Digital Services Tax in Chile
In June of 2020, a new 19% VAT on digital services was introduced in Chile. At the time it was nicknamed the “Netflix” tax, but the new law has far reaching effects on all companies that provide software as a service to Chilean residents and companies.
There are many foreign companies that provide their software and solutions by digital means to Chilean residents and companies who will be affected by the new law. It also means that previous tax structuring where companies who may have had local operations but chose to invoice for their software from abroad, may no longer be the most tax efficient.
We have provided an outline of the most issues to help management teams understand the new changes.
What is the new change in Law?
As per Law No. 21,210 of February 24, 2020, VAT would not now be charged on all “digital services” provided to Chilean consumers. The legislation establishes a simplified VAT regime for foreign service providers to report and pay the VAT collected to the tax authorities (IRS). This regime applies to foreign service providers that render digital services to individuals located in Chile that are not VAT taxpayers themselves.
How was digital service treated before the new law?
Under the previous system, when the service provider did not have either an address or residence in Chile, the services rendered were affected by withholding taxes which were to be paid by the Chilean resident.
(i) The use of standard computer programs was exempt from Additional Tax or WHT. – Standard software was understood to be that in which the rights transferred are limited to those necessary to allow its use, and not its commercial exploitation, nor its reproduction or modification for any other purpose than to enable it to be used.
(ii) The use of Non-standard software is subject to a 15% Additional Tax or WHT. – Non-standard software the use, enjoyment, or exploitation of computer programs, understood as a set of instructions to be used directly or indirectly in a computer to carry out or obtain a certain process or result.
What are the details of the new law and how it works?
It is important to note that the purpose of the new law is not to create a double taxation scenario where VAT is being charged in addition to withholding taxes. The taxation that is ultimately applied will depend on the analysis made on a case-by-case basis.
WHT or VAT?
WHT will generally takes precedence over VAT. So, the main modifications regarding standard software and non-standard software are as follows:
Standard software will be subject to VAT to the extent that they are supplied or used in Chile and enjoy an exemption from WHT. The same applies to non-standard software, if it is not subject to WHT under a Double-Tax Agreement (DTA).
As an example, software considered to be for standard according to the definition provided by the same income law, when provided by entities not resident or domiciled in Chile and used in Chile, will be subject to VAT. An example of standard software could be Microsoft’s Office that comes installed in a PC, SAP software, AutoCAD, etc.
Definitions of Digital Services
New Concepts of what are considered “digital services”, which are also levied with VAT, have been established. Digital services relate to the provision of software, storage, IT platforms or infrastructure. It also includes cloud computing, networks, servers, storage, applications, and services, which can be quickly provisioned and released with minimal management effort by the service provider.
Software as a Service or SaaS: The consumer can use the provider’s applications running on a cloud infrastructure. Applications can be accessed from various customer devices through a thin client interface, such as a web browser.
Platform-as-a-Service or PaaS: The consumer can run applications created or acquired by the consumer on the cloud infrastructure, using programming languages, libraries, services, and tools supported by the provider.
Infrastructure-as-a-Service or IaaS: The service delivered to the consumer is the provision of processing, storage, networking, and other critical computing resources where the consumer can deploy and run software, which may include operating systems and applications.
An example of SaaS or Software as a Service would be an online subscription to Office 365, a service received from the cloud, without the need to install the software on the PC. Considering this, companies will have to review to see what services will attract VAT, as opposed to WHT Tax.
Who is responsible for withholding, declaring, and paying the VAT?
The answer to this question depends on if your customer is a registered VAT payer or not.
A) If you’re a foreign company not domiciled or resident in Chile, which provides software service to a Chilean entity that is not a VAT payer, then you have the responsibility to pay the VAT.
B) If you’re a foreign company not domiciled or resident in Chile, if the beneficiary of the service is a Chilean entity that also pays VAT, then it will be this entity that must withhold, declare, and pay the VAT.
Where do I pay the VAT in Chile if I am a foreign company not domiciled or resident in Chile?
The legislation has created the Simplified Taxation System to facilitate foreign companies that provide digital services, such as software services, so that they can register in the IVA Digital Services Portal of the Chilean tax office – “Servicios Impuestos Internos SII”. This will allow them to pay VAT, either monthly or quarterly and in Chilean pesos or foreign currency.
The new law does not directly affect companies providing software to Chilean residents or companies since the tax is ultimately paid by the consumer. What is important is that companies understand the changes to the law and how their services could be affected. Depending on their circumstances they will need to register with IVA Digital Services Portal of the Chilean tax office.
From our point of view, foreign companies who provide business to business (B2B) software solutions to Chilean clients will increasingly be requested to be invoiced in-country rather than from abroad. Local companies generally do not want to withhold money on behalf of the foreign companies, so it is often easier to be invoiced inside of Chile. It will also be increasingly likely that it will make sense for companies who do not have a local presence already, to have a local entity so they can charge VAT and make use of the credit themselves. The same for companies who do have local entities but choose to charge clients from abroad.
Lastly, companies providing digital services will need to review their billing processes, register under the simplified regime for non-domiciled taxpayers, and consumers will now be affected by the 19% VAT.
Ax Legal is a legal and business advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at email@example.com