On June 22, 2023, the U.S. Senate voted to approve the ratification of the tax treaty between the U.S. and Chile, 13 years after being signed. The vote was 95 to 2. The Senate Foreign Relations Committee had two reservations: one related to U.S. tax on BEAT (base erosion and anti-abuse tax) payments of corporations with substantial gross receipts and the other on the relief of double taxation. The treaty also includes a declaration on the need for changes being made to international tax provisions in relation to the Tax Cuts and Jobs Act to be included for future tax treaties.
This approval is crucial for ensuring U.S. companies have access to lithium, an essential component for electric vehicle batteries. The treaty was initially approved by Chile’s Congress in 2015 and didn’t advance out of the U.S. Senate in 2012 due to a concern of foreign tax authorities obtaining information on U.S. citizens. The U.S. Chamber of Congress has been saying this is an urgent priority and businesses have been pushing for it for years. Without this treaty in place, taxes on U.S. companies with Chilean operations could climb higher than 44%. Mining and finance are strong industries for U.S. companies to do business in Chile.
In April, Chile announced a plan to expand lithium mining and regain the title of world’s top lithium producer and if the treaty were to fail, it is expected to harm the U.S. transition to clean energy and technologies.
Significant provisions of the approved tax treaty include the following:
- Withholding tax rates on interest payments from Chile may be reduced to either a 4%, 10%, or 15% rate.
- Withholding taxes on royalties paid from Chile or the U.S. may be reduced from 30% to 2% or 10%.
- There will be no effect to the Chilean dividend withholding tax on dividends paid from Chile to the United States. The treaty states that the source country generally may impose a 15% tax on dividends, but it’s reduced to 5% if the beneficial owner of the dividends directly owns at least 10% of the voting stock of the paying entity. Dividends paid to pension funds are tax-exempt from source country taxation.
- The implementation of the treaty reduces the Chilean capital gains tax rate in some cases from 35% to 16% and may eventually protect U.S. residents from Chilean indirect transfer tax applicability.
- Clarify and mitigate some uncertainties regarding the foreign tax credit systems for the taxes paid.
The treaty includes rules that source interest and royalty income to the residence of the payor or, if the payor has a permanent establishment (PE) in connection with the liability to pay interest or royalties was incurred, then to the location of the PE. It also provides a place-of-use test for sourcing royalty income in cases where the residence of the payor and the PE rules do not apply.
Impacting transfer pricing, the treaty enables requesting a Mutual Agreement Procedure if a taxpayer is subject to taxation that is inconsistent with the tax treaty on adjustments derived from transfer pricing and agrees to execute advance pricing agreements between the two jurisdictions.
In addition, the Limitation on Benefits (LOB) article of the approved tax treaty is an anti-treaty shopping provision that is intended to prevent residents of third countries from obtaining benefits under a treaty not intended for them. It includes a headquarters company test and a triangular provision.
The final approval is being sent to the White House, and President Joe Biden has plans to sign it. Once ratified, the withholding provisions are 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 other taxes, the provisions are effective for January 1 following the date the treaty is signed.
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