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A Blog Post

Chile Tax Reform: VAT Exempt Services

Written by Karem Duffoo, Senior Tax Lawyer

In accordance with the tax reform approved in March this year, it is important to highlight that there are changes specific to the VAT law that will be relevant to some companies who provide services where some of those services are subject to VAT and others are exempted.

The changes to the VAT law provides a definition of service for the purpose of determining which services are subject to the 19% VAT rate. 

It is established that each service is taxed independently according to its nature. In other words, if a combination of services is provided but some are not subject to or exempt from VAT, only those that are subject to VAT will be taxed. For this purpose, it will be necessary to determine whether the service provided would be exempt or not. If the services cannot be identified individually, the whole service is subject to VAT.

Practical Example:

An example would be a construction company where some engineering is included as part of the project. Previously, everything would be taxed with VAT because it was a construction company that also provided some engineering as part of the project. It was not always distinguishable in the contract what is engineering and what is construction. Due to this, often the whole contract would include VAT even though engineering services are VAT exempt. 

Now with the tax reform, there is more clarity and these activities can be separated and priced separately. In this way, the construction activity is subject to VAT and the engineering is a VAT-exempt service. 

Conclusion:

With the new changes, there is some room for companies to have flexibility which is good, particularly if you are providing services to an end customer, because you can be more cost effective by not charging VAT on the whole contract. With that being said, there is also room for companies to abuse this by allocating more of the contract as engineering services even though it was actually construction which should be charged with VAT.

It will be important for companies to realize that the SII may exercise its faculty of appraisal provided for in Article 64 of the Tax Code. That is, for the purposes of determining the respective values of the services provided, the SII, without the need for prior notice to the taxpayer, may appraise such price or value in cases where it is notoriously lower than the current market prices or those normally charged in agreements of a similar nature considering the circumstances in which the transaction is carried out.

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.

Although we have used construction as an example in this blog, it will be applicable to other other type of industries such as consulting services provided by a software company.

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Bolivia, Ecuador, Brazil, and Argentina. Over the last 19 years, we have been supporting foreign companies with their growth in Australia and Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.

To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at cmm@hgomezgroup.com