The U.S. –Chile Income Tax Treaty: A Guide for other Developing Countries

By David Spencer, guest blogger:

Say a company from one country invests in another country and earns income there. The question then arises as to which country gets to tax which parts of that income. A principal purpose of income tax treaties is to allocate taxing rights between the two countries which are parties to the treaty.

This allocation of taxing rights is especially important when the income tax treaty is between a developing country and a developed country. The U.S.-Chile income tax treaty provides greater taxing rights for the country which is the source of income. This is considered advantageous to developing countries -- so this treaty might serve as a guide for other developing countries which negotiate income tax treaties with the United States or other developed countries.

The OECD has a model income tax treaty (OECD Model Tax Convention on Income and on Capital) which was intended to be implemented between two developed countries. That OECD model tax treaty generally favors residence country taxation - that is, taxation in the country where the investor resides (is based). This favors OECD countries because most major multi-national corporations are based in developed (OECD) countries. (See our briefing paper on souce- and residence-based taxation.)

The United Nations has a model income tax treaty (UN Model double Taxation Convention between Developed and Developing Countries) which is intended to be used between a developed country and a developing country. The UN model tax treaty generally favors source country taxation that is, taxation in the country which is the source of the income.

The United States and Chile signed an income tax treaty in 2010, which has not yet been ratified. Although Chile became a member of the OECD in 2010, Chile is still generally considered a developing country.

The Treaty provides greater source country taxation of general business activities, dividends, interest, royalties and capital gains, and certain other income: greater taxation rights for the source country even than the UN model tax treaty does.

Chile has a network of twenty-six income tax treaties, which is a substantial number for a developing country. Its tax administration, the Servicio de Impuestos Internos (SII) is highly respected for its expertise, including in regard to its electronic filing/compliance system

In view of Chile’s expertise in international tax matters, the Treaty may serve as a guide to other developing countries which are negotiating income tax treaties with the United States or other developed countries.