By way of background, VAT is levied at a flat rate of 19 percent on the recurrent sale of tangible goods located in Chilean territory and on the supply of certain services rendered or used in Chile. A service is deemed to be rendered in Chile when the activity that generates the service is provided in Chile (regardless of where the service is actually used). VAT is applied to such services irrespective of whether the remuneration for these services is paid or received in Chile or abroad.
Prior to the introduction of the recent reforms, Chilean VAT law provided that VAT exemption should apply to services rendered in Chile where payments made in respect of these services to non-residents were already subject to withholding tax (under Article 59 of the Income Tax law). The aim of the provision was to avoid overseas payments being subject to both VAT and withholding tax. However, in practice, the exemption from VAT was frequently applied regardless of whether withholding tax was effectively paid. The reforms recently introduced incorporated a limitation on the application of the VAT exemption which seeks to ensure that it is applicable only to cases where withholding tax has actually been applied to the remittance.
The original wording of the VAT provision stated that the VAT exemption was applicable to “profits that are not considered income according to Article 17 of the Income Tax law and those subject to withholding tax provided in Article 59 of the same law”. The revised law, in force since 1 January 2013, furthermore requires that in order for VAT exemption to apply, payments made in respect of such services must not be exempt from withholding tax by virtue of a double tax treaty or other legal exemption.
The foregoing amendment reflects the spirit of the exemption as the original aim of the provision was that such transactions are subject to either VAT or withholding tax but not exempted from both. The Chilean tax authorities are actively enforcing the provisions introduced by the tax reform. Non-resident businesses should therefore be aware of these changes and in particular, they should be aware of the risk that the limitation of the VAT exemption could result in a non recoverable Chilean VAT cost arising on services acquired in Chile in addition to the possibility of double taxation (e.g. if the service is used and taxed again in an overseas jurisdiction).