US-Chile Tax Treaty Will Enhance, Streamline Trade for Companies

The US-Chile tax treaty entered into force in December, aiming to reduce tax barriers between cross-border business relationships between the US and Chile.

This treaty has the potential to enhance the profitability of businesses looking to establish foreign operations in either country, as it will have a substantial impact on taxes and trade. There are three areas where we anticipate significant change.

Eliminating Double Taxation

While the existing trade agreement between the US and Chile helped streamline trade between the two countries, it didn’t solve one of the biggest barriers to foreign business operations between the two countries: double taxation.

Previously, businesses operating in both countries faced the risk of being taxed by both the US and Chile on any recognized income. Without addressing the complexities of both countries’ separate tax codes, the existing agreement ultimately led to increased costs and confusion.

This risk of diminished profitability due to double taxation deterred businesses considering cross-border operations between the two countries. The US-Chile tax treaty will lower tax rates and, therefore, eliminate the issue of double taxation for US businesses operating in Chile and vice versa.

Foreign Tax Credits

The treaty will also reduce double taxation by expanding access to foreign tax credits on the US side. Existing regulations impose strict limits on eligible foreign taxes, potentially skewing the amount of tax credits available if said foreign taxes diverge from US federal tax principles.

Under the treaty’s terms, the US acknowledges certain Chilean income taxes as eligible for foreign tax credits, expecting a significant broadening of the types of taxes qualifying for such credits. While there are still regulations around FTC availability and limitations, businesses will no longer need to determine whether the taxes are considered income taxes under US federal tax principles.

US-based businesses and workers interested in conducting business in Chile can expect to feel the impact of this expanded access soon through significant reductions in their tax bills. This change will make operating in Chile more profitable, especially as it creates a prime environment for US foreign investment.

Lithium-Ion Imports

The global mobile technology landscape hinges mainly on lithium-ion batteries, powering devices from smartphones to electric vehicles. As one of the most crucial resources in the modern world, lithium-ion batteries heavily depend on the relatively scarce mineral lithium.

While the US has a few lithium reserves and a lithium mine in Nevada, its natural resources aren’t sufficient to meet the rising demand for lithium and lithium-ion batteries. Because of this, the US relies heavily on imports, with China as its main supplier.

This reliance on China has drawn scrutiny amid escalating tensions between the two countries. And while it’s risky, it’s also extremely difficult to optimize domestic battery production to meet rising demand without an accessible and affordable source of lithium.

Enter Chile: the second-largest lithium producer and home to the largest lithium reserves in the world. With reduced tax barriers through the US-Chile tax treaty, imports from the country are much more accessible. The treaty presents the opportunity to optimize production with a more secure and mutually beneficial lithium source.

Looking Forward

The US-Chile tax treaty opens the door to many opportunities for individuals and businesses in both nations. Chile stands to reap significant benefits by welcoming a surge of foreign investment from US businesses seeking to establish a foothold in the country.

The US also gains a strategic advantage with expanded access to a reliable supply of lithium and potential business opportunities related to tapping the country’s reserves. Overall, the treaty enables workers from both the US and Chile to live and work in either country without worrying about double taxation.

This treaty likely will spur more cross-border commerce, spanning various sectors. It benefits rules for individuals such as provisions governing the taxation of income from employment, payments to students and trainees, and pensions and Social Security payments—all of which can facilitate the movement of labor and expertise across borders, benefiting the whole region.

There is no doubt that the treaty will serve as an exemplary model for future arrangements between the US and other nations in the region.

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

Vanessa Piedrahita is tax partner and Latin America practice leader at Aprio.

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