Tax considerations in the digital economy

Michelle Visbal

Serrano Martinez CMA, Bogotá

mvisbal@serranomartinezcma.com

Report on a panel discussion at the 16th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami

Wednesday 12 June 2024

Session chair

Paul Carman Chapman and Cuttler, Chicago

Victor Maldonado VMEO Tax & Business Advisory, Mexico City

Speakers

Luciana Martina  Virgile, Marval, O’Farrell & Mairal, Buenos Aires

Juan Gabriel Reyes Pérez, Bustamante & Ponce, Quito

Daniela Lara Rolim Goulart Cardoso, São Paulo

Bibiana Cruz Holland & Knight, Miami

Angela Sánchez Rojas PwC Colombia, Bogotá

Elsa Sánchez-Urtíz SMPS Legal, Mexico City

Introduction

The panel analysed how different countries implement new tax regimes in the digital economy era, particularly by addressing the current legislative landscape and the challenges experienced and efforts made by each jurisdiction. The discussions covered both direct and indirect tax policies in various Latin American countries as well as in the United States. Insights were shared on the obstacles and opportunities these changes present, highlighting the diverse strategies adopted by each country to align to the OECD guidelines.

Panel discussion

Argentina

There have been no official proposals regarding the OECD Pillars in Argentina. Further, Luciana Virgile indicated the country’s federal income tax system has no specific provisions for the digital economy for the purposes of direct taxation. As a general rule, services rendered from abroad are not considered national sourced income and therefore are non-taxable. There are certain exceptions for technical assistance services and the exploitation of audiovisual content from abroad by any means. These include, for example, advertisement, streaming and social media platforms.

Regarding VAT, taxation depends on whether the transaction involves a business or consumer. For business-to-business (B2B) transactions, VAT applies as importation of services, with the Argentinian recipient being the taxpayer. For business-to-consumer (B2C) transactions, digital services used or exploited in Argentina are subject to VAT, even if the recipient is not registered for VAT. To facilitate tax collection, the tax authority has implemented a special mechanism where financial institutions or cash collectors collect VAT payments if made to a service provider listed by the tax authorities. If this mechanism does not apply, VAT must be paid directly by the customer.

Finally, reference was made to turnover and Pais taxes. Regarding turnover tax, it is charged for the performance of an economic activity within the territory of a province, and it is collected by the same mechanism as VAT. Pais tax is charged on foreign exchange transactions on currency used to pay these services.

Ecuador

Although Ecuador has not yet adopted the OECD’s Pillars, the organisation’s recommendations have influenced recent tax reforms enacted in the country. Juan Gabriel Reyes pointed out that these reforms include the elimination of safe harbour provisions regarding transfer pricing regime exemptions, temporary tax residency, controlled foreign corporation (CFC) rules and taxation of digital services.

Reyes explained that in Ecuador, digital services are subject to various taxes to ensure that companies operating in the digital environment contribute fairly to the country’s tax system. Further, the indirect taxation regime and its effects on digital assets and services was explained. Regarding digital assets, it was indicated that because of their intangible nature, transactions carried out with these types of assets are not subject to VAT.

In contrast, digital services offered by foreign providers to consumers in Ecuador are subject to VAT. These services encompass a range of activities such as online advertising, streaming services, digital subscriptions and intermediary platforms. There are two main options for collecting this tax: one is through a withholding mechanism; the other option is through the registration of the foreign supplier. In the first case, the financial entity processing the service payment is entitled to withhold the VAT and then file and pay it before the tax authority. Under the second mechanism, the foreign digital service provider must enrol in a specific register and file and pay the VAT itself.

United States

The US has not yet adopted OECD Pillars One and Two, with concerns surrounding Pillar One’s potential impact on the tax base.

In 2020, proposed regulations on foreign tax credits (FTCs) were published and generated significant uncertainty over the application of historical creditable taxes. The rationale behind updating these regulations was to limit the allowance of foreign credits by extraterritorial taxes such as digital services taxes. By the end of 2022, new FTC regulations were proposed to clarify that historically creditable taxes remain eligible for credits. In 2023, there were some notices providing reliefs on certain provisions.

Bibiana Cruz mentioned that, regarding indirect taxation, the US has not enacted a VAT system and instead relies on sales and use taxes imposed independently by each state. The South Dakota v Wayfair case was discussed, highlighting that under this judgment, companies may be required to remit and record taxes in states where they have economic nexus, even if they lack a physical presence. This case had an effect on states changing physical presence rules to economic nexus rules.

Cruz also mentioned that there is proposed legislation for Indiana, Massachusetts, Connecticut and New York on these subjects. Additionally, there is a Multistate Tax Commission Work Group on the Sales Taxation of Digital Products to discuss and draft model rules.

Brazil

VAT has not yet been implemented in Brazil and this has resulted in a lack of neutrality, a high cost of tax compliance and disputes.

Daniela Lara indicated that the Brazilian tax landscape has experienced recent changes: in December 2023, a constitutional amendment was approved altering the consumption tax system. Subsequently, in April 2024, the Executive Branch introduced a complementary bill to Congress aimed at regulating this tax reform. Among the impacted sectors is the digital economy industry.

Under the current indirect system, there are three federal taxes, a state tax on goods and a municipal tax imposed on the provision of services. In the new system, with the creation of dual VAT, there would be a federal social contribution and a state and municipal tax with the same incidence rule.

A positive point of the reform is the simplification of the system. In contrast, an issue might be the increase of the indirect tax burden from 9 per cent to 26.5 per cent. Also, a crucial point is the tax liability for digital platforms in the bill. According to the bill, foreign digital platforms will be subject to VAT with respect to transactions carried out through them, even if they are domiciled abroad.

Finally, it was highlighted that Brazil has been trying to align to OECD tax rules. However, there is still not a bill that regulates the implementation of Pillar One and Pillar Two. With respect to the introduction of a digital service tax, a bill was introduced in 2017 and recently the discussion on the issue has begun again.

Colombia

Colombia has recently implemented significant reforms in response to developments in the digital economy by introducing unique domestic rules for OECD Pillars One and Two. Specifically, a significant economic presence regime was enacted.

Angela Sánchez indicated that this regime intends to subject to income tax the income obtained by non-residents derived from the sale of goods and/or provision of digital services into Colombia. It applies to non-residents, entities or individuals: specific conditions shall be met for it to apply, including a gross income threshold, deliberate systematic interactions with a certain number of customers or the ability to visualise payments in Colombian pesos. Legislation includes definitions of customers, users and digital interfaces, and there has been discussion on this point. With respect to compliance, this can be achieved by two different mechanisms. The foreign taxpayer may file a special annual tax return and pay a 3 per cent rate on gross income or opt for 10 per cent withholding tax to be applied on gross income. The amount withheld is taken as the final payment and there is no need to file a tax return.

Sánchez also mentioned that, if there is a special provision under Colombian law that applies for a specific type of service, that specific rule should apply. That is the case, for example, for technical services, technical assistance or consultancy services.

Reference was also made to VAT. Non-resident entities are subject to VAT when serving Colombian beneficiaries even if the service is rendered from abroad. There are exceptions that may be applicable to certain type of services, for example cloud computing or hosting services. With respect to VAT compliance for digital service providers, the foreign entity may register and file tax returns or opt for an alternative system where credit/debit card issuers, as well as other entities designated by the tax authority, may act as withholding agents. This registration does not imply taxable presence.

Mexico

As an OECD member, the country has made efforts to follow the guidelines. In 2020, Mexico started the implementation of a legal framework applicable to tax both Mexican and non-residents who provide digital services. These rules are for income tax and VAT purposes.

With respect to income tax, Elsa Sánchez-Urtíz indicated that ‘selling goods or providing services through [the] internet, using digital platforms, computer applications and similar means’ is subject to tax. There is a simplified tax mechanism in place. Under such mechanism, if income obtained is less than $18,000, the taxpayer may elect to be subject to withholding. This is taken as the final payment and there is no need to file a tax return.

Sánchez-Urtíz explained that digital services rendered by non-Mexican tax residents through the internet, digital platforms, computer applications and similar means, are subject to VAT. These services are subject to 16 per cent VAT when the recipient of the service is in Mexico. Service provider compliance obligations were also discussed. These include registering as a withholding agent, charging and collecting VAT, issuing electronic invoices and appointing a legal representative in Mexico, among others.

Finally, it was highlighted that failure by non-resident service providers to register with the tax authorities, or to file tax and informative returns, is sanctioned by blocking their access to the digital services.

Conclusion and final remarks

In conclusion, the digital economy tax environment remains dynamic and complex. The discussions highlighted not only the challenges and implications brought about by adopting international standards but also emphasised the key role of international collaboration and agreement among jurisdictions. Effective collaboration between different countries is essential to navigating these evolving frameworks.