Written by Felipe Mac-Conell, Associate Lawyer – Tax
Companies are relying on international contractors more than ever. The model is flexible, efficient and helps scale operations quickly. But there is one area where this flexibility disappears: taxes. When payments cross borders, the way they are taxed depends not only on local rules, but also on the Double Tax Treaty (DTT) between both countries. And here, precision matters.
A contractor relationship may look simple, but behind each payment there is a legal definition that decides whether your company pays VAT, a reduced withholding tax or more than it should. This interplay is complex in nature. Many businesses assume that contractor payments are automatically treated as standard services under local legislation. In reality, treaties use their own categories, and those categories can radically change the outcome.
A clear approach for companies that hire foreign contractors
When a contractor works entirely from abroad, without stepping into the country, the natural instinct is to treat the payment as a regular service “used in Chile,” triggering 19 percent VAT. But this is not always the correct approach. A DTA may classify the very same activity differently, be that as a consultancy, a technical service or even a royalty. Each of these categories has a different tax impact, and in many cases, a much lower cost.
This is why applying the treaty correctly is not just a tax question. Further than this, it is a strategic decision that protects the business from unnecessary expenses and future disputes with the tax authority.
Case study – A real example that shows what is at stake
One of our clients believed they had no option other than treating their contractor’s work as a taxable service in Chile. Under that assumption, 19 percent VAT would apply. They were ready to proceed that way because it seemed obvious and consistent with domestic rules.
But when we reviewed the case, we saw something different. Under the Chile–Colombia DTT, the contractor’s work matched the treaty’s definition of technical and consultancy services, a category treated as a royalty for treaty purposes. If this interpretation was correct, the company would not owe VAT at all, but instead apply a single 10 percent withholding tax.
To avoid any doubt, we took the matter to the Chilean Tax Office. The authority confirmed the treaty-based analysis. The contractor was not providing a VAT-taxable service. The payment was a royalty under the treaty, and only the 10 percent withholding applied. The difference for the client was substantial: paying ten instead of nineteen is a material reduction, but more importantly, they gained complete certainty on how to handle similar cases moving forward.
Why precision is essential
The way a payment is classified under the relevant DTT directly determines the tax cost and the compliance obligations. A precise approach ensures that the company pays only what corresponds under international rules, avoids VAT where the treaty recognises a different category and reduces the likelihood of future adjustments or disputes.
Conclusion
International contractors bring efficiency and flexibility. But without a precise approach to DTTs, companies exposed to cross-border services can end up paying more tax than required. When treaty rules are applied correctly, the outcome is clearer, more efficient and safer for the business. Reviewing contractor arrangements with the DTT in mind is a simple step with direct benefits, and one that every global company should prioritise.
Harris Gomez Group METS Lawyers ® opened its doors in 1997 as an Australian legal and commercial firm. In 2001, we expanded our practice to the international market with the establishment of our office in Santiago, Chile. This international expansion meant that as an English speaking law firm we could provide an essential bridge for Australian companies with interests and activities in Latin America, and to provide legal advice in Chile, Peru and the rest of Latin America. In opening this office, HGG became the first Australian law firm with an office in Latin America.
As Legal and Commercial Advisors, we partner with innovative businesses in resources, technology and sustainability by providing strategy, legal and corporate services. Our goal is to see innovative businesses establish and thrive in Latin America and Australia. We are proud members of Austmine and the Australia Latin American Business Council.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. It does not create a solicitor-client relationship, and readers should seek independent legal advice for their specific circumstances. Harris Gomez Group accepts no liability for reliance on this content.