South America and Mexico got in on the digital tax revolution this year. A wave of developments have come across our radar as we continue to monitor rule changes and legislative proposals across the globe.
Here, we provide a brief summary of what has happened in a number of South American and Mexico jurisdictions over the past number of months. One consistent thread running through these laws, and proposed laws, is that the scope of digital services covered is focused on international digital companies such as Netflix.
Argentina announced back in December its intention to tax digital services supplied by non-resident companies, under Law 27,430 initially effective as from February 1, 2018. However, this date remained irrelevant as there was no collection mechanism in place, this was later implemented under Resolution 4240 and is effective as of June 27, 2018.
A key difference in the design of the Argentine rules when compared to other global implementations is that the liability to collect and remit the tax is placed upon the payment service provider. In addition, this liability only concerns foreign digital service merchants that appear on an AFIP (Administración Federal de Ingresos Públicos - Argentina’s revenue service) list.
Back in November 2017, a Brazilian State Agreement (Convênio ICMS 106/2017) revealed plans to tax digital services – e.g. games, streaming services, music and image downloads, etc — via the State tax mechanism (ICMS).
However, by March 2018, these plans were put on hold after a favourable ruling for the Brazilian Association of Information and Communication Technology Companies (Brasscom). This association had filed a petition against the imposition of ICMS on software downloads and streaming. They won a preliminary injunction to suspend the effects of the ICMS Decree that proposed to impose ICMS on the purchase of software via download or streaming.
Chile has also been reviewing its legislation relating to cross-border digital sales. In August 2018, Chile’s Finance Minister Felipe Larrain revealed that such foreign-supplied digital services would be taxed at a rate of 10%. The moves are part of a broader aim to modernize Chile's tax structure.
Back in June 2018 Minister Larrain had revealed his government's plans. “We are looking at other ways to apply tax, perhaps charge a transaction fee,” Minister Larrain is quoted by Reuters. “Initial estimates suggest that collecting taxes from the digital economy and digital commerce could bring in several hundred million dollars.”
Of course, this is a familiar refrain from governments seeking to tax cross-border e-commerce. As traditional tax revenue sources slow, or disappear, there becomes a need for governments to seek revenue elsewhere. The burgeoning digital economy has attracted a lot of attention from tax authorities as it has become such a significant part of the economies of countries around the world. The issue in Chile is replicated across South America and further afield.
A law in Colombia has been published confirming the liability for foreign suppliers to register, collect, and remit VAT at 19% in Colombia from July 1, 2018, for sales to individuals.
An important point to note is that if a foreign supplier does not register, collect, and remit VAT to the Colombian tax authority (DIAN), the government could instruct the Colombian bank card issuers to withhold the tax that is due.
A draft legislative proposal in Mexico's Chamber of Deputies seeks to tax international digital platforms at a rate of 3%. The proposed tax would be remitted to Mexico's Servicio de Administración Tributaria (SAT).
Such a plan has been rejected by members of Mexico's digital industry as they claim there is not enough maturity in the market to absorb such a tax imposition.
Paraguay's tax authority, la Subsecretaría de Estado de Tributación (SET), is investigating the possibility of taxing digital platforms supplying services to residents in the country. This comes after a 'film law', which accounts for audiovisual services, was enacted. Potential targets of such taxation included international companies such as Netflix and Spotify.
Deputy Minister of Taxation at the SET, Liz Del Padre, has stated that Paraguay is analyzing the experiences from other countries in the region, which recently regulated the taxation of digital platforms providing services to domestic residents.
Rules governing the supply of cross-border digital services came into force in July 2018. The rules, however, differ from other implementations as income tax may also be due in addition to the 22% VAT.
We first learned of Uruguay’s plans to tax foreign-supplied digital services back in October 2015 when a report in El Observador website outlined how the National Association of Uruguayan Broadcasters (Andebu) had raised the issue of an unfair marketplace when competing with the likes of international streaming players such as Netflix and Spotify.
It is estimated that this new VAT could raise USD$10 million per year from sales of foreign digital services to customers based in Uruguay.