The move to tax Latin America's digital economy

The taxation of digital services at the place of supply has been a progressive global trend for the last decade. Now Latin America is quickly becoming part of the revolution with both Chile and Mexico introducing taxation laws in June 2020, adding to nascent regulation in Argentina and Colombia. However, across the region implementations by country are bespoke and vary significantly. As an Online Business selling digital services into Latin America here is what you need to know about new taxation laws in the region and how it may impact your payments acceptance strategy.

Argentina was the first adopter of a digital tax in LatAm by applying a tax on digital services by non-resident entities in June 2018. The tax rate initially applied was the standard domestic VAT rate of 21%. However, in November 2019 an amendment to this original digital taxation law occurred called ‘Impuesto País’. The Impuesto País tax rate is 30% of the gross amount invoiced on digital service purchases which are provided from entities outside of Argentina. This is the current rate of tax applied today to digital services provided by non-resident entities which are defined by the Argentinian revenue service AFIP (Administración Federal de Ingresos Públicos). The list is available here.

The implementation of the Argentinian digital tax is unique in that it taxes the Argentinian consumer directly, through the country's payments eco-system. Card Issuers in the country are required to collect tax on their Cardholders customers who have made purchases from non-resident entities and remit funds to the Argentinian tax authorities on a weekly basis.

Brazil is the largest digital economy in Latin America with over 40% of all digital purchases and is the elephant in the room when it comes to digital taxation strategy. For many years, Brazil has applied a tax on all foreign currency purchases by Brazilian Cardholders (IOF) of 6.38%. IOF applies to any transaction paid for by a Brazilian Issued Credit Card in a foreign currency (both online and physically).

While there have been recent failed attempts to introduce a digital services tax in Brazil, the taxation reform initiative under present Economic Minister, Paulo Guedes, seems finally destined to deliver. However, between Guedes and implementation is the Brazilian parliament. While previous taxation initiatives have fallen at this hurdle, given current economic circumstances in the country, it is difficult to see where the political opposition will come from. At the time of writing, exactly what form this tax will take and when is unclear but it is more likely than not, and in the next 12 months. A space to be watched...

Since June 1st 2020 all non-resident suppliers of digital services to Chile are required to collect and pay a tax of 19% on the value of sales to the Chilean revenue authorities.

The system is simple and straightforward. Registration is possible through a dedicated portal. Non-resident supplies may choose to pay their tax obligations in Chile on either a monthly or quarterly basis, by payment through international bank transfer.

Since July 2018 non-resident digital services providers have been required to pay tax in Colombia for Business to Consumer services rendered in the country at a rate of 19%.

Non-resident providers should declare tax charged on the service to its Colombian customers and make payment to the Colombian tax authorities directly, every two months.

Colombian tax law considers the following sales as digital services: 1) audiovisual services, 2) services through digital platforms, 3) online advertising services, 4) e-learning and long-distance training services, 5) sales of intangibles, and 6) other electronic or digital services provided to Colombian residents. Note that there are some exemptions to the tax which may apply.

In the event of non-compliance by non-resident entities the Colombian law provides for the with-holding of such taxes by domestic Colombian Banks and Card Issuers.

Since June 2020, both resident and non-resident providers of digital services to Mexico are required to pay a tax to Mexican revenues authorities of 16% on sales to Mexican customers.

Some of the main obligations of the non-resident digital services company are as follows.

• Returns are monthly
• Mexican Tax ID (RFC)
• Appoint a local tax representative

And the rest...

Paraguay intends to introduce a digital services tax in January 2021 applying to non resident providers. The proposed tax rate is 10% and is expected to be collected by the Card Issuer ala the Argentinian model.

Costa Rica has outlined its plans to tax non-resident digital services providers from August 1st 2020. A 13% tax rate will be levied.

Since 2018 Uruguay has applied a tax on digital services, which includes both resident and non-resident providers. Non-resident providers are expected to register with the Uruguayan tax authorities directly.

So what does this mean for payments acceptance?

It is important to state that none of the new digital taxation rules force non-resident operators to become resident. Therefore, a digital services provider using a Cross Border payments acceptance model continues to be a valid strategy for Latin America. Of course, the new tax rules may cause recalculation of the value of operating as a non-resident entity in some markets, but this decision will vary from business to business. In the particular case where the Card Issuer is applying the tax (i.e Argentina), it is important that the Cardholder is made aware of this charge at Checkout. In this application of the digital services tax there is significant potential for poor customer experience, high customer support engagement and ultimately lost accounts.