June 9, 2023
U.S.-Chile tax treaty advances toward ratification
- The U.S. Senate Foreign Affairs Committee voted out of committee the proposed Double Taxation Agreement between Chile and the U.S.
- The next step is for U.S. Senate to give its advice and consent to ratification of the Treaty.
- Once approved, Chile would become the third Latin American country with a Double Tax Treaty with the U.S.
On 1 June 2023, the U.S. Senate Foreign Relations Committee (SFRC) voted out of committee (20-1) the proposed U.S.-Chile Double Taxation Agreement (Treaty).
The Treaty includes two reservations and two declarations. Text of the resolution of advice and consent to ratification can be found here.
Senate Majority Leader Chuck Schumer (D-NY) stated that ratifying the Treaty is crucial for access to critical minerals such as lithium. Senate Schumer has also indicated that getting it done is a priority.
Once the Senate takes the next step to give its advice and consent to the Treaty, the President must sign the ratification instruments to complete the approval and ratification process in the U.S. The Treaty would enter into force when all applicable approval procedures in the U.S. and Chile have been satisfied.
A prior edition of the Treaty was signed on 4 February 2010 (along with a Protocol) and was reported on favorably by the SFRC in 2014, 2015 and again in March 2022.
As in 2022, the SFRC's 2023 approval is subject to two reservations concerning the Base Erosion and Anti-abuse Tax (BEAT) and Article 23 (Relief from Double Taxation). The reservation concerning BEAT clarifies that (i) the Treaty shall not prevent the imposition of BEAT under U.S. Internal Revenue Code Section 59A and (ii) paragraph 1 of Article 23 of the prior Treaty would be deleted and replaced with the following:
1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof):
- the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens the income tax paid or accrued to Chile by or on behalf of such citizen or resident. For the purposes of this subparagraph, the taxes referred to in subparagraph b) of paragraph 3 and paragraph 4 of Article 2 (Taxes Covered), excluding taxes on capital, shall be considered income taxes; and
- in the case of a United States company owning at least 10% of the aggregate vote or value of the shares of a company that is a resident of Chile and from which the United States company receives dividends, the United States shall allow a deduction in the amount of such dividends in computing the taxable income of the United States company.
Significant provisions of the Treaty from a Chilean perspective would:
- Reduce withholding tax (WHT) rates on interest payments from Chile (i.e., from 35% to either 4%, 10% or 15%)
- Reduce WHT rates on royalties paid from Chile (i.e., from 30% to either 2% or 10%)
- Reduce Chilean capital gains tax rate in certain cases (i.e., from 35% to 16%); the tax Treaty may eventually protect U.S. residents from Chilean indirect transfer tax applicability
- Eliminate WHT on the payment of services, if certain conditions are met and business is not conducted through a permanent establishment (PE) in the country
- Not affect Chilean dividend WHT on dividends paid from Chile to the U.S. ("Chile clause" within protocol)
- Include a limitation-on-benefits provision that includes a "headquarters company test" and a triangular provision
- Include provisions for exchange of information between the U.S. and Chilean tax authorities
- Include rules that source interest and royalty income to the residence of the payor or, alternatively, if the payor has a PE in connection with which the liability to pay interest or royalties was incurred, then to the location of the PE
- Provide a place-of-use test for sourcing royalty income in cases where the residence of the payor and the PE rules described previously do not apply
- Facilitate and eliminate some uncertainties on the foreign tax credit systems for the taxes paid
- From a transfer pricing perspective:
- Enable requesting a Mutual Agreement Procedure (MAP) if a taxpayer is subject to taxation inconsistent with the tax treaty (e.g., double taxation) on adjustments derived from transfer pricing
- Make it possible to sign Advance Pricing Agreements (APAs) between both jurisdictions (i.e., bilateral APAs)
If the Treaty is ratified, the withholding provisions would become effective for amounts paid or credited on or after the first day of the second month following the date on which the Treaty enters into force. For all other taxes, the provisions would take effect for tax periods beginning on or after the first day of January following the date the Treaty enters into force.
For additional information with respect to this Alert, please contact the following:
EY Chile, Santiago
Ernst & Young LLP (United States), Washington
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor