HGG Tax: Recovering VAT in Chile
In comparison to other countries, Chile has one of the highest Value-Added Tax (VAT) rates in the LATAM region, which currently sits at 19%.
In addition, the VAT is levied on the price of a broad range of transactions having a very comprehensive scope and with very few exemptions.
In general, all the following transactions are burdened with VAT:
- Sales and other contracts, by which the ownership of tangible goods is transferred to another party;
- Services, whether or not recurring, which may be considered commercial, industrial, financial or related to mining, construction, insurance, advertising, computer development or in general, any other type of commercial activity; and
On the other hand, unlike other jurisdictions, VAT is only rarely paid in cash and it may only be carried forward to the next tax period, which is counted from month to month.
This norm of control means that even if the taxpayer has a positive difference between the VAT credit and the VAT Debit, this difference is not returned in cash to the taxpayer and may only be carried forward to the next period, with no limits of time in this regard.
Article 27 Bis.
Despite the general norm, the VAT Law does contain an exemption that provides the possibility of a VAT refund in cash even if the taxpayer has made very little sales and has no VAT Debit to offset the VAT credit.
In effect, if there remains a VAT credit because of the purchase of goods accounted as part of the fix assets of a company and the remaining VAT credit has been carried forward at least six consecutive tax periods (6 months), the taxpayer is given the option to either offset the tax credit against any other type of fiscal tax, including withholding taxes and customs duties; or it may request a reimbursement in cash.
Most taxpayers choose this second alternative requesting directly a cash refund from the National Treasury, however, both mentioned requisites must be met and the interpretation of this norm has been rigorous by the Chilean Internal Revenue Service (IRS). In this regard, what is part of the fix assets of a company and when does this occur, have been the most controverted issues. The Chilean IRS has clarified that the concept of fixed assets requires a permanent use in the company’s line of business, with no purposes of trading or reselling them.
In addition, the benefit may not always be what the company may expect as the recovery will probably not be for the total amount of the VAT Credit but only for a portion.
To determine the amount to be refunded, it is necessary to calculate the fixed assets’ VAT Credit as a percentage of the taxpayer’s total VAT Credit, and then apply this percentage to the VAT Credit. In the end, what is actually recovered is only the credit related to the purchase of fix assets and nothing more.
In our experience, the IRS usually answers the request towards the end of the 60-day period and, in the case of approval; it takes about 7 days to notify the Treasury, who then pays the refund within 5 business days. During the 60-day period, the IRS audits are typically focused on the taxpayer’s right to the accumulated fiscal credit and its connection to fixed assets designated to VAT taxable activities. This audit generally involves a detailed review of the supporting invoices, their proper registration in accounting books and the relevant agreements. In some cases, it also involves visits to the location of fixed assets to verify their real existence and its fixed nature.
Even though the restrictions that we have broadly underlined, this norm is particularly useful in regards to projects that require significant amount of funding for construction or the acquisition of fix assets and only after is the company in a position to develop their business and carry on sales. During this period, in many occasions the timeframe are drawn out, the taxpayer may request the accumulated amounts of VAT Credit in application of article 27 bis, providing fresh cash in times when projects usually only accumulate costs.
This VAT relief could positive effects on the financing and funding model of the company In such cases, VAT exemption regimes or early-recovery scenarios should be deeply analyzed by the local advisors when structuring the financing model.
The importance of VAT within the Chilean fiscal funding is crucial. Indeed, it is the main source of tax funding representing 48,7% of all Fiscal tax finance on 2013, 49,5% on 2014 and 47,7% on 2015, per se to the information provided by the IRS, however, tax reliefs like the one mentioned above do contribute to business development and to the renovation of assets, which in the long run benefits both taxpayers and the IRS.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Mexico, Peru, Brazil and Argentina. Over the last 15 years we have been supporting foreign companies with their growth in 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 firstname.lastname@example.org
Miguel Guerrero Fuentealba is a Senior Associate with the Harris Gómez Group, an international and multidisciplinary firm, specialising in cross border transactions between Common Law Countries and Latin America.
Miguel worked for Deloitte Chile within their international tax division. He has an extensive amount of experience advising multinational clients on tax related matters related to domestic legal compliance, tax planning, repatriation of capital as well as completing due diligence reports on tax and legal compliance.