As a small or medium sized business, it is very important to manage cash-flow. To assist with this there are a number of mechanisms available to help, one specifically is the ability to delay the payment of Value Added Tax (VAT). By delaying this payment, you can increase the amount of cash being held by the business, which can be used to help fund existing operations or to fund future expansion. This is why it is essential that your financial management team or provider of financial services have a comprehensive understanding of Chilean financial and accounting laws and regulations.
How Does the VAT Function in Chile?
In Chile, the VAT on goods and services is 19%. Specifically, any sale equal or greater the $180 Chilean pesos must pay a 19% VAT (Called IVA, Impuesto al Valor Agregado in Chile). The Chilean Government offers Micro, Small, and Medium Enterprises (MSMEs) the possibility of deferring the date of payment of the VAT for up to two months after the initial due date. To defer VAT payment, companies must be part of the simplified taxation regime or the simplified general accounting regime. Moreover, only taxpayers that declare via the internet can take advantage of this benefit.
To use this benefit in 2016, the income of companies cannot exceed the 100,000 UF (In Chile, Unidad de Fomento or UF, it’s a unit determined by Consumer Price Index). For 2017 and onwards, companies’ average annual income cannot exceed 100,000 UF during the last three commercial years. Keep in mind that as of September 1, 2016, one UF is equivalent to CLP$26,210.79 Chilean Pesos.
A company’s income consists of the the total of all income generated from sales, exports, services and/or other operations that make up the taxpayer’s normal business. This excludes the surcharge tax on the operations subject to tax, as well as the rest of the specific taxes surcharged in the corresponding product or service price. Consequently, since only income generated from the taxpayer’s normal business operations and activities are considered, all those sums or amounts obtained from occasional and sporadic activities and operations must be excluded.
VAT Deferral Conditions and Requirements
In order to defer VAT payment, MSMEs must declare their VAT through “Form 29”, having until the twelfth day of the corresponding month if they invoice in paper form or until the twentieth day if it is completed electronically. In Form 29, in the “VAT payment deferral” box under code 756 must be selected, which will automatically allow companies to pay the tax at a later time, until the twelfth day for paper invoices or until the twentieth day for electronic invoices. If box 756 is not checked, MSMEs will not be able to access this benefit. It is important to highlight that VAT payment deferral does not mean that the submission of form 29 can also be deferred, nor the payment of other taxes covered in this form. It should be noted that other taxes such as PPM, retention fees, withholding tax, etc. that are declared and paid in the Form 29 are not part of this benefit.
As long as companies pay within the new two-month deadline, companies will not be subject to penalties and/or interests. However, if payment is not made within the two-month window, penalties and/or interest will begin to accrue. Businesses do not have to wait until the end of the two-month period to pay, in fact, they can pay at any time after declaring their VAT. Furthermore, payment deferral is applicable to the total VAT amount accrued in a fiscal period; hence, the total VAT, and not a portion of the tax, for instance, must be paid in two months’ time at the latest.
MSMEs can defer payment for each period VAT is declared. In other words, for every month of the year in accordance to taxpayers’ needs and discretion. However, companies cannot defer VAT payment if at the time of requesting VAT deferral, reiterated defaults in VAT payment or Annual Income Tax. Taxpayers are considered to be in reiterated default when they owe the taxes corresponding to at least three fiscal periods within any 12-month period for VAT or two consecutive fiscal periods for Annual Income Tax.
If MSMEs fail to pay VAT within the deferral two-month legal period, readjustments, interests and penalties will be generated. Interests will accrue according to the interest rate in force for every month. The foregoing is pursuant to articles 53 and 11 of the article 97 of the Law Decree 830, the Tributary Code. In addition, Circular Letter No. 9 of January 22, 2015 contains the information regarding these interests, readjustments, and penalties. The interest, readjustments, penalties, and VAT can be paid through the Internal Tax Service’s (SII in Spanish) website or directly at the bank. Tax payment deferral is not applicable to VAT on imports.
Many companies operating in Chile have realized the advantages of outsourcing their financial and accounting services to a profesional firm who have an extensive understanding of the local laws and regulations. At Chile Business Services, which is part of the Biz Latin Hub group, we can provide further expert advice and/or guidance with respect to the deferral of VAT payments. In addition, we can add value to your business through the provision of profesional tax, accounting and financial services. Please contact David at [email protected].