In general, differences arising from the choice of business organisation are not hugely significant.
An agency, branch, or permanent establishment of a foreign corporation are only subject to Chilean-source income tax. Taxable income is determined by the actual profits earned in its activities in Chile. When the accounting records do not reflect actual profits, the Internal Revenue Service can determine presumptive net income using either of the following bases:
In a limited liability partnership, if a partner is a Chilean resident, his/her share of income is not subject to the Additional Tax, but is added to that partner’s other income and taxed at the appropriate personal rates (Complementary Tax) with a tax credit equivalent to the First Category Tax paid by the limited liability partnership.
In the case of a Chilean corporation, the corporation pays the First Category Tax, but it is a tax credit for shareholders. Resident individual shareholders receive a credit against their Complementary Tax on dividends received. Resident corporate shareholders are not taxed on the dividend received and transfer the related tax credit to their own shareholders when they distribute dividends. Nonresident shareholders receive a tax credit against the additional tax due on dividends remitted abroad.
Value Added Tax
A 19% Value Added Tax (VAT) is charged on all recurring sales and other customary conventions over material goods. The customary element is presumed on sales that relate to the line of business of the company. VAT has to be paid on services, whether recurrent or not, that activate interest, premiums, commissions or other similar remunerations that are considered of a commercial, industrial or financial nature, or that derive from mining, construction, publicity and computers, amongst others. Professional services rendered by employees or independent consultants are not subject to VAT.
A typical Value Added Tax comes from the process whereby the VAT paid on imports, purchases, and services received (tax credit or input tax) is deducted from the VAT due on sales and services rendered, tax debit or output tax. The vendor or the service provider must file a monthly tax return and pay the next tax debit by the twelfth day of the subsequent month. A net tax credit (increased to reflect the changes in consumer price index) can be forwarded to the subsequent months.
Exports are not subject to VAT, but VAT paid on purchased goods is either deducted from the other VAT due or refunded by the Internal Revenue Service. Incoming and outgoing marine and air transport services are exempt from VAT. Services given to non-resident entities and which are used exclusively outside Chile can be deemed to be exports by the customs service, and are therefore exempt from VAT.
Foreign investors covered by the foreign investment statute are not required to pay VAT on their capital contributions as long as those assets are included in a listing especially set up for that purpose.
Sales tax, as well as VAT, is paid on certain luxury items and beverages at rates that vary according to the type of items sold.
Foreign tax credit
In Chile, taxes are paid on foreign source income on a net paid basis (except for branches that pay on an accrued basis). If investors meet certain conditions established in the Income Tax Law, they are entitled to a credit against the first category tax and final taxes for the income taxes paid or withheld abroad on dividends profit remittances and income deriving from permanent establishments.
The credit is capped at 30% for dividends and 17% in the case of branch profits. In computing taxable income, foreign taxes paid are added to the taxable income. If foreign taxes paid exceed the cap (not to be used as tax credit) are allowed as a deduction from taxable income.
Customs duties are 6% ad valorem for almost all imported imported goods and products. There are some bilateral and regional reductions regarding some products in the context of the ALADI (Latin American Integration Association) Agreement.
Chile has signed free trade agreements with Canada, Mexico, USA, the European association EFTA, the EU, South Korea, Japan and China. Chile has also entered into bilateral and economic complementation agreements with Colombia, Brazil, Ecuador, Peru, Argentina, Cuba and Venezuela in order to reduce or eliminate customs duties.
Chile is an associate member of MERCOSUR and has negotiated immediate and staged reductions or eliminations of customs duties.
A municipal license is an annual fee collected by the municipalities, taxing any activity carried out by a taxpayer in its territory. The fee is calculated on the taxpayer’s equity at a rate which is set by each municipality, with a minimum of 0.25% and a maximum of 0.5%.
The total fee can be no larger than 8,000 monthly tax units (about US$533,000). The fee is allocated among the municipalities in which the taxpayer has an office, factory, warehouse or other establishment.
Law No. 20,280 states that the SII has is obligated to inform the municipalities of the taxpayer’s entity in order to facilitate the collection of the municipal license.
Accounting and bookkeeping requirements
The entity’s financial year cannot exceed twelve months and can end on any day chosen by the shareholders. However, for tax purposes, a December 31 year-end must be used, although the Internal Revenue Service can authorize the use of a June 30 year-end. Usually, such authorization is not granted. In general any business or taxpayer is required to maintain complete accounting records:
All the accounting and tax books must be stamped by the Internal Revenue Service. The records can be loose leaf, prepared either manually or by data processing equipment, if they have been previously authorized by the Internal Revenue Service. Enterprises that operate in the free trade zones (Arica, Iquique and Punta Arenas) and in areas subject to incentives (currently the I, XI and XII Regions and Chiloé Province) must maintain a separate set of accounting records for those operations. Accounting entries must conform to Chilean accounting principles and practices. However, Chile has gradually adopted IFRS as of January 1, 2009 and they will be fully implemented as of January 1, 2014. Recent changes to the Tax Code have made it simpler to keep accounting records in foreign currency when certain requirements are met. Rules for paying taxes in foreign currency have also been relaxed.
Independent statutory audits
In general, only certain types of entities are required to appoint independent auditors. Such entities include banks, financial institutions, insurance companies, pension plans, publicly-traded corporations, and cooperatives. Almost all other entities are usually free to appoint auditors or to establish other means of control.
Public availability of financial statements
Certain entities (principally banks, financial institutions, insurance companies, pension plans, and publicly-traded corporations) are required to file quarterly and annual financial statements with the appropriate regulatory agency (Superintendency). These statements are publicly available. In addition, the annual financial statements filed in the Superintendency and those of an agency or branch of a foreign corporation must be published in a newspaper. Other entities are not required to file financial statements with any Government agency.
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