“SOFTWARE” AND THE NEW DIGITAL SERVICES TA – (VAT vs. WHT)
Written by Karem Duffoo, Senior Tax Lawyer.
In a blog post earlier in the year we wrote about an important change that came into effect regarding the 19% VAT on digital services. You can find that post here.
This is an important change considering the number of foreign companies that provide their software and solutions by digital means. It also means that previous tax structuring by companies where software was invoiced from abroad may no longer be the most tax efficient.
At the time of our original post, there was very limited information on how exactly this law would be enforced and applied, and many of the the finer details regarding which digital services would be affected were missing. In today’s article, we will answer some of the most common questions that have arisen following the announcement of the new law.
What was the new announcement?
In accordance with Law No. 21,210 of February 24, 2020, a new update applicable to “digital services” with VAT was established.
With the new reforms made by the Chilean taxation law regarding software and digital services, it’s important to clarify how they will be taxed either with VAT or withholding tax, and the taxation affecting certain services provided from abroad by providers not domiciled or resident in Chile.
What was the previous system?
Under the previous system, when the service provider did not have either an address or residence in Chile, for the purposes of tax law the following distinction had to be made:
(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.
How does the new tax system work?
With the introduction of the new law, further distinctions must be made:
It’s important to highlight that the purpose of the new law is not to add tax on tax, so services that have Additional Tax (WHT) applied will not also subsequently or simultaneously have VAT applied (or vice versa). The taxation that is ultimately applied will depend on the analysis made on a case-by-case basis.
Generally, however, WHT takes precedence over VAT. So, the main modifications regarding standard software and non-standard software is 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 under 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.
- A new concept was introduced and recognised, the so-called “digital services”, which are also levied with VAT. Digital services relates 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.
Digital services also extends to the following:
(i) 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.
(ii) 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.
(iii) 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 from a PC to Office 365, a service received from the cloud, without the need to install the software on the PC.
In light of this, companies will have to review which of these services are being paid abroad, and see what will attract VAT, as opposed to WHT Tax.
Who is in charge of withholding, declaring and paying the VAT?
The answer depends on if your customer is a 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 also 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.
Finally, we would like to point out that the provision of standard software from abroad to be used in Chile as indicated, as well as software services such as IaaS, PaaS and SaaS, the latter being considered as digital services, are subject to VAT under the new rules introduced by Law No. 21,210.
When do the changes apply from?
For all digital services, the changes will apply from 1st June 2020. For standard software as discussed in the first part of this post the changes took place from from 1st March 2020.
It is in our view that companies who provide business to business (B2B) software solutions may increasingly be requested by their clients in Chile to be invoiced in-country so they do not need to withhold the money. It will also be increasingly likely that it will make sense for companies who do not have a local presence to have a local entity so they can charge VAT and make use of the credit themselves.
Lastly, there is no doubt that the companies providing digital services will need to review their billing processes, register under the simplified regime for non-domiciled taxpayers, and most likely increase their prices to take into account the 19% VAT.
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 email@example.com