El Salvador assessing options to apply VAT on foreign-supplied digital services

El Salvador may be the next Central American tax jurisdiction to extend its VAT system to the sale of digital services by non-residents. 

In recent times, Costa Rica followed the trend of many tax jurisdictions worldwide in applying VAT to the sales of global digital businesses. From October 1, 2020, VAT at 13% must be levied by financial institutions on digital sales from foreign digital service providers and intermediaries — that are included on a government list — to consumers in Costa Rica.

Elsewhere, Mexico imposed 16% VAT on digital services supplied by foreign businesses on June 1, 2020, triggering compliance requirements for affected businesses.

El Salvador VAT proposal and IMF funding link

A May 18 article in El Salvador’s El Mundo website, the Minister of Finance Alejandro Zelaya was quoted as saying his government was assessing the potential taxation of e-commerce. "Yes, we are going to tax e-commerce services that are not being taxed at the moment," he is quoted as saying. He added: “There is a factor of tax inequality that must be corrected, and these are taxes that are already established and operations that are being transacted in Salvadoran territory, not in foreign territory.”

The background to this proposal to tax digital businesses is that the El Salvador government is in negotiations with the International Monetary Fund (IMF) to obtain a USD1.3 billion loan under a program called Expanded Service of the Fund. Increasing the amount of tax revenue recouped by El Salvador’s Treasury is one element of these negotiations.

The taxation of e-commerce itself is not a new idea. Currently, in El Salvador, the recipient of a digital service should report the 13% VAT due on purchase of the service to the country’s treasury department. It is the mechanism for the registration of non-resident digital businesses as well as the efficient collection and remittance of VAT that any new rule will aim to change.  

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