Chile News Brief: Ratification of Alianza del Pacifico’s double taxation treaty

Written by León Lanis, Paralegal

In a strategic leap towards fortifying economic partnerships and reducing fiscal barriers, Chile has recently achieved a noteworthy milestone by ratifying the Double Taxation Treaty within the framework of the Alianza del Pacífico. This significant development underscores Chile’s commitment to fostering an environment conducive to cross-border investments, trade, and economic cooperation. The ratification of this treaty marks a pivotal moment in the ongoing efforts of the Alianza del Pacífico member nations—Chile, Colombia, Mexico, and Peru—to create a more seamless and mutually beneficial economic alliance.

Background

In 2016, the Alianza del Pacífico, an economic bloc formed by Mexico, Colombia, Peru and Chile, issued a treaty to standardize double taxation treaties between the signatory countries. The idea of said treaty was to have a single framework to govern the international tax issues in an increasingly borderless economy, especially in consideration of the rise of digital economies and markets.

The principles behind said treaty are the ideas of boosting the economy and lowering the economic barriers of having to pay income and VAT taxes in each country a business exports or imports to, thus reinforcing the market flow between the economies of the bloc.

Nevertheless, there were a few issues with the implementation of this new ground-breaking treaty, mainly due to the previous and already signed accords between these countries, driven by MERCOSUR treaties.

Thus, in 2017, the presidents of the four countries signed a ratification treaty in Washington D.C in order to drive amendments within each country in order to apply the standard. Very recently, Chile’s Congress finally approved the ratification treaty completely (previously, in 2018 it had approved it only partially).

Motives of the treaty

It is important to note that the treaty is very clear in its motives. In the first section it clarifies that idea of the ratification is to:

Narrow the relations and cooperation within the bloc’s countries;
Preserve a sustainable economic growth in the region;
Deepen economic and financial inclusion;
Consolidate the relevance of the bloc in the financial markets;
Strengthen the Latin American financial markets (MILA);
Re-affirm the objectives of lowering economic barriers between markets;

Benefits of the treaty

These treaties do not only agree on a standard for double taxation, but also try to create incentives for financial markets through tax benefits, the following are the two key aspects of those benefits:

Benefits for pension funds: with the Alianza del Pacífico’s treaty, there is a recognition of pension funds as residents, in order to allow them to benefit from the tax exemptions and reductions, as well as the double taxation benefits.
Investment benefits: there is also a clear incentive to do transactions in the capital markets within the bloc’s stock exchanges. The idea is that investors can now use standard treatment for the buying and selling of shares within any of the stock markets of the signatory countries, where there will only be income taxation when there is a greater value in the selling of the shares. In this case specifically, countries can maintain their own way of taxation (whether being a fixed tax or have some variations), but there is the benefit of not having to pay taxes in both countries when a position is being liquidated in the stock or securities market.

Conclusion

In Chile, the treaty will come into force the first of January 2024. Chile’s ratification of the Double Taxation Treaty within the Alianza del Pacífico exemplifies the nation’s proactive approach to enhancing economic cooperation and facilitating cross-border activities. As businesses and investors enjoy the benefits of reduced tax complexities, the Alianza del Pacífico continues to solidify its position as a regional powerhouse, fostering a climate of innovation, growth, and shared prosperity among its member nations. This strategic move by Chile sets the stage for increased collaboration and economic vibrancy, marking a positive stride towards a more integrated and interconnected Pacific Alliance.