The digital economy has challenged important paradigms of international taxation, particularly the idea that the states have the right to tax all the income arising from the activities performed or goods located within its territory, as an expression of its sovereignty.
In this context, the digitalisation of the economy does not operate within territorial limits, making the traditional nexus rules very diffuse, with the risk of creating a perfect scenario for obtaining a tax base erosion and profit shifting.
States started to define how to deal with the challenges that the digital economy imposed on international taxation. In October 2015, states, led by the OECD, adopted a package of measures on BEPS, covering 15 Actions against tax evasion. Action 1 addresses the challenges of digitalisation of the economy.
Between 2017 and 2020 intense discussions took place at the Inclusive Framework on how to manage the challenges imposed by the digitalisation of the economy, culminating in a two-pillar approach in October 2020, where pillar one adopted the position that a coordinated solution was the most appropriate option to deal with the referred challenges. During these discussions it was also proposed that the states may adopt unilateral measures for addressing this matter while a coordinated solution was discussed.
In Chile, applying a specific, indirect and substitute tax was originally proposed at a rate of 10%, which would be levied on digital services provided by foreign companies, but after several discussions in the context of the approval of a tax reform by Chilean Congress on 2020, digital services were finally subject to a 19% VAT when performed by foreign entities or individuals from abroad, as long as the services are provided or used in Chile.
At that time the Chilean government projected a tax collection of US$97 million per year, but it reached US$153 million in the first year. Importantly, the Chilean unilateral measure was not only efficient in the field of collection, but also in the area of compliance, since, in the same period, 199 platforms voluntarily signed up for the payment of the respective tax including Google, Netflix International BV, Spotify AB, Microsoft Corporation and Amazon.
For those not willing to comply with the tax obligations, the Chilean Internal Revenue Service recently published a resolution that contained a list of defaulters and ordered that the issuers of means of payment act as withholding agents.
Then, in terms of tax collection and taxpayer compliance, the introduction of digital tax in Chile has been highly efficient. The question is whether or not this measure should be repealed in 2023. As a member of the OECD and as a country involved in the pillars one and two debate, Chile could sign the Multilateral Convention to implement Amount A in pillar one.
Amount A in pillar one focuses on multinational companies (MNCs) with a global turnover of more than €20,000 million and a profitability of more than 10%. It introduces a new special nexus rule that will allow jurisdictions in which final consumers or users are located, to tax the Amount A assigned to the market jurisdiction (for MNCs earning at least €1 million in revenue in that market, or €250,000 in the case of jurisdictions with a GDP of less than €40 billion). Amount A would correspond to the 25% of the residual profits of the MNEs, defined as profits in excess of 10% of revenues.
Additionally, the Multilateral Conventions will require all parties to eliminate their taxes on digital services and other similar relevant measures and commit not to introduce such measures in the future. This should oblige Chile to eliminate the current VAT on digital services.
None of the Chilean companies would meet the requirements to be subject to these new measures. On the other side, in the case of foreign MNEs, it is not clear that they will meet the requirements to pay taxes in Chile.
It is too early to say that Chilean VAT on digital services is more effective than Amount A in the pillar one measures, but it could be the case that pillar one will make us eliminate an effective tax, from a collections and compliance perspective, in a scenario where Chile is currently discussing a tax reform that aims to increase tax revenues.