There have been some interesting taxation developments in Central and South America since the turn of the year, specifically in Mexico City and Paraguay.
Mexico City’s Congress has enacted a plan to levy a 2% tax, effectively a type of Digital Services Tax (DST), on the commissions received by online marketplaces. The funds raised will go towards Mexico City’s infrastructure.
Paraguay, meanwhile, has revealed a plan to impose an effective 4.5% non-resident income tax on a portion of revenues earned by foreign digital businesses from customers based in Paraguay.
Mexico’s effective DST plan
While the two approaches vary, they are still relevant as jurisdictions continue to implement rules aimed at taxing foreign digital businesses. Mexico’s DST plan comes at a time when OECD discussions are aimed at reducing, nay eliminating, such unilateral moves with the global advisory body attempting to garner consensus on the efficient and effective taxation of the digital economy.
Mexico has made some significant adjustments in recent years regarding the taxation of foreign digital businesses. Back in June 2020 a 16% VAT on digital services was confirmed placing the obligation for collection and remittance of the VAT on the foreign digital businesses. This was not a new rule, per se, but the copper fastening of existing VAT obligations.
As has happened in other jurisdictions that introduced similar VAT/GST rules the knock-on effect with this model of taxation was that the majority of affected digital businesses passed on these VAT obligations in their pricing model. What is interesting about Mexico’s DST-esque plan is that affected online marketplaces will not be allowed, by law, to pass on the cost of VAT collection and remittance to their sellers.
Mexico’s plan is similar to the United Kingdom’s online sales tax plan. The UK government plans to begin a consultation period on the online sales tax announced during its 2021 Autumn Budget. A report on a review of business rates for the UK’s Treasury found that such a tax “would be passed on to consumers at a high rate, suggesting it would be “regressive” – or borne more heavily by low-income households.” The UK’s Online Sales Tax, if introduced, would raise revenue to fund business rates reductions.
Paraguay’s new non-resident income tax
In Paraguay, meanwhile, the tax authority there (Subsecretaría de Estado de Tributación, or SET) is expanding its scope of taxation when it comes to the revenues generated in Paraguay by foreign digital businesses. A new decree enacted in late December 2021 obliges foreign digital businesses to register for a non-resident income tax (INR) and pay an effective rate of 4.5% on a portion of their revenues. These new rules came into effect on January 1, 2022. The affected foreign digital businesses will feature on a list compiled by Paraguay’s SET, but is not applicable to VAT.
A different taxation model exists in Paraguay when it comes to VAT with specific applying to sales of digital services provided by foreign businesses since January 1, 2021. Here, the obligation to collect and remit the VAT lies with domestic financial intermediaries, e.g., banks. For example, a Paraguayan credit card issuing bank will notify its customers via a separate line item in their bank statement that 10% VAT has been collected on the service provided by a foreign digital business. In addition, the affected foreign digital business does not have to register for VAT in Paraguay.
Acknowledgement: Thanks to Horacio Sánchez Pangrazio of Ferrere Abogados in Paraguay for his assistance with this article.
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