To benefit from a double tax treaty (DTT), non-domiciled non-residents of Chile must provide the Chilean payor proof of residency for tax purposes in a country with which Chile has a DTT in force so that they benefit from the application of the DTT.
Following the dispositions of the law, provision of proof is materialised through the delivery of a tax residency certificate which states that the foreign taxpayer is resident in the other country during the relevant dates.
A sworn statement is also necessary which states that the foreign taxpayer is a beneficiary of the DTT and did not have a permanent establishment in Chile during the relevant dates-. Those ‘relevant dates’ are key in order to benefit from the application of the respective DTT.
Situation in 2015
In 2015, the Chilean Internal Revenue Service (IRS) decided that the resident certificate and sworn affidavit had to cover the time in which the income was paid, distributed, withdrawn, remitted, credited to an account or put at disposition.
All those actions (payment, distribution, withdrawal, remittance, crediting to an account or putting at disposition) match the actions that the Chilean Income Tax Law (ITL) identifies as triggering the obligation to withhold taxes when making a payment to a non-domiciled non-resident of Chile.
As noted in our previous article, those actions are not all the actions that serve to determine the rate and amount to be withheld. According to the ITL, the mere action of accounting an expense serves to determine the rate and amount to be withheld, while it does not trigger the withholding obligation.
This detail (that the mere accounting served to determine the tax but does not trigger the obligation to withhold) was previously ignored by the Chilean IRS for purposes of the residence certificate and sworn statements.
It was not in line with the dispositions of the law, nor with other Chilean IRS’ administrative jurisprudence and created a strange scenario where the benefits of a DTT seemed to be available, but technically they were not and vice versa. For further details see our previous article.
Resolutions 151 of 2020 and 58 of 2021
Through the publication of Resolution 151 of 2020 (published in December 2020) and Resolution 58 of 2021 (published in June 2021), the Chilean IRS reconsidered this situation and established that the tax residence certificates and sworn statements required to benefit from a DTT must include the moment in which the additional tax (withholding tax) “is owed, that is, the moment in which the tax obligation arises and its amount being determined, in accordance with the rate, surcharges and other regulations in force at that time, including those cases in that, according to the rules of the DTT, the income will be exempt from taxes in Chile”.
This change is relevant because the situation in which the withholding tax rate and amount is determined by the accounting of the expense and later paid on a different date is far more common than expected.
Such is the case when the expense is accounted as an expense in the debtors accounting but paid at a later date. There could be days, months or years of difference.
There are arguments to suggest that the new criterion may not be enforceable to payments before the publication of each resolution, but the door is open for some retroactive effect when the accounting of the expense has already occurred before publication, but the payment abroad occurs after the publication of the resolution.
Resolution 151 of 2020 establishes that the residence certificate should be available when the tax is determined (which includes the moment in which the expense is accounted for), while Resolution 58 of 2021 establishes that the sworn statement must cover the time in which the tax was determined, but it should be available for the local payor only before the withholding tax is paid by the withholding agent.
Even though control of this situation represents a challenge for tax authorities, this is a matter that needs to be discussed further. The new criterion puts a larger burden on local payors who will face further difficulties when determining and applying withholding tax.
Gregorio Martinez
Senior manager, PwC Chile
