Chile Tax Update – No VAT on Drilling Services
Written by Osvaldo Cabezas
In August, the Chilean Internal Revenue Service (hereinafter “SII”) issued Ordinary Resolution No.1484, stating that drilling services associated with mining projects are not subject to VAT.
What Services are charged with VAT?
First, we must point out that a given service will only be taxed with VAT if it meets the definition of “service” established within the VAT Law. Hence, “Service” is the action or provision that one person performs for another and for which they receive any interest, bonus, commission, or any other form of remuneration, provided that it is produced by the exercise of the activities included within Article 20 No. 3 or No. 4 of the Income Tax Law (“LIR”).
Previous Ruling on Drilling Services
The SII previously had a clear position concerning whether drilling services should be charged with VAT. going back to Ordinary Resolution No. 429 of 1981. It stated that services such as drilling for mining companies, would be subject to VAT. The same resolution states very clearly that even if the tasks are made by companies specialized in the prospecting field and whose objective is to obtain mineralogical samples, there is no doubt that they are necessary and complementary activities to the mining industry.
Article 20 Nº3 of the Income Tax Law (LIR) states that “incomes from the industry … from the mining activities” will be subject to the Corporate Tax (“First category tax”), and, therefore, if prospecting activities can be categorized within the industrial sector, the remuneration for such tasks is contained within No. 3 of article 20 of the aforementioned law and, therefore, affected by VAT.
How Are Drilling Services Handled Now?
But the criteria of the SII changed drastically with the recent issuance of Ordinary Resolution No. 1484 mentioned above after being requested by a company regarding its diamond drilling services.
The prospecting service would consist of small diameter and large lengths drillings, that are made to reach inaccessible areas from the surface or in mining operations. Such prospecting allows the sampling of said zones at depths of up to 1200 meters, to be studied and analysed by geologists.
The SII concluded that prospecting or drilling services are not necessary and are complementary activities to the mining industry, hence, they are considered as “indefinite services”, which is why those services are no longer taxed with VAT.
Consequently, drillers moving forward who meet the criteria are able to perform their services without having to pay VAT.
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