As is often the case, the reality and development of technological advances is faster than the legislation, particularly tax law.
The digitalisation of the economy has been a key focus of tax debates in recent years. Political debates have focused on the differences between taxing physical business operations and virtual operations.
A tax reform was discussed and approved in Chile in 2020, which was published through Law 21,210 on tax modernisation. In the middle of the tax reform discussion, the idea of an indirect and single tax was raised, which finally resulted in a VAT that is applicable to certain digital services.
Foreign digital service suppliers that provide services to Chile must apply, collect and remit 19% VAT on certain digital services (since June 1 2020).
According to Article 8 letter n) the following services performed by providers domiciled or resident abroad are subject to VAT:
- The intermediation of services rendered in Chile, whatever their nature, or of sales made in Chile or abroad provided that the latter give rise to an import;
- The supply or delivery of digital entertainment content, such as videos, music, games or other analogues, through downloading, streaming or other technology, including for these purposes, texts, magazines, newspapers and books;
- The provision of software, storage, platforms or computer infrastructure; and
- Advertising, regardless of the means through which it is delivered, materialised or executed.
Thus, one of the digital services to which this new taxable event is applicable is ‘cloud computing services’.
Cloud computing provided as a service is typically divided into three service models:
- Infrastructure-as-a-Service (IaaS);
- Platform as-a-Service (PaaS); and
- Software-as-a-Service (SaaS).
Even though the solutions offered under each of the three service models may vary significantly, the essential difference is the user’s authority and control.
Cloud services are services available through a remote cloud computing server rather than an on-site server. These scalable solutions are managed by a third party and provide users with access to computing services over the internet.
In Chilean legislation there is an intricate relationship between VAT and withholding tax (WHT) to determine whether any payment abroad is subject to VAT. Therefore, it is key to consider the interpretation made by the Chilean IRS regarding software-related services and how they are affected by WHT.
In general terms, the services that are subject to the WHT of Article 59 of the Chilean Income Tax Law (ITL) are exempt from VAT.
‘Software’ is defined under Article 59 as the group of instructions to be used in a direct or indirect way in a computer or processor, with the purpose of performing or obtaining a determined process or result, contained in a digital or intangible support. Such rule levies the amounts paid for the use, enjoyment or exploitation of software with WHT at a 15% rate.
Regarding ‘standard’ software, in the same Article 59, the Chilean ITL defines them as software in which the license granted only allows its use and not its commercial exploitation, nor its reproduction (i.e. copy) or modification with any purpose other than enabling the software to be used. A WHT exemption is provided for amounts paid in consideration for the use of standard software.
In this way, the transfer of a license for a non-standard computer program, which is subject to WHT, will be exempt from VAT. On the contrary, the assignment of a license of a standard computer program, or the standard SaaS that is exempt from WHT, will be subject to VAT.
Although the ITL does not refer to SaaS, the Chilean IRS interpreted that the treatment of standard software should be applied not only to on premise software but to SaaS as well.
In the case of PaaS and IaaS there is no specific applicable income tax treatment in Chilean legislation, so when analysing VAT on digital services we should have concluded that in the case of countries with which Chile maintains a double taxation agreement in force, in most cases it would be interpreted that payments as business profits and therefore payments made abroad for these services are subject to VAT. On the contrary, the payment for such services to countries without a double taxation agreement, as subject to WHT with a general or reduced rate, and therefore exempt from VAT.
Notwithstanding the above, the Chilean IRS recently published the circular letter N° 26 that contains the normative interpretation of the modifications introduced by Law 21,210 to the VAT Law.
In this regard, we can comment that this new regulation makes applicable to PaaS and IaaS the same treatment described above for SaaS, that is, distinguishing whether the remuneration is paid for the use of ‘standard’ software or for its commercialisation, i.e. SaaS, PaaS and IaaS remunerations that are paid to providers domiciled or resident abroad that only allow the use of them are exempt from WHT and therefore subject to VAT.
Without trying to argue that a SaaS is not the same as IaaS or PaaS, we understand that there are tax policy reasons to standardise and simplify the treatment of cloud computing services when they are not used for commercial purposes.
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