Taxation

This article reviews the policy advancements on digital taxation, the individual initiatives that some developed countries have enacted, and considers some recommendations for developing countries to address future changes. It also contains a brief analysis of the Ecuadorian VAT reform for digital services and other possible options that need to be considered by the country.

December 9, 2020

This blog reflects on an issue as current and complex as the control of the digital economy by the Tax Administrations (TAs). The topic is very important in Latin America and Caribbean because it is the most unequal region in the world with extreme poverty. The prevalence of informal economy in Latin America and Caribbean requires that controling the digital economy and combating tax evasion be a priority for the region.

Digital Economy and Taxation in Latin America

The aim of this contribution is to suggest some courses of action for Latin America and the Caribbean (hereinafter, LAC) in relation to the taxation of the digital economy. For this purpose, after a brief description of the international background on direct and indirect taxation, I refer to the state of play in the LAC region, making a few preliminary considerations and presenting some generalities on the measures that have been adopted. Finally, I will share some thoughts and recommendations.

Returning to a global vision of the analyzed matter, it should be noticed that in its long path to becoming an OECD member, Peru closely follows the discussion progress towards a global solution to tax challenges arising from digitalization. Nevertheless, Peru has not stablished yet unilateral tax measures to levy high digitalized services especially in the context of B2C services, but the intention is present according to a later comment.

On August 23, 2018, Sebastián Piñera, president of Chile, with the general support of all political actors, sent to the Congress a Bill proposing a new tax, on the supply of digital services rendered by digital platforms. This Bill was introduced with a general objective, included in its title, to “modernize the Chilean tax system, intending to incorporate the best practices observed at the international level, as well as taking care of the challenges and particularities that technological advances imply, such as the digital and collaborative economy”.

Most of DSTs significant propositions are based on several grounds, including the goal of having businesses and corporations, especially multinational corporations (MNCs) pay their due share on taxes, taxing profits derived from consumers activities in their territory, or adapting traditional regulations and systems of international taxation to guide and inform new forms of unsettling business models that can be conducted virtually. This is following the debate that digital firms are undertaxed.

Teaching taxation is not only a matter of mastering the tax codes and regulations, not anymore. Tax return filing apps, either provided by governments or companies, will provide for results that may not reflect the best interpretation of legal provisions. Working with tax policies for the digital economy has proved to be almost an ”impossible mission”: difficult to draft a proposal and even more difficult to reach a consensus.

The COVID19 pandemic has shown that, while physical presence-based commerce was suffering the consequences of social isolation, with many businesses going into bankruptcy, the e-commerce increased. With millions of new customers - lots of those who had never bought anything on the internet before - the sector experienced unprecedented growth, despite the Pandemic, despite the crisis.

The role of  States’ in the protection and delivery of fundamental rights was reintroduced in the international debate.  The  State is responsible for the implementation of the most relevant measures, mainly in emergencies such as the one we are facing now. Only coordinated measures with collective goals will have a real effect on the fight against the COVID19. The cries of "less state" began to be rethought. We may mention the example of the Brazilian health system,  the SUS - Free and universal Unified Health System, which provided for health services for most cases of COVID19 in Brazil, despite a large private health services network across the country. At this moment, we hope that Brazilian authorities will become more aware of the importance of social controls of public money and demand transparency and efficiency of public measures and expenses.