VAT on digital services came into effect in Chile on June 1, 2020. Under this rule, non-resident suppliers of digital services to final consumers were obliged to register for VAT in Chile and charge VAT on their invoices to customers.
To handle non-compliance, the Chilean tax authority (SII) has published a consolidated list of companies they believe are not observing the digital service VAT rules. To ensure that VAT is collected, SII is now requiring financial institutions to apply a withholding for payments to the digital service providers listed. This is effective August 1, 2022.
Listed companies will be subject to the financial institution withholding unless they register and charge Chilean VAT on digital service supplies to final consumers.
What are the challenges with withholding via financial institutions?
While this withholding may be viewed as an alternative mechanism for VAT collection, it comes with a number of disadvantages and is not recommended as a primary mechanism for collecting VAT on supplies by non-resident businesses by the OECD.
Withholding is overly expansive. Digital service rules traditionally cover B2C services. A business may provide B2B services as well, or non-digital services that require manual intervention. The financial institution performing the withholding generally does not have enough data to distinguish between B2C or B2B transactions, or between digital and non-digital services. For other challenges with financial intermediary-led withholding regimes please see Annex B of the VAT Digital Toolkit for Latin America and the Caribbean.
The risk a company takes by falling into this withholding scheme is that VAT may be withheld on more transactions than required by law. Being compliant (ie. registering and charging VAT where required) allows the company to have more control over and appropriately apply VAT on their transactions.
What's the impact?
Put differently, VAT withholding can directly reduce a company's margin and significantly impact revenues. If VAT is not considered when charging customers, either by separately stating the tax or marking up to take VAT into account, VAT withholding can become an additional cost to the business.
Possible next steps
Companies that have not yet been named but fall within the scope of the digital service rules should register and remit to become compliant, and avoid appearing on SII’s next public release of non-compliant entities. Not only would this identification subject the company to the withholding regime, but it would provide a public notice to other tax authorities who may be reviewing adherence to digital service regulations in their own country.
How can Fonoa help?
Providers of digital services have a global reach. Tax laws are constantly changing. We are actively preparing for any new digital tax rules that we’ll implement into our software to make sure that tax-compliance is continuous.
Fonoa's tax engine seamlessly automates indirect tax rate calculation in 130+ countries across the globe (including Chile!) and takes into account revenue sellers made to each specific country.
Our tools are packed with helpful features like revenue tracking which helps you understand whether you need to register for VAT locally and start applying local VAT rates to your transactions.
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