Chile - Did you cross the PE line?

In my business, the question of whether a foreign enterprise has a permanent establishment (“PE”) in Chile comes up at least a few times a month.

In the old days the answer was fairly simple: if you have a fixed place of business or a representative with legal powers to close deals on your behalf in Chile, you may have a PE (Interpretation No. 1). 

Later, without changes in the law, it was clarified by the tax authority (“SII”) that if a representative without legal power to close deals on behalf of a foreign enterprise was factually exercising said powers, and the deals were honored by the foreign enterprise, you might also trigger a PE (Interpretation No. 2). 

Today, the interpretation of the same legal provision went one step further, and not without cause. Chilean tax law has evolved remarkably slow on this matter and due to the fast pace at which global economy evolves the authority was somehow forced to come up with a “forced” interpretation of the law.

Under Interpretation No. 3, published on December 7, 2017, through Circular No. 57 of 2017, a PE can be deemed to exist in Chile in absence of a tax treaty if:

1. A foreign entity or individual performs all or part of its business in Chile through a branch, office, site or other location (PE hypothesis No. 1).
2. An agent or representative operates in Chile for the account or benefit of a foreign entity or individual, performing all or part of its business (PE hypothesis No. 2).

In the view of the authority, PE hypothesis No. 2 can occur when an agent or representative closes businesses on behalf of the foreign entity or individual, or when said agent or representative performs the principal role that leads to the conclusion of said businesses, excluding of course agents that are appointed only for specific tasks (e.g. agents appointed to receive judicial or administrative communications on behalf of the foreign entity or individual).

A few notes on the above:

1. Whoever is looking for a Service PE hypothesis may need to keep looking.
2. The OECD and the G20 are generous by providing examples of auxiliary activities that even if performed for the benefit of a foreign enterprise do not cause a PE to be created. Some of that generosity is missing here.
3. Chile, being a strong OECD and BEPS supporter, imported on this interpretation (albeit not in the law) the possibility of a representative or agent creating a PE by means of fulfilling the principal role that leads to the conclusion of business. We can thank Action 7 for that.
4. However, there are a couple tiny (not really) details from Action 7 that were left out from this interpretation (ups?):

(i)  the foreign enterprise must not materially modify the contract; and;

(ii) these contracts are: (a) in the name of the enterprise; or; (b) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or, (c) for the provision of services by that enterprise.

Interestingly enough, at the end Circular No. 57 does provide clarity on one relevant topic: the fact that upon a treaty being applicable said treaty would only grant taxing powers to one state or the other, but it won’t determine local taxation of the PE. In that regards the authority does point out that upon a PE deemed being existent under a treaty the next step was to confirm if said PE would be deemed to exist under Chilean law.  

Based on the above I would like to share with you all a few simple thoughts:

1. Which non-commercial activities would be excluded from generating a PE? Warehousing and distribution for an online retailer? Training for a software company? Marketing for a laboratory? Assuming neither of those foreign enterprises has a commercial team in Chile, those activities could be seen as the most relevant activity performed by a local entity for the benefit of the foreign enterprise. However, are they relevant enough? Under Chilean law, the answer seems clear: no, but does the SII share that view? It seems unclear.
2. If I trigger a Service PE under a tax treaty, considering neither Chilean law nor the interpretation of the SII acknowledges it, do I get to walk home? Do I have to report it and then have the authority confirm there is no PE because Chilean law does not know it?
3. If I do have a PE, so what? To me, this is the key question still unresolved (from a practical perspective) in Chile.
4. Assuming a PE has been created an arm’s length remuneration for the function performed by the PE should be sufficient under Chilean transfer pricing regulation.
5. Will the SII be happy with cost-plus remuneration of a local PE that in their view performs a principal role that leads to the conclusion of the business, or would they like a bigger chunk, let’s say by means of a split profit methodology? Unfortunately, the answer remains unknown and they line might already have been crossed.