By Fernando Barros, Founding Partner, and Tomás Kovacevic, Senior Associate, Barros y Errázuriz Abogados, Santiago
On April 21, the Chilean tax agency issued regulation 26/2021 on the application of value-added tax (VAT) to digitalized services provided from abroad, such as software, infrastructure, or platform services.
The new regulation follows several tax agency rulings that add welcome clarity to the withholding tax and VAT rules applicable to digital services.
New regulation
The main purpose of the regulation is to recognize (and instruct on) different tax outcomes that arise from the interaction of Chile’s income tax law, VAT, and tax treaties. Understanding this interaction is a key element for determining the taxation of digitalized services provided from abroad.
Amounts paid to foreign residents for services and royalties (digitalized or not) that are subject to withholding tax are granted a VAT exemption in Chile. However, if a taxpayer is released from withholding tax, VAT is triggered. The objective of these rules is to avoid the application of both taxes.
The regulation is part of the instructions that the Chilean tax agency has issued on the amendments introduced by the 2020 tax reform. Among other measures updating the Chilean tax system, the reform included provisions for value-added taxation of digitalized services provided by foreign residents, following the OECD guidelines, particularly the implementation of a simplified registration and payment mechanism.
According to the new regulation, payment by a Chilean resident to a foreign resident for a license for distributing software is subject to a 15% withholding tax. On the other hand, a payment for a license that grants limited rights for using software – excluding any commercial exploitation – is exempt from withholding tax. As a result, the payment is subject to VAT at a 19% rate.
If the local distributor subsequently grants a sublicense, such sublicense is subject to VAT. In addition, the distribution fee paid by the foreign service provider to the local distributor is subject to VAT if not qualified as an exportation service by the Chilean customs agency. Finally, the Chilean tax agency ruled that the taxation may change under the provisions of a tax treaty, though no specific provision of a treaty was referenced.
Chile digital tax rulings
In 2021, the Chilean tax agency published several rulings on the taxation of digitalized services.
In ruling 778/2021 of March 25th, the Chief Financial Officer of the Chilean Sport Ministry asked if the Ministry is subject to VAT on payment of a license for Office (Word, Excel, PowerPoint, etc.), a software-as-a-service provided by Microsoft, a United States resident company.
The Chilean tax agency ruled that the license grants limited rights of use, excluding commercial exploitation, and therefore, it is subject to VAT (and exempt from withholding tax). Accordingly, the foreign licensor must register in the simplified mechanism for filing and payment of VAT.
In ruling 982/2021 of April 20th, a taxpayer requested the tax agency for guidance on the taxation of cloud solution services – denominated software-as-a-service – provided by a resident of the United States that operates through a local distributor.
According to the ruling, the local distributor was granted a license with limited rights to resell or sublicense, excluding authorization for any reproduction or modification of the rights.
The Chilean tax agency ruled that the sale through the local distributor is subject to withholding tax, as the assigned rights are not limited to its use. However, the tax agency declared that if any tax treaty provisions exempt the application of withholding tax, the services would be subject to VAT. (No references are made in the ruling to a specific provision of a tax treaty that may exempt a license or services from the application of the withholding tax).
In relation to the local distributor, the agency confirmed that a sublicense granted to local customers is subject to VAT, reversing a previous ruling that declared that the “resale” of a license by a local distributor was exempt from value-added tax (ruling 810/2020).
In ruling 983/2021 of April 20th, a taxpayer asked the Chilean tax agency for guidance on the taxation of cloud solution services – denominated software-as-a-service – in which a foreign resident grants a license with limited rights of use directly to local customers.
The foreign service provider also has an agreement with a Chilean resident company to offer services to local customers, demonstrating the functions, and providing collection services. However, the resident company is excluded from any participation in granting the license to customers. The local entity’s fee is determined as a discount of the total payments carried out to the foreign service provider.
The agency ruled that the service is subject to VAT and exempt from withholding tax, as exclusive rights of use were granted to customers. Finally, the agency ruled that the local company’s fee must be invoiced to the foreign service provider and the provision of such services is subject to VAT.
Chile’s taxation of digital services
The publication of the regulation and rulings provide insight into the Chilean tax agency’s interpretation of the tax rules applicable to digitalized services.
However, other aspects must be considered that have not been addressed, such as the appication of tax treaty provisions and effects on foreign tax credit rules.
Further guidance on these open topics from the Chilean tax agency would be welcome.
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