By Fernando Barros, Founding Partner, and Tomás Kovacevic, Senior Associate, Barros and Errázuriz Abogados, Santiago
On April 21, the Chilean tax authority issued Ordinance 26/2021 on the application of VAT to digitized services from abroad such as software, infrastructure or platform services.
The new regulation follows several decisions by the tax authority that provide welcome clarity to withholding tax and VAT rules for digital services.
New regulation
The main purpose of the ordinance is to identify (and instruct) different tax outcomes resulting from the interaction of Chile's income tax law, VAT and tax treaties. Understanding this interaction is a key element in determining the taxation of digitized services from abroad.
Amounts paid to foreign residents for services and royalties (digitized or non-digitized) that are subject to withholding tax are exempt from VAT in Chile. However, if a taxpayer is exempt from withholding tax, VAT will be triggered. The aim of these rules is to avoid the application of both taxes.
The regulation is part of the instructions given by the Chilean tax authority on the changes introduced by the 2020 tax reform. The reform included, among other things, measures to update the Chilean tax system and contained provisions on VAT on digitized services of foreign citizens in accordance with the OECD guidelines, in particular the introduction of a simplified registration and payment mechanism.
Under the new regulation, the payment of a license to distribute software by a resident of Chile to a foreign resident is subject to a 15% withholding tax. On the other hand, paying for a license that grants limited rights to use software – with the exception of any commercial use – is exempt from withholding tax. As a result, the payment is subject to 19% VAT.
If the local dealer later grants a sub-license, that sub-license is subject to VAT. In addition, the distribution fee paid by the foreign service provider to the local dealer is subject to VAT if it is not qualified as an export service by the Chilean customs authorities. Ultimately, the Chilean tax authorities decided that taxation could change under the terms of a tax treaty, although no specific provision of a treaty was referred to.
Chile's digital tax rulings
In 2021, the Chilean tax authority published several rulings on the taxation of digitized services.
In decision 778/2021 of March 25, the CFO of the Chilean Ministry of Sports asked if the Ministry, when paying for a license for Office (Word, Excel, PowerPoint, etc.), a software-as-a, is subject to VAT, is a service provided by Microsoft , a US-based company.
The Chilean tax authority ruled that the license grants limited usage rights without commercial use and is therefore subject to VAT (and exempt from withholding tax). Accordingly, the foreign licensor must register in the simplified mechanism for filing and paying VAT.
In decision 982/2021, dated April 20, a taxpayer asked the tax authorities for guidance on taxing cloud solution services – software-as-a-service – provided by a US-based company that operates through a local distributor is.
According to the judgment, the local distributor was granted a license with limited rights to resell or sublicense, other than permission to reproduce or modify the rights.
The Chilean tax authorities decided that sales through the local dealer are subject to withholding tax as the rights assigned are not limited to their use. However, the tax authority stated that the services would be subject to VAT if provisions of the tax treaty exempted the application of withholding tax. (The decision makes no reference to any specific provision of a tax treaty that may exempt a license or service from withholding tax.)
With regard to the local dealer, the agency confirmed that a sub-license granted to local customers was subject to VAT and overturned a previous decision stating that the "resale" of a license by a local dealer would be exempt from VAT is exempt (rule 810/2020).
In decision 983/2021 of April 20, a taxpayer asked the Chilean tax authority for guidance on taxation of cloud solution services – software-as-a-service – where a foreign resident grants a license with restricted usage rights directly to local customers.
The foreign service provider has also reached an agreement with a company based in Chile to offer services to local customers, to demonstrate the functions and to provide debt collection services. However, the resident company is excluded from any participation in the granting of the license to customers. The local facility fee is calculated as a discount on the total payments to the overseas service provider.
The agency decided that the service is subject to VAT and is exempt from withholding tax as customers have been granted exclusive rights of use. Ultimately, the agency decided that the local business fee must be billed to the overseas service provider and that the provision of such services is subject to VAT.
Chile's taxation of digital services
The publication of the regulation and the decisions provides an insight into the interpretation of the tax regulations applicable to digitized services by the Chilean tax authority.
However, there are other issues that need to be considered that have not been addressed, such as the application of tax treaty provisions and the impact on foreign tax credit rules.
Further information from the Chilean tax authorities on these open issues would be welcome.