Value Added Tax (VAT) in Latin America
Benjamin Franklin once said that nothing is certain in life except death and taxes. The phrase may have been first uttered by one of the authors of the US Constitution, but nowhere is it more true than in Latin America. And unlike the United States (with comparatively low rates), Value Added Tax (VAT) in Latin America accounts for a significant amount of the taxes that governments in the region collect.
It is of the utmost importance that foreign businesses and entrepreneurs do the necessary research into a particular Latin American country before setting up shop there. Incorporating and/or establishing a satellite office in a jurisdiction without the due diligence, and you may find that your business is strangled by high tax rates – with Value Added Tax (VAT) in Latin America being one of them. While you can get meaningful information from the internet, there is no substitute for local, on-the-ground professionals with legal, accounting, administrative, and back office services expertise.
With a few exceptions, Value Added Tax in Latin America has been steadily on the rise for the past 30 years. VAT is the largest source of tax revenue on average in Latin America and the Caribbean (LAC), at 27.7 percent of total tax revenues in 2019, according to the Organisation for Economic Co-operation and Development (OECD). Revenue from Value Added Tax in Latin America – as a percentage of GDP – nearly tripled on average between 1990 and 2019, from 2.2 percent of GDP in 1990 to 6 percent in 2019.
Top 10 countries with the highest VAT in Latin America
The following is a list of nations with the highest percentages of Value Added Tax in Latin America, as of 2019 (the year for which the latest figures are available):
- Chile – 39.9%
- Guatemala – 38.8%
- Peru – 38.5%
- El Salvador – 37.5%
- Paraguay – 35.7%
- Dominican Republic – 34.7%
- Honduras – 31.8%
- Ecuador – 30.3%
- Colombia – 29.6%
- Belize – 29.3%
- Regional average – 27.7%
During the Covid-19 pandemic and the lockdowns that followed, online shopping, e-commerce, and other digital commercial activity skyrocketed in Latin America. Retail e-commerce sales shot up 36.7 percent in 2020, representing higher growth than any other region in the world at the time.
A year later, a wide-ranging study was jointly released by the OECD, the World Bank, the Inter-American Development Bank (IDB) and an organization representing regional tax authorities. Entitled the ‘VAT Digital Toolkit for Latin America and the Caribbean’, the study recommended that LAC governments reform their tax laws to apply VAT to all e-retail purchases/e-commerce sales.
“Latin America and the Caribbean could increase tax collection by $3 billion by applying the value-added tax to e-commerce, according to estimates from the IDB, one of the institutions involved in the development of this toolkit,” the IDB stated in June 2021.
“With regard to Value Added Tax in Latin America, “the main VAT challenges relate to the strong growth in online sales of services and digital products to private consumers (such as ‘apps’, music and movie streaming, gaming, ride-hailing, etc.) and to the exponential growth in online sales of low-value imported goods, often by foreign sellers, on which VAT is not collected effectively under existing rules,” the organization added.
Many nations in the region heeded the Toolkit’s recommendations, and as a result, Latin America now leads the world in taxing digital services.
Value Added Tax levied on digital commerce in Latin America
What follows are the percentages of VAT in Latin America levied on digital goods and services by country:
- Uruguay – 22%
- Argentina – 21%
- Chile – 19%
- Colombia – 19%
- Peru – 18%
- Honduras – 15%
- Mexico – 16%
- Bolivia – 13%
- Costa Rica – 13%
- El Salvador – 13%
- Ecuador – 12%
- Guatemala – 12%
- Panama – 10%
- Paraguay – 10%
While a more robust VAT regime in Latin America is good for governments’ tax revenues, it is a costly nuisance for businesses in the region – especially for small- and medium-sized enterprises (SMEs). Any kind of tax hike means the cost of doing business goes up, and as that cost is typically passed onto the consumer, it means that the cost of many goods and services goes up too.
Companies looking to avoid paying business- and consumer-unfriendly Value Added Tax in Latin America (as well as other taxes) should look into the various Free-Trade Zones (FTZs) that dot the region. They are designed to attract foreign direct investment by providing businesses large and small with tax exemptions on corporate taxes, capital gains tax, import duties and VAT, among others.
VAT in Latin America: Top 10 countries offering FTZ tax exemptions
What follows is a list of Latin American countries that have active FTZs in place, where foreign businesses enjoy many tax exemptions (including Value Added Tax in Latin America):
- Costa Rica
- Dominican Republic
- El Salvador
Biz Latin Hub can help you
At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean, with offices in Bogota and Cartagena, as well as over a dozen other major cities in the region. We also have trusted partners in many other markets.
Our unrivalled reach means we are ideally placed to support multi-jurisdiction market entries and cross border operations.
As well as knowledge about Value Added Tax in Latin America, our portfolio of services includes hiring & PEO accounting & taxation, company formation, and corporate legal services.
Contact us today to find out more about how we can assist you in finding talent, or otherwise do business in Latin America and the Caribbean.
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