US-Chile Tax Treaty to Open Doors to Business in Latin America

Strengthening our relationship with Latin America is crucial in the current geopolitical environment. The recently forged US-Chile Tax Treaty is a step in the right direction.

Companies rely on predictability and stability to drive cross-border trade and investment. Tax treaties are vital tools that prevent double taxation, reduce withholding rates, and foster investment between countries. Despite being the largest economy in the world, the US has a relatively limited number of tax treaties.

These treaties are hard to negotiate and often take years when both countries have to reconcile and evaluate the treaty partner’s tax framework, determine the scope of applicable taxes and reduction of rates, protect against tax evasion, and navigate political challenges.

However, the main issue in recent years hasn’t been the negotiation, but that signed treaties stall in the US Senate awaiting ratification. The recently passed Chile treaty is a prime example.

Signed in 2010, it’s also known as the US-Chile Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital. It languished in the Senate for more than a decade, despite being reported out of the Senate Foreign Relations Committee on multiple occasions under both parties—thwarting a critical mechanism to strengthen the bilateral business climate.

This treaty is crucial for Chile because US companies operating there will see immediate benefits and rate reductions when it enters into force. In the past decade, Chile has increased its corporate tax rate to 20% from 17% in 2012, to 21% in 2014 from 20% in 2013, and up to 25% to 27% in 2018 (depending on reporting method).

In addition to increased corporate tax, capital gains withholding rates in Chile have reached 35%. Non-resident providers of digital services to consumers now pay a 19% value-added tax. And a recently passed 1% ad valorem tax on copper mining, along with anti-avoidance rules, slims capitalization rules and limits on interest deductibility for related parties, among other things.

US multinational corporations have been competing on an unlevel playing field with other nations in the Chilean market—particularly Australia, UK, and Canada—which all have tax treaties in place. China is becoming more aggressive on its investments in South America, and Chinese companies also enjoy the benefits of a tax treaty with Chile.

Without the treaty, the rate for US companies would have reached as much as 44.45% by 2027, making it close to impossible for them to operate in Chile. Companies headquartered in a country with a bilateral tax treaty enjoy the reduced rate of 35%—nearly 10% lower than without a treaty, which amounts to a huge competitive disadvantage.

Withholding rates on interest payments now set at 35% will plummet between 4% to 15%, payments on royalties will plummet from 30% to 2% or 10%, and capital gains tax rates can drop in certain circumstances to 16% from 35% . All these reductions can support US companies devoting more resources to productive activities such as research and development.

For example, the Chilean withholding tax, coupled with the non-creditability of that tax under new US foreign tax credit regulations from 2022, made it difficult for companies to keep certain jobs in the US.

If work was performed in a country with no existing treaty with Chile, the withholding tax and non-creditability of the taxes created additional costs on those US services, making them 15% to 35% more expensive than competitor’s services in China and other countries with a treaty with Chile. The new US treaty provides certainty and allows foreign tax credits for taxes paid in Chile.

It also helps to keep workers and jobs in the US, instead of providing an incentive to relocate jobs abroad. When multinationals operate abroad, they hire workers here in the US to support their foreign operations. Tax treaties provide benefits to individuals and workers in both countries by helping to determine who has the right to tax and preventing double taxation of income.

Tax treaties also provide resources and remedies for taxpayers operating abroad. Provisions in this agreement in particular determine who has primary taxing rights and contain tie-breakers rules.

Companies operating in the US and Chile can sign advance pricing agreements between both jurisdictions to provide certainty on inter-company transactions. It also enables them to request a mutual agreement procedure if a taxpayer is subject to taxation inconsistent with the tax treaty (such as double taxation) on adjustments.

Tax treaties bring multiple benefits for US companies, workers, and taxpayers. They allow for fairer competition and increased access to international markets as well as increased investment here and abroad. The negotiation and ratification of additional tax treaties throughout the world should be a top priority for the administration and for Congress in years to come.

We applaud the policymakers who made the US-Chile tax treaty a reality and look forward to working with them to strengthen the competitiveness of US companies.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anne Gordon is vice president for international tax policy at the National Foreign Trade Council. She has worked on international tax matters in both the private and public sector.

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