Law 20,780 – published in the Official Gazette on September 29 2014 – introduced the most complex and comprehensive tax reform in Chile for decades. Several provisions are already in force, while others will enter into force on January 1 2016. Most of the remaining provisions will be in full force by January 1 2017.
The reform introduced a series of changes to bring Chilean tax laws into line with Organisation for Economic Cooperation and Development (OECD) standards.
The changes include the introduction of Article 41(H) of the Income Tax Act, which came into effect on January 1 2015 and defines low or no-tax jurisdictions, providing different criteria for identifying these kinds of jurisdiction.
A territory or jurisdiction is considered to be a low or no-tax jurisdiction – provided that it is not an OECD member country – if it meets at least two of the following criteria:
- Its effective tax rate is lower than 17.5%. As the requirement is for an effective tax rate, if nominal tax rates are higher but taxpayers enjoy exemptions or reductions that imply a tax rate lower than 17.5%, then this criterion is satisfied.
- It has no agreement with Chile that enables the exchange of information for tax purposes. This includes comprehensive tax treaties with an exchange of information provision and treaties that deal only with the exchange of information.
- It has no mechanisms to monitor transfer pricing.
- Its legislation contains limitations on the disclosure of financial information to third countries (ie, bank secrecy).
- It is considered a preferential regime for tax purposes by the OECD and the United Nations.
- It follows the principle of territorial taxation as opposed to the principle of worldwide taxation.
The final paragraph of Article 41(H) provides that the tax authorities, at the request of a taxpayer, is required to issue a ruling on whether a specific territory or country is to be considered a low or a no-tax jurisdiction.
Although Article 41(H) applies generally for the purposes of the Income Tax Act, specific provisions will be relevant if a country or territory qualifies as a low or no-tax jurisdiction:
- For transfer pricing purposes, any commerce involving a low or no-tax jurisdiction is presumed to be a related transaction and thus the taxpayer must file a transfer pricing statement with the tax authorities. This provision is already in force.
- From January 1 2015 – in case of thin capitalisation rules – the beneficiary of income will be considered as being connected to the debtor if the creditor resides in a low or no-tax jurisdiction. As a result, the 35% penalty tax will apply to any excess interest transaction.
- From January 1 2015, royalties or fees paid to a resident in a low or no-tax jurisdiction will be subject to a 30% withholding tax.
- From January 1 2016 – for the purposes of controlled foreign corporation rules – any entity established in a low or no-tax jurisdiction will be considered a controlled entity.
- From January 1 2017, additional reporting obligations and increased penalties for failure to file reports will apply where investments are carried out in low or no-tax jurisdictions.
For further information on this topic please contact Omar Morales at Montt y Cia SA by telephone (+56 22 233 8266) or email (email@example.com). The Montt y Cia SA website can be accessed at www.monttcia.cl.
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