Chile
Taxation of the Digital Economy – The Chilean
Approach
In this article, the author addresses the efforts
made by the administration of President
Sebastián Piñera to effectively tackle some
of the challenges arising from the digitalized
economy. Mainly, the author explains the
proposals towards a “multiple solution
approach” by the Chilean government sent to
the National Congress in late 2018, which are
expected to be either passed or rejected by mid-
2019.
1. Introduction
Developing an assertive approach to tackle the budgetary
need for effectively imposing taxes on the digital (or dig-
italized) economy takes time. It is rather similar to con-
templating which bottle of wine to take as a gift to a good
friend.
Chile is a country where tax legislation still refers to dis-
kettes, discs, cassettes, etc. Such objects today are more
likely to be found in antique shops. This means a new
approach is not a small issue.
That said, as a devoted follower of the OECD, the G20 and
now apparently of the European Commission, Chile has
decided to take on the daunting task of effectively taxing
the digital economy.
Is this decision all down to foreign influence? Certainly
not, particularly when licensed cab drivers take their
protest to the streets in a violent way and even more when
the influential National Commerce Association starts to
voice its concern about what it claims is not a level playing
field, competing against foreign providers of goods. The
claim by the National Commerce Association and its
affiliates seems valid as it is not feasible for tax-compliant
businesses to adequately compete with businesses that are
apparently not subject to taxation when providing similar
goods or services.
For these reasons, VAT has been frequently singled out as
the most appropriate tool to level the playing field. This
option has been heard by the government and has thus led
to a proposal, in the form of an outstanding bill of law, to
effectively tax some foreign providers of digital services
through indirect taxes, while the taxation of ride-hail-
ing services (i.e. hiring an on-demand private driver for
a ride) has been addressed in a very specific way through
direct taxes.
* Director at Puente Sur in Santiago, Chile.
16 International VAT Monitor January/February 2019
Exported / Printed on 25 Apr. 2019 by Institute of Advanced Legal Studies.
Ignacio Gepp*
2. Current Legislation
2.1. Taxation of imports
Chile imposes VAT at the standard rate of 19% on the
importation of goods, regardless of their value. However,
an exemption to the aforementioned rule exists for goods
with no commercial purpose whose free on board (FOB)
value is below the threshold of USD 30. In that case, the
importation of goods below said threshold is exempt from
import duties and VAT.
As one can imagine, this benefit can be exploited when
local customers and foreign suppliers agree that the
item bought for USD 100 will be shipped as a “gift” for a
declared value lower than USD 30. In a similar way, it is
understandable that a kind friend abroad might be willing
to give away a phone worth hundreds of dollars.
The accuracy of the disclosed value of imported items is
a matter of (i) a truthful declaration by the supplier and/
or (ii) a keen inspection by the Chilean customs author-
ity. The efforts of the latter have focused on improving
its processes so that packages can be reviewed within 5
days, with the result that taxes and duties, and further
clearance requirements, are imposed on about 80% of the
inspected packages.
Notwithstanding the aforementioned effort, there are still
challenges ahead because, due to the exponential increase
in the importation of goods purchased through e-com-
merce, it does not seem feasible for the customs author-
ity to rely solely on their inspection capabilities. For
that reason, and according to the author’s understand-
ing, the Chilean government might consider eliminating
the aforementioned USD 30 threshold and require from
credit card issuers that they withhold and remit the VAT
due on the importation of goods. The elimination of the
threshold for import of low-value goods is one of the rec-
ommendations of the OECD in Action 1 of its BEPS Final
Report.1
2.2. Taxation of digital services
As a general rule, Chile imposes a 35% income withhold-
ing tax on the outbound gross amount paid by a Chilean
resident (individuals and entities) for services received.
However, since digital services are commonly rendered
through a “vessel” called “software”, the issue becomes
trickier as the debate about the proper characterization
of the payment being made has just started in Chile. The
1. See https://read.oecd-ilibrary.org/taxation/addressing-the-tax-challeng
es-of-the-digital-economy-action-1-2015-final-report_9789264241046-
en#page1, p. 193.
© IBFD

key question is: are these payments for the licence through
which software can be used that renders the service or are
they for the service itself? This characterization is of the
utmost relevance as Chile will tax software-related royal-
ties paid abroad at a 15% income withholding tax unless
the software is deemed as standard.2 If the software is
standard, a general income withholding tax exemption
applies.
Based on the above, a characterization dispute can lead to
taxes ranging from 35% to 0% on the same income, which
makes this one of the most crucial issues to address by the
Chilean authorities and lawmakers.
Further, and contrary to what one may believe, VAT at a
19% rate will not apply to services provided by non-res-
ident providers, irrespective of whether the withholding
tax applies (or whether exemption from withholding tax
applies, for example in the case of royalties associated with
standard software).3
The consequence of Chile’s current regulation is that a
local provider of digital services will have to charge VAT
to its customer, whereas foreign providers of digital ser-
vices rendered through standard software might not have
to deal with either VAT or income withholding taxes, thus
distorting the balance between local and foreign digital
service providers.
Therefore, since most solutions delivered online involve
some sort of software licensing, Chilean tax law currently
and practically prohibits Chile from imposing taxes on
“digital income” when the provider is not tax resident in
Chile.
3. The Path to the Reform
The Chilean tax authority has altered its position in view
of this situation over the years. Since 2012, it has gone
from asserting that the characterization of a digital service
is defined by its vessel or container (i.e. the software)4 to
2. CL: Ley sobre Impuesto a la Renta (Income Tax Law), Decree-Law 824
of 1974, amended most recently by Law 20,899, published in the Offi-
cial Gazette of 8 February 2016 [hereinafter ITL]. Under art. 59 ITL,
software will be deemed standard, provided it cannot be commercially
exploited nor modified for any other purpose but to enable it for ade-
quate use.
Hence, it has been understood that when software is licensed for the
purpose of sublicensing it, it cannot be deemed as standard. An example
of this interpretation can be found in Ruling 606 of 2015 issued by the
Chilean tax authority. The software that is considered standard is:
– basic programs that are defined as those indispensable for the
functioning of the equipment or machine without which it cannot
operate as such; and
– shrink-wrap software, the transferred rights of which are limited
to the use of the program, and not its commercial exploitation, its
reproduction or modification made for any purpose other than its
use (Law 20,630).
3. CL: Ley sobre Impuesto a las Ventas y Servicios (Value Added Tax Law),
Decree-Law 825 of 1974, revised text included in Decree-Law 1,606 of
1976, as amended most recently by Law 20,899, published in the Offi-
cial Gazette of 8 February 2016 [hereafter VATL]. Pursuant to art. 12(E)
(7) VATL, income deemed as non-taxable pursuant to art. 17 ITL or in
principle subject to withholding income tax pursuant to art. 59 ITL is
exempt of VAT. The latter holds, unless the service is rendered in Chile
and is not effectively subject to withholding income tax due to a treaty
provision or an exemption granted by Chilean law.
4. Ruling 1482 of 2014 issued by the Chilean tax authority.
© IBFD
Exported / Printed on 25 Apr. 2019 by Institute of Advanced Legal Studies.
Taxation of the Digital Economy – The Chilean Approach
trying to establish that the content should be taken into
account as well.
The clearest example of this change came through Ruling
2000 of 2017 wherein the tax authority asserted that, with
regard to online games, the taxation of the income should
not be characterized as royalties in consideration for the
right to use a standard software (i.e. exempt from VAT
and income withholding tax) but rather as fees paid for
the entertainment service provided through the software
(i.e. subject to a general 35% income withholding tax rate
and exempt from VAT).
Although this may appear to be a fair interpretation to
some, this ruling has one major problem to it. Under
Chilean law, it is the Chilean resident taxpayer (i.e. the
user for this purpose) who is required to directly with-
hold, declare and remit the income tax to the authorities.5
Unsurprisingly, the thousands of gamers in Chile who had
difficulties with this interpretation quickly forgot about
them as it is impossible for the tax authority to secure
compliance. The prospect of receiving a writ from the
tax authority about the taxes related to the monthly bill
of USD 4.99 enabling a user to play games on their phone
seems rather absurd.
Things are changing, however, as Chile has a new govern-
ment, with new ideas and new tax changes that are seen
as desirable. The following changes deal with the digital
economy.
3.1. Ride-hailing companies
A tailor-made suit was prepared for ride-hailing compa-
nies (Uber, Cabify, etc.), whereby they will be required
to operate in Chile through a locally incorporated legal
entity and as a corporate taxpayer. This proposal is still
being debated as of 2 October 2018 in Congress.
This has major consequences because, by operating as
local corporate taxpayers, ride-hailing companies will be
subject to taxation on some form of income (still unclear
from the transfer pricing perspective6) but, more impor-
tantly, they might be required to withhold income taxes
on behalf of the drivers for their share.
To summarize, it seems that Chile has opted for full imple-
mentation with this formula, which will require both the
ride-hailing companies and the tax authorities to be able
to allocate an arm’s length income (and profitability) to
their Chilean subsidiaries. The latter is unquestionably a
remarkable approach for a country with barely any expe-
rience of the profit split transfer pricing methodology
but which strongly favours the transactional net margin
method.
It is worth noting that this approach is likely driven by
regulatory reasons more than straightforward tax policy,
5. Art. 74(4) ITL.
6. For this matter it is worth noting that per art. 41(E) ITL, the jurisdiction
follows in most part, albeit not expressly stated in the law, the OECD
Guidelines on Transfer Pricing and the methods therein. Then again,
if the OECD has not agreed on this, how is it possible to determine an
arm’s length income for ride-hailing companies in Chile?
International VAT Monitor January/February 2019 17
Ignacio Gepp

although it embodies the strongest approach one could

take on this matter. Hence, in the author’s opinion, it is
not possible to know whether this will be the generalized
approach that the Chilean authority will favour for other
players of the digitalized economy.
3.2. Payments by consumers to non-resident digital
service providers (B2C)
For payments made to foreign digital service providers7
by individuals residing in Chile, the approach suggested
by the current government through a bill of law being
debated in Congress as of October 2018, is to impose a
10% indirect tax on the gross amount paid by the user
to the foreign supplier. This 10% would be a new indi-
rect tax, not VAT. Tackling the evident problem that was
already clear with the aforementioned ruling of 2017 con-
cerning games, the amendment proposed to the law forces
credit card issuers to withhold, declare and remit the tax
on behalf of their clients.
As part of the proposed architecture concerning this
new indirect tax, the government was careful to estab-
lish it separately from Chilean VAT and income tax laws
(while at the same time substituting all taxes arising from
such bodies). The result is now a tax that, in the author’s
opinion, effectively circumvents the more than 30 tax
treaties signed by Chile.
3.3. Payments by corporate taxpayers to non-resident
digital service providers (B2B)
With regard to payments made to foreign digital provid-
ers by Chilean resident corporate taxpayers, there is one
colossal change. An amendment to the VAT law was pro-
posed, whereby the VAT exemption on income subject to
income withholding tax will not apply if the remunerated
service is used in Chile and is exempt from income with-
holding tax either due to Chilean law or by a tax treaty.
Hence, if a corporate taxpayer uses licensing standard
software in Chile (which in accordance with Chilean law
is a transaction subject to VAT and exempt from with-
holding income tax), the 19% standard VAT rate applies.
In this case, the Chilean taxpayer will proceed to declare
the VAT in its own VAT return, thus being entitled to
deduct this input VAT against its output VAT, assuming
it is a registered VAT taxpayer.
4. Conclusions
The author considers it is worth noting first that
Chile has taken a stance through taxing the digital
economy. Secondly, the author finds it odd that
the government is doing so, perhaps inadvertently,
through three completely different models: (1)
forcing an incorporation on and registration of
ride-hailing companies as corporate taxpayers
and subjecting them to the same rules as any other
taxpayers in the country; (2) a 10% indirect tax on
payments made by individuals to foreign suppliers of
digital services through a withholding system by the
issuers of credit cards, with the issuers of credit cards
being responsible for withholding this indirect tax;
and (3) an effective 19% VAT rate on transactions
that are subject to VAT and exempt from income
withholding tax.
This hybrid approach (some would say “targeted”)
raises a few questions, such as:
(1) If from a transfer pricing perspective it
is possible to determine an arm’s length
remuneration for ride-hailing companies in
Chile as corporate taxpayers, why stop there
instead of forcing all significant digital service
providers to register locally?
(2) How is it justified for two indirect taxes to
coexist at different rates for individuals and
corporate taxpayers?
(3) How does the indirect tax on digital services
address the taxation of local business partners
of foreign digital enterprises, such as drivers of
a delivery service? Would it be possible to have
the foreign enterprises withhold taxes from
such partners and remit them to the Chilean tax
authorities without having to register them as
corporate taxpayers in Chile?
(4) Will it be possible to circumvent the
withholding mechanism of the indirect tax on
digital services by using a virtual wallet instead
of a credit card? If so, would the government
be open to allowing foreign digital enterprises
to pay the tax that was not withheld by the
financial intermediary, without having to
register them as corporate taxpayers in Chile?
Regardless of whether this approach is desirable or
not, the author considers it fair to say that it will be
worthwhile examining the Chilean experiment, if
approved by Congress, as it would involve testing
three different solutions to the same problem.

7. The services covered by this tax are the following: intermediation,

entertainment (games, streaming, etc.), advertising, use and subscrip-
tion of internet based service platforms and data warehousing regard-
less of how they operate (e.g. software as a service or cloud-based soft-
ware). In the case of an intermediation service, it should be noted that
the tax does not waive any tax liability that may apply to the service
provider that benefited from the intermediation.

18 International VAT Monitor January/February 2019 © IBFD

Exported / Printed on 25 Apr. 2019 by Institute of Advanced Legal Studies.