Latin America is a hotbed of innovation for real-time taxation as applied to value-added tax (VAT), and countries elsewhere around the globe are starting to take notice. The United Kingdom, for example, has proposed a split payment VAT system that echoes the rules already in place in some Latin American jurisdictions. A Vertex whitepaper explores the UK’s plan and the Latin American influence.
A quick refresher on split payment: it’s a VAT collection model in which all or part of the tax obligation is extracted from the transaction at the time of purchase – usually through the application of payment technologies – and submitted directly to the government’s coffers. The split is usually performed by a “withholding agent” – a bank, credit card company or other service provider –involved in the exchange.
So which Latin American countries are furthering the art of split payment? The white paper highlights five:
Argentina assigns withholding agents to extract VAT at various rates depending on the transaction: goods and services are taxed at a lower rate than utilities, for example. Payments made via credit cards are subject to withholding, but small businesses are not required to withhold VAT.
Peru has operated a split payment system for more than a decade. It’s unusual in that it works in conjunction with a special account, which each taxpayer is required to open with the Nation’s Bank and is used exclusively for tax purposes. When a taxpayer pays its supplier, it simultaneously pays the VAT portion of the transaction into the special account. The deposits are used to ensure the payment of the account holder’s tax obligations.
Ecuador adopted a split payment system as part of a VAT withholding framework introduced in 1997. All credit and debit card companies, and some other companies known as “special taxpayers,” are designated as withholding agents.
The Dominican Republic adopted a split-payment VAT withholding system a dozen years ago. Withholding agents extract 30 percent of the VAT on many transactions.
Chile introduced the concept of the withholding agent for VAT several decades ago. The country “likely has established the most interventionist model, when it comes to certain transactions between private parties and third parties,” the white paper notes. The amount of VAT withheld can be total or partial, depending on the nature or the good sold or the service rendered.
As always, we’ll keep you updated as the UK moves forward with plans to introduce split payment methods.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.
Fernando has more than 23 years of experience in the technology segment, managing strategy, sales, and operations areas at all levels. He had worked for some of the highest-profile technology companies in Brazil and over the last eleven years has been focused on the Tax & Accounting market in Brazil and Latin America. His experience includes work with companies such as Oracle, Mastersaf, TaxWeb, and NFe do Brasil. Fernando graduated with a degree in Business Administration and an MBA in IT Management from FGV and UCI California University.