Latin America To Offer Solution To Tax Digital Economy

; posted on
April 16th, 2019

At an event hosted by the Inter-American Dialogue, Ubaldo González (Senior Sector Specialist in Tax Administration, Inter-American Development Bank) explained that Latin American countries face unique challenges, including revenue shortages that threaten their ability to meet the U.N.’s 2030 Agenda for Sustainable Development. One of the causes of the revenue shortage is due to the untaxed income generated in digital economy.

Overview

Latin American countries rely more on consumption taxes than developed economies, therefore, all the revenue lost to consumption that is not being effectively taxed VAT is a big loss for these countries. These countries, including those whose primary revenue source is corporate income tax, have been unable to capture corporate tax revenue from digital companies and also struggle with eroding tax bases in sectors such as the hotel, transportation, and retail industries.

During the event, Gonzales conveyed his believe that significant economic presence approach is the preferred option for the Latin American region. The reason for that is that this significant economic presence approach is the one that in principle will be capable of giving back some of the tax base to the market economies in Latin American economies.

Unilateral Action Across Latin America

Regardless of the recommendation given by Gonzales to adopt significant economic presence, some Latin American countries have implemented or introduced unilateral measures targeting digital companies as shown below:

Countries

Initiative

Applicable legislation

Peru

  • Applying 30% withholding tax for digital service. Such service defines very broadly as services that are rendered through internet or other networks. Digital services are considered as Peruvian sourced “when the service is economically used or consumed within the country”.  (Market use).
  • Business to customer operation (B2C) are not regulated

Legislative Decree 945 (2004) and Legislative Decree 970 (2006)

Chile

  • Digital services can be driven to the rules of VAT or Income Tax.
  • August 2018: Bill that introduces a tax on Digital Services (3%) in operations B2C
  • The Tax will be withheld by debit and credit card issuers
 

Argentina

  • The system provides, as a new taxable fact, the importation of digital services if the actual use or exploitation of the product is carried out in the territory.
  • Different provisions in Argentina are referred to taxes for royalties and other services that in practice cover many digital services

Law 27,430, Decree 354 of April 23, 2018 and the General resolution 4240 Federal Public Revenue Administration.

Mexico

  • A bill that introduces a tax on digital services, at a rate of 3%, no matter where they are generated, is being discussed. The main target are advertising services.
 

Costa Rica

  • Bill aiming at enforcing VAT on digital services.
 

Colombia

  • Last two tax reforms included provisions for VAT on digital services in B2C operations
  • Foreign providers should register before DIAN or being subject to withholdings by debit, credit and other card issuers (if appointed by the tax administration)
 

According to the Inter-American Development Bank (IADB), which supports countries in their tax policy and administration reforms, the unilateral measures should not be taken and wait until 2020 to see what comes out of the OECD.

Source: The Dialogue

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