Chile Tax Advice – VAT Exempt Services
There has been specific changes to the VAT law over the last few years which are important to companies who provide a range of services as part of their commercial offering. This is particularly important to companies where some of the services provided are subject to the 19% VAT and others are exempted.
The changes to the VAT law were introduced in the last tax reform which provides a clear definition of different services so that companies can determine if they are subject to the 19% VAT rate. The law confirms that each service is taxed independently based on the actual activity. Essentially, if a range of services are provided as part of a contract, only those that are actually subject to VAT will be taxed with it. For this reason, it is important to determine whether the service provided would be exempt or not. If the services cannot be identified individually, the whole service would then be subject to VAT.
As an example, a construction company could provide some engineering services within the overall project. Previously, everything would be taxed since construction services are subject to VAT and often the engineering services in the contract would be intertwined and not distinguished. Due to this reason, often the whole contract would include VAT even though the engineering services would be exempt. With the recent changes, there is more clarity and these activities can be separated and priced separately. For this reason, the construction activity is subject to VAT and the engineering is considered a VAT-exempt service.
The new changes are applicable to other type of industries as well. Many mining technology companies provide engineering and technical assistance as part of their contracts when installing new products at mine sites. The engineer and technical assistance could be exempt from VAT, while the software license would not.
The same can be said for a an equipment provider where as part of the contract there is a requirement to provide pre-engineering services or after-sales technical assistance. These could be separated from the contract for the physical goods which would lower the overall VAT.
This new change provides companies with some flexibility in how they package and price their services. By distinguishing between services that have VAT and those that are exempt, a company can be more cost effective by not charging VAT on the whole contract. On the other hand, there is also room for companies to abuse this by allocating more of the contract to say “engineering services” even though it was actually “construction” which should be charged with VAT.
It will be important for companies to note that the tax office (SII) has the faculties to determine their own values of the services should they feel that the amounts allocated were less than market rates. In such case, the SII, without prior notice to the taxpayer, may appraise different prices or values.
In simple terms, the tax office can overrule the taxpayer if they do not think that it was done in good faith. This means that companies will need to be careful how they apply these new rules to ensure that they are not reviewed by the tax office.
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