The Chilean IRS issues guidelines regarding new VAT on Digital Services

In this context, the Chilean IRS has made available for public consultation a draft of what would be the official guidelines on the matter (the “Guidelines Draft”), summarizing the VAT Law amendments introduced by the Tax Modernization Law and interpreting how the new regulations would be implemented.

The VAT amendments rules have already entered into force on the 1^st of June of 2020. Accordingly, in light of these new regulations, the taxation of several cross-border services will have to be reviewed, but, particularly, those related to the so-called “digital economy” (i.e. software, cloud computing, entertainment platforms, etc.).

New VAT taxable events

The Tax Modernization Law established as new VAT events, the following services provided from abroad:

1. Intermediation for services provided in Chile, regardless of their nature and intermediation for sales performed in Chile or abroad, if in this latter case they create an import;
2. Supplying or delivering digital entertaining content such as videos, music, games or similar others, through downloads, streaming or other technologies, including for this purpose texts, magazines, newspapers, and books;
3. Making available software, storage, platforms or computing infrastructure;
4. Advertising, regardless of the format or media in which it is delivered, materialized, or executed.

The new tax framework

Before the Tax Modernization Law, services rendered from abroad could have been subject to Additional Withholding Tax (at rates assessable on a case-by-case basis depending on the nature of the service), and therefore exempted from VAT (19%).

Notwithstanding, there were situations where neither the Additional Withholding Tax applied, as happened regarding services rendered from abroad exempted from Additional Withholding Tax due to double taxation treaties and/or exemptions provided by Chilean local tax laws.

Some typical examples in which verified this “double tax exemption” regarded to “standard software” fees and intermediation fees collected by “digital platforms”. Nonetheless, because of the new framework introduced by the Tax Modernization Law, except for certain professional services rendered from countries with which Chile has entered into double taxation treaties, the “double tax exemption” will no longer be available for services used within Chilean territory.

Considering the abovementioned, taxpayers that have entered or are planning to enter into agreements involving such kind of services should carefully revise the potential tax effects that as of the 1^st of June such services may arise. In some cases, VAT will be applicable, while in others, the application of the Additional Withholding Tax will prevail.

The analysis at hand is important not only for determining potential withholding requirements or for VAT invoicing obligations, but also for evaluating the financial impact of such taxes (ie. VAT paid may qualify as VAT credit to offset against monthly VAT debits, whereas the Additional Withholding Tax would need to be expensed for corporate tax purposes). 

Filing and compliance requirements

For regulating the filing and payment requirements regarding the VAT applicable over the new taxable services mentioned, the Tax Modernization Law distinguishes depending on whether or not the beneficiary of such services has the condition of VAT taxpayer.

I. Non-VAT taxpayer beneficiaries

The Tax Modernization Law set up a special simplified VAT filing regime for non-domiciled non-resident service providers.

In this regard, although the law provides that said regime would only apply to services rendered by non-domiciled non-resident providers to local non-VAT taxpayer individuals, the Guidelines Draft has broadened the application of the simplified filing regime to foreign resident taxpayers rendering services to Chilean resident non-VAT taxpayers legal entities (such as companies).

The Chilean IRS extensive interpretation would facilitate complying with tax-filing requirements in these cases. Indeed, should this interpretation had not been included; the aforementioned non-resident non-domiciled service providers would have had to file VAT as regular Chilean resident VAT taxpayers.

Therefore, regarding the cases at hand, for applying the simplified regime, non-resident non-domiciled taxpayers shall follow the regulations set forth by the Tax Modernization Law, the Guidelines Draft, and Resolution Nº 55/2020, which regulate the registration in the simplified tax regime.

II. VAT taxpayer beneficiaries

Following the change of taxable subject set forth by the Tax Modernization Law, the Guidelines Draft confirms that regarding the new taxable events therein regulated, Chilean local VAT-taxpayers replace non-domiciled non-resident service providers as VAT taxable subjects.

Therefore, in such cases, instead of the simplified regime above mentioned, the Chilean resident or domiciled VAT-taxpayer will have to issue a purchase invoice charging the applicable VAT, which would qualify as VAT credit to be offset against monthly VAT debits. 

Considering the above, local VAT-taxpayers should be especially aware of these new VAT related obligations, which did not apply before the Tax Modernization Law.

Conclusions

As the Guidelines Draft confirms it, the Tax Modernization Law has introduced deep adjustments to the tax framework applicable to cross-border services, and, particularly, regarding intermediation services, software and digital platforms services, digital entertainment content and, advertising.

Many of these services had been benefiting from a “double exemption” from both Additional Withholding Tax and VAT. However, in light of the new tax framework applicable as of the 1^st of June, taxpayers should review their service agreements and analyze how the new rules will impact their current tax status.