Chile Ups Ride-Hailing Company Tax Regulation Amid Tension

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By Tom Azzopardi

Uber Technologies Inc. and other ride-hailing companies would have to create local subsidiaries in Chile that would be liable for corporate income tax under new draft legislation.

The bill, presented to Congress July 20, is the latest attempt by the Chilean government to regulate the companies amid growing tension between taxi drivers, Uber drivers, and police on Santiago’s streets.

Last June, an Uber driver was shot in the arm after he tried to avoid a police inspection at Santiago’s international airport. The incident took place amid government efforts to step up inspections of unlicensed taxis, imposing fines, and seizing vehicle in some cases.

The previous administration presented legislation to Congress in 2016 after taxi drivers brought Santiago to a halt in protest over the government’s lack of action against the rise of ride-hailing companies.

But such incidents haven’t stopped drivers signing up to join Uber in droves. The number of individuals now registered with the company outnumbers licensed taxis by three to one.

New Business Category

The new bill would create a new category of business called a “ Transport Application Company” which would be responsible for complying with regulation governing the services provided by registered drivers.

By declaring themselves a transport company, the domestic Uber businesses would be exempt from paying value-added tax on the services they provide. But by creating a subsidiary in Chile registered with the tax authority Servicio de Impuestos Internos (SII), the legislation also implies that such businesses would be responsible for withholding tax on drivers’ income, whether these are considered employees or contractors.

These registered drivers would also be required to possess a professional drivers’ license and a car that meets higher technical standards than private vehicles. Individuals with convictions for drunk driving or sex offenses would be prohibited from undertaking any working for the app-based services.

“As a government, we are acting responsibly, understanding that the correct use of technology and a regulation which assures the professionalization of the sector implies improvement, for all the parties involved, especially the general public,” said Transport and Telecommunications Minister Gloria Hutt, announcing the bill July 20.

Companies or drivers found breaching the new rules could face fines up of to 4.7 million Chilean Peso ($7,093).

Uber has initially welcomed the announcement of a new bill to regulate the sector but expressed concern that the requirement for a professional driver’s license would affect the employment of its more than 75,000 drivers.

A requirement for companies to report information to the Ministry of Transport and Telecommunications could also breach the privacy of passengers and drivers alike, noting that a similar requirement was rejected during the discussion of the previous government’s bill, the company said in a July 20 statement.

Better Tax Model for Uber?

According to Ignacio Gepp of Puente Sur Tax Advisory, the government proposal potentially represents a more favorable model for taxation than the digital economy tax announced by the government last month which would subject offshore digital businesses to a withholding tax on payments.

That proposal is expected to be include in a wider overhaul of the tax system which Finance Minister Felipe Larrain said recently would be sent to Congress next month.

However, the crucial issue could be how much of Uber’s local income that the Chilean tax authorities will allow them to distribute back to their parent companies as a royalty for use of the ride-hailing technology.

“The approach that Chile has adopted on the taxation of this kind of digital company is the boldest that it could be,” Gepp told Bloomberg Tax July 23. However, he noted that it implies that “Chile will be capable of determining with the company the appropriate income to be allocated here.”

To contact the reporter on this story: Tom Azzopardi in Santiago at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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