.
According to the rules in force, the exemption to apply requires that the amount is subject to additional tax (Chilean withholding tax) or, in case the payment is not subject to additional tax (due to the application of a legal exemption or due to the application of a double tax treaty), that the service is rendered abroad. Then, services that are rendered in Chile and not levied with additional tax, are therefore subject to VAT, as long it is a VAT levied service.
In this regard, it should be noted that not all services are subject to VAT. Only the services contained in number 3 and 4 of Article 20 of the Chilean Income Tax Law are levied with VAT, among which it can be found: commerce, banks, construction, marketing, television, automatic processing of data, telecommunications, labs, entertainment, etc.
The modification under discussion would state that, in order to benefit from the exemption, the services must not be rendered nor utilised in Chile. In the previous report, PwC Chile emphasised that this change could affect payments for standardised software to abroad. This briefing analyses other payments that may be affected by the change under discussion.
Understanding the changes
To fully interpret the extent of the above-mentioned modification, it is crucial to be knowledgeable of what the Chilean Internal Revenue Service (IRS) has understood for the place of utilisation of a service.
On this matter, the Chilean IRS has taken the position that a service is deemed to be utilised where the beneficiary of the service is domiciled and where it develops its business (rulings 1484 and 1920 both of 2015 of the Chilean IRS, among others).
One may ask about the appropriateness of the above criterion, particularly since it implies that every time a Chilean taxpayer receives a service from abroad, it must be concluded that the services are utilised in Chile, only due to their domicile, and it doesn't even consider the physical location of the taxpayer at the moment the service is provided, nor where the service is materially used or the purpose of the service.
Then, following the Chilean IRS criterion, we can review some services exempted of additional tax:
Commissions, when someone entrust the execution of a business to another, as defined by the Chilean IRS. Whenever an exporter entrusts the sale of their products to a third party, the payment of such service is exempted from additional tax.
Marketing related to exportation of products or services.
Questions on applicability
With the proposed modifications, all of the examples above are to be considered VAT levied services if the beneficiary has domicile in Chile, since the place of utilisation is bounded to the domicile, according to the Chilean IRS.
Furthermore, income exempted from additional tax due to the application of a double tax treaty may also be affected with VAT, as long as it is a VAT service. That, added to criterion regarding utilisation, provides for interesting cases.
For example, as per the rules described above, if a Chilean taxpayer requests for construction work to be performed in Spain by a Spanish resident, would the payment for the construction service be subject to Chilean VAT considering that the remuneration is to be deemed as a business profit in the context of the Chile-Spain double tax treaty?
In a similar context, what if the service requested is freight transport performed abroad? - again, delivered by a resident of a country with which Chile has a double tax treaty.
There are several cases still to be reviewed and the full extent of the VAT exemption modification proposed in the tax modernisation bill is still to be fully comprehended. Once the tax bill is passed, there will be important work to be done by the Chilean IRS to provide clarity over the matter to the taxpayers.
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