The Implications of the US – Chile Tax Treaty

At a glance:

• The main takeaway: Both Chile and the US stand to gain from their new tax treaty, and so will any businesses and individuals who want to establish operations or live in either country.
• The implications for your business: Provisions for expanded access to foreign tax credits and other tax provisions aimed at reducing the overall tax burden, and in particular double taxation, will greatly improve the potential profitability of businesses wishing to establish foreign operations in either country.
• Next steps: Learn more about the tax treaty and the doors it may open for your business, then reach out to Aprio’s International Tax Specialists to learn more and explore your options.

Schedule a consultation with Aprio’s international tax specialists today.

The full story:

While it officially entered into force on December 19, 2023, this historic tax treaty between the United States and Chile has been a long time in the making. The historic agreement – now just the third tax treaty between the US and countries in South and Central America – is, as its name implies, aimed at preventing double taxation and fiscal evasion for people and companies operating and/or doing business between Chile and the United States.

“The Convention between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital” was originally signed in Washington in February 2010, then languished between the two countries’ governments for over a decade due to concerns over language on the base erosion and anti-abuse tax (BEAT) and the foreign tax credit (FTC). Chile officially completed its process of approval of the treaty back in 2015, but it took the American Senate until June 2023 to approve the treaty with two reservations and a vote of 95 to 2 in June 2023.

It may have significant implications for trade, mutual mobility and the establishment of American entities in Chile and vice versa. Understanding how those implications may impact your business is of critical importance.

Implication #1: No More Double Taxation

The United States already has a comprehensive free trade agreement with Chile. That agreement already removes many of the barriers that could otherwise stifle trade between the two countries, but it didn’t do much to clarify the taxing rights of each country.

Any American business with operations in Chile previously had to contend with both the American and Chilean tax codes, greatly increasing both the cost and confusion associated with maintaining such operations.

The problem of double taxation was especially detrimental to any cross-border operations.

Without the treaty, any income recognized by foreign companies or individuals could be taxed by both the American and Chilean governments, greatly reducing the profitability and viability of such operations. Even with the free trade agreement between the two countries, any business that considered establishing cross-border operations in either country would have to factor in the added burden of a second income tax assessment on their earnings into their calculations.

As any economics professor could tell you, putting such rigid and onerous constraints on potential profitability served as a potent deterrent for both foreign businesses and individuals who may have otherwise invested and/or worked in either Chile or the United States.

Implication #2: Reduced Foreign Tax Credits

The US side of the treaty in particular makes significant accommodations for relieving the burden of double taxation in the form of expanded access to foreign tax credits (FTC). Current regulations put strict limits on which foreign taxes are eligible for foreign tax credits, essentially limiting it to foreign taxes that qualify as income taxes under US federal tax principles, potentially limiting the amount of tax credits one could receive if the foreign taxes in question didn’t fit US federal tax principles.

Under the terms of the treaty, the US will start recognizing certain Chilean income taxes as eligible for a foreign tax credit, with the expectation being a significant expansion in the types of taxes that are eligible for foreign tax credits. The rules governing the limitations on the availability and uses of the FTC will still apply, though claimants will not need to analyze whether the taxes are considered income taxes under US federal tax principles.

The impact of this change could be felt soon. American companies and workers who want to operate and/or work in Chile should find their tax bills reduced significantly. Easing this burden should greatly increase the profitability and overall viability of operating in Chile, paving the way for any number of American foreign investments in the country – which may be as important to businesses as it is strategically important to the United States.

Implication #3: Improved Lithium-Ion Diplomacy

Most of the mobile technology in the world operates using lithium-ion batteries. Laptops, smartphones, earbuds, e-scooters, electric vehicles and a long list of other electric and electronic devices are reliant on lithium-ion batteries, making the relatively rare mineral one of the most important resources in the modern world.  

Chile is home to the world’s largest lithium reserves and is the second-largest lithium producer in the world. The US has some lithium reserves and at least one productive lithium mine in Nevada, but relies on imports to sate its need for both lithium and lithium-ion batteries. The amount of lithium-ion batteries the US imports has been growing by leaps and bounds over the past decade, with most of those imports coming from one place: China.

The country’s reliance on China as their primary supplier of lithium-ion batteries has come under increasing scrutiny as relations grow increasingly tense between the two economic superpowers. It’s become clear that relying on China for such an important resource is risky, at best, but it’s very difficult to scale up domestic battery production to the necessary degree without a more accessible source of lithium itself – making the signing of this US/Chile tax treaty as timely as it is mutually beneficial.

New Opportunities Ahead

The new tax treaty between the US and Chile opens numerous opportunities for people and businesses in both countries. Chile stands to benefit greatly from the surge of foreign investment from US businesses looking to establish operations in their country. The US will benefit from having expanded access to a steady supply of Chilean lithium, particularly if American firms can help Chile fully tap its reserves.

Workers from both countries will be able to live and work in the other country without bearing the burden of double taxation. The treaty will undoubtedly facilitate higher volumes of cross-border commerce of all kinds, and will hopefully serve as a model for future arrangements between the US and other countries in the region.

Schedule a consultation with Aprio’s International Tax Specialists today to explore the new options available to you and your business.

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