Chile's tax administration (SII) is clarifying that falsified invoices may disqualify VAT credits unless paid through nominative bank instruments, while unverified expenses for income tax purposes face add-back taxation or special penalties depending on whether cash disbursements were involved.
Chile’s tax administration (SII) has issued Ruling No. 1407-2026 on 10 June 2026 outlining the tax implications regarding fraudulent or unreliable invoices in relation to Value Added Tax (VAT) and Income Tax. It clarifies that while falsified documents generally disqualify a business from claiming tax credits, exceptions exist if specific payment verification methods are followed.
The Ruling also distinguishes between VAT compliance and the deductibility of expenses, noting that expenditures must be rigorously proven to be accepted as necessary for generating income. If a business fails to provide sufficient evidence for a transaction, the cost is categorised as a rejected expense. Such unverified disbursements may then be subject to a special penalty tax or added back to the taxable liquid income.
Distinction between VAT and income tax
It is essential to separate the eligibility for the VAT credit from the acceptance of the expense when determining net taxable income. According to Article 23, No. 5 of the Law on Sales and Services Tax (LIVS), taxes charged or withheld on false or non-genuine invoices, or those issued by individuals who are not taxpayers of this tax, do not grant the right to a tax credit. However, the buyer may retain this credit if they meet specific requirements, primarily that the payment was made via nominative bank instruments (check, cashier’s order, or electronic transfer) in the name of the invoice issuer.
Evidence of expenses for income tax
Regarding income tax, Article 31 of the Income Tax Law (LIR) stipulates that net income is determined by deducting all expenses necessary to produce it from gross income. The mere presence of a false or non-genuine invoice does not necessarily imply the rejection of the expense for income tax purposes. A taxpayer may use all legal means of proof to reliably justify or credit the nature and effectiveness of the expenditure before the Service.
Taxation of rejected expenses
If an expense fails to meet the requirements of Article 31 (for instance, if it is not reliably proven), it is considered a rejected expense. Its final taxation depends on its nature:
- If it constitutes an effective cash disbursement or withdrawal of goods: The taxation under Article 21 of the LIR applies. This occurs when the taxpayer fails to prove the nature and effectiveness of the disbursement or when the expenditure benefits owners or parties related to the company. In these cases, it is subject to a sole tax or the treatment outlined in the third paragraph of said article.
- If it DOES NOT constitute a cash disbursement or withdrawal of goods: The item must simply be added back to the net taxable income to be taxed with the First Category Tax (IDPC). In this scenario, the IDPC corresponding to these rejected expenses that are not subject to the sole tax of Article 21 must be deducted from the Accumulated Credit Balance (SAC) registry.
