No one is a stranger to the fact that understanding tax and corporate compliance are essential to the good standing of any business operating globally. Tax law and regulation vary greatly between countries, and for businesses operating in various jurisdictions, complications can arise due to these variations.
Chile has many tax and bookkeeping requirements that must be met by all corporations operating in the region. Probably one of the most standard tax compliances across the board, including Chile, is the ‘Value-Added Tax‘, commonly known as ‘VAT’ (or ‘IVA’ in Spanish-speaking Latin America).
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What is the value-added tax (VAT) in Chile?
VAT is a consumption tax incorporated into the value of goods and services whenever value is added at any stage of the supply chain.
How much is the VAT in Chile?
In Chile, VAT reaches 19%, indicating a surcharge of 19% on top of the normal price of the good and/or service.
How does the VAT system work in Chile?
The final consumer will suffer the economic burden of paying the tax without having the possibility of getting that 19% reimbursed. This is mandatory for final consumers. The way tax authorities make sure that this tax is paid for is by the adequate use/register of receipts and invoices.
A debit/credit system takes places where the seller of a good or services charges VAT to the next party down the line and buy charging this surcharge, a credit in favor of the Government is born/accrued. This means that the seller needs to pay back the Government – completed via a monthly VAT declaration.
In light of the above, on a monthly basis, each company needs to make an analysis and compensate debited VAT with the credited one. After this operation, and if the balance is positive, the company can use it to compensate for future debt flows. On the other hand, if the balance is negative, the company would need to pay the difference to the Government via a monthly tax declaration.
How Does the Value Added Tax (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.
Real-Life Example: If a restaurant buys one cooked dish at CLP1,000 + VAT and then sells it for CLP 3,000 + VAT, the restaurant needs to pay the Government CLP570 (Which is the 19% of 3,000). However, the restaurant is entitled to a “reimbursement” of CLP190 (which is the 19% of 1,000). Therefore, it would only need to pay a VAT of CLP380 which corresponds to the difference between CLP 570 and CLP190.
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.
Are all goods and services affected in Chile?
- Goods and Merchandise: In light of Article 4 of the VAT Law (Decree N°825) all sales of goods are VAT-affected as long as they are located within Chile, regardless of where the transaction/agreement takes place.
- Services: In compliance with Article 5 of the VAT Law (Decree N°825) all services being provided or used within Chile will trigger VAT, regardless of where the corresponding payment is made or received.
The general rule is that the sale of all goods and services triggers VAT in Chile. In order to avoid confusion, the law specifically states different operations that trigger the tax such as any type of importation in Chile. The law also specifically states which operations are VAT exempt, for example, the purchase of used cars.
Important considerations for businesses
In general terms, if a company is going to import and/or sell goods, it will need to charge and pay VAT on a monthly basis. On the other hand, if a company executes professional business services (i.e legal counsel and back-office services), it will not charge VAT and it´s issued invoices will be VAT exempt. It is highly recommended that a lawyer or accountant analyses this prior to registering with the tax authorities in order to ensure full corporate compliance.
Need Local Tax Support understanding about VAT in Chile?
While Chile remains a favorable business destination, complexities may arise during operations. Foreign companies operating in Chile often encounter problems when trying to undertake commercial activities without the support of a local ally. For this reason, all businesses looking to expand operations to Chile should work with a local group who can assist them and ensure that their Chilean expansion is successful.
At Biz Latin Hub, we have a group of local professionals who can support your business venture – from assisting with incorporating a local company, to tax and accounting support to recruitment and hiring. Contact us today to find out how we can be of assistance.