Digital tax developments in South America and Mexico

South America and Mexico have joined the digital services tax revolution. 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  jurisdictions and in Mexico. One consistent thread running through these laws, and proposed laws, is that the scope of digital services covered is focused on international digital companies.

Argentina

Argentina announced its intention to tax digital services supplied by non-resident companies back in December 2017. This was planned under Law 27,430 and 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 has been 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. More here.

Brazil

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

Foreign digital service suppliers with sales in Chile have to apply, collect and remit 19% VAT on certain digital services since June 1, 2020. More here.

Colombia

In July 2018 Colombia published a law confirming the liability for foreign suppliers to register, collect, and remit VAT at 19%  for sales to individuals in Colombia. The law came into effect on January 1, 2019. 

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. More here.

Ecuador

Ecuador's VAT law was originally published on December 31, 2019. The country's President issued the relevant VAT regulations on July 28, 2020. The new VAT comes into effect on September 16, 2020.

The plans were revealed in the government’s draft Economic Growth Law that was presented to Ecuador’s national assembly. The burden of the collection of the 12% VAT on these digital sales will be the responsibility of certain financial institutions that will act as withholding agents. More here.

Mexico

Since June 1, 2020, Mexico imposes VAT at the standard rate of 16% on digital services provided to Mexico-based customers by non-resident businesses. More on Mexico's plans here.

Paraguay 

Paraguay's tax authority, la Subsecreta­ría de Estado de Tri­butación (SET), has postponed plans to tax the supply of digital services by non-residents to consumers based in Paraguay until January 1, 2021. 

In common with other South American rules, the burden of the settlement and collection of the VAT due (Paraguay’s standard VAT rate is 10%) will be on the local bank, the issuer of the payment card used in the purchase. More here.

Uruguay

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.

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