Tax remedy of cloud computing providers in Chile

19% VAT is charged on certain digital services

As is so often the case, the reality and development of technological progress is faster than legislation, especially tax law.

The digitization of the economy has been a focus of tax debates in recent years. Political debates have centered on the differences between taxing physical and virtual business processes.

In Chile, a tax reform was discussed and approved in 2020, made public through Law 21.210 on the modernization of taxes. In the middle of the tax reform discussion, the idea of an indirect and uniform tax was raised, which eventually led to a VAT that applies to certain digital services.

Foreign digital service providers providing services to Chile are required to apply, collect and transfer 19% VAT on certain digital services (since June 1, 2020).

According to Article 8 (n), the following services provided by foreign or foreign-based providers are subject to VAT:

The mediation of services provided in Chile, regardless of their nature, or sales in Chile or abroad, provided that these lead to an import;
Providing or providing digital entertainment content such as video, music, games or other analogs by downloading, streaming or other technology, including text, magazines, newspapers and books for these purposes;
Provision of software, storage, platforms or computer infrastructure; and
Advertising, regardless of the way in which it is delivered, materialized or executed.

One of the digital services to which this new chargeable event applies are therefore “cloud computing services”.

Cloud computing delivered 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).

Although the solutions offered under each of the three service models can vary significantly, the main difference lies in the authority and control of the user.

Cloud services are services that are available through a remote cloud computing server rather than an on-site server. These scalable solutions are managed by third parties and provide users with access to computer services over the Internet.

In Chilean law, there is a complex relationship between Value Added Tax and Withholding Tax (WHT) to determine whether payments abroad are subject to Value Added Tax. Hence, it is important to consider the Chilean IRS interpretation regarding software related services and their impact on WHT.

In general, the services subject to the WHT of Article 59 of the Chilean Income Tax Law (ITL) are exempt from VAT.

“Software” is defined in Article 59 as the group of instructions intended to be used directly or indirectly in a computer or processor in order to perform or obtain a specific process or result in digital or intangible support. This rule collects the amounts paid for the use, enjoyment or use of software with WHT at a rate of 15%.

With regard to "standard software", the Chilean ITL defines it in the same Article 59 as software in which the license granted is for its use only and not for its commercial use, as well as its reproduction (ie copy) or modification for any purpose other than enabling it to be used Software. A WHT exemption is granted for amounts that are paid in return for the use of standard software.

In this way, the transfer of a license to a non-standard computer program subject to the WHT is exempt from VAT. On the contrary, the assignment of a license to a standard computer program or the standard SaaS exempt from WHT is subject to VAT.

Although the ITL does not refer to SaaS, the Chilean IRS interpreted that the treatment of off-the-shelf software should be applied not only to on-premise software but also to SaaS.

In the case of PaaS and IaaS, there is no specific applicable income tax treatment in Chilean law. When analyzing VAT on digital services, we should therefore have drawn the conclusion that in countries with which Chile has a double taxation treaty in force in most cases, it is interpreted that payments are made as corporate profits and therefore payments abroad for these services of VAT subject. On the contrary, payment for such services to countries without double taxation treaties is subject to WHT at a general or reduced rate and is therefore exempt from VAT.

Notwithstanding this, the Chilean IRS recently published Circular No. 26, which contains the normative interpretation of the changes introduced by Law 21.210 to the Value Added Tax Act.

In this context we can point out that this new regulation for PaaS and IaaS applies the treatment described above for SaaS, ie differentiates whether the remuneration is paid for the use of "standard" software or for its marketing, ie SaaS, PaaS – and IaaS fees that are paid to providers domiciled or domiciled abroad who only allow their use are exempt from WHT and are therefore subject to VAT.

Without arguing that a SaaS is not the same as IaaS or PaaS, we understand that there are tax policy reasons to standardize and simplify the treatment of cloud computing services when they are not used for commercial purposes.

Loreto Pelegrí

Partner, PwC

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