An Alternative Digital Services Tax: The Latin American Experience
During our webinar a few weeks ago on the US presidential elections and international taxation, IBFD’s Stuart Gibson brought up a very interesting point on the taxation of the digital economy and digital services taxes that deserves some further exploration.
Gibson, who heads the IBFD’s Chief Editor for Global and US News, explained that “there are other countries…that are tackling the whole notion of digital services in a very different way, one that's something alien to us in the US, which is through a VAT.”
Citing Latin American countries such as Chile, Mexico and Argentina as a few of the prime proponents of taxing the digital economy via a VAT, Gibson said that implementing such a tax “completely takes it out of the realm of income taxation,” adding another “moving part” to this highly complex discussion.
Here’s a short summary of what three Latin American countries have done to tax the digital companies selling their products and services at a local level.
Starting on June 1, 2020, over-the-top media service companies (OTTs) and other firms involved in the provision of digital services such as Amazon, Netflix, AirBnB and Spotify have to pay a 19 percent VAT on its products and services, a charge that has to be collected by the company itself.
More specifically, as stated in the tax bill, this new VAT applies to “the intermediation of services provided in Chile; the supply or delivery of digital entertainment content; the provision of software, storage, platforms or IT infrastructure; and advertising, regardless of the medium through which it is delivered.”
The government expects this levy to rake in close to $2.2 billion in revenue.
Several companies such as Netflix have already passed on this charge to consumers, jacking up subscription prices by close to a fifth in order to cover for this unexpected expense.
Mexico started charging a VAT on digital services providers on June 1, 2020.
Under this plan, as explained by Mondaq’s Hanna Mialik, the government will “allow for the taxation of online sales made to customers based in Mexico, regardless of whether the supplier has a physical presence in-country.”
Services targeted include “downloading and/or accessing images, movies, music, text, information, video, gaming (including gambling), ring tones, visualization of online news (but not eBooks or electronic versions of periodicals), traffic, weather, online clubs, dating sites and other multimedia content, distance learning, tests and exercises.”
Argentina has had a VAT on digital services in place since June 27, 2018, one that was expanded to between 29 and 30 percent in 2020 following the implementation of the País tax, which was intended to build “an inclusive and supportive Argentina.”
As explained by DLA Piper, this VAT focuses on digital services that are defined as: “... whatever the device used for download, viewing or use, those carried out through the Internet or any adaptation or application of protocols, platforms or technology used by the Internet or other network through which equivalent services are provided that, by their nature, are basically automated and require minimal human intervention…”
Furthermore, under this regulation, writes Taxamo in one of their blog posts, “liability for the collection and remittance of Value-Added Tax (VAT) [falls] on the shoulders of the Argentine consumer’s payment provider” and not the non-resident company offering the products or services, an interesting decision that goes against OECD recommendations.
Argentina’s tax administration (AFIP) put together a list of those companies that are impacted by this new VAT. More than 180 firms were included, but many large multinationals fell outside of the scope of this regulation.
What are your thoughts on taxing digital companies via a VAT?
Does it make more sense than taxing income like France and other European nations?
Stay tuned for more on the digital tax battle!