10 minute read 5 Nov 2020
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What’s next for tax policy in Latin America

By Americas Tax Policy

Cross-functional team that identifies and analyzes tax policy trends and developments affecting businesses.

10 minute read 5 Nov 2020
Related topics Tax

Tax reform efforts, COVID-19 responses and tax policy outlook scenarios for seven Latin American countries.

In brief

  • Latin America has been hard-hit by the COVID-19 crisis, and many economists are predicting a resulting 5.3% contraction, with a recovery expected to follow.
  • Looking ahead, while each country’s path will vary, the region overall is expected to face increasing fiscal deficits.
  • Companies need to understand what is driving tax developments in the region as they plan for a post-pandemic world.

Before the COVID-19 pandemic hit, the countries of Latin America were engaged in a variety of tax reform efforts and initiatives to turn around economies. Some countries focused on broadening or adjusting their tax revenue bases and strengthening compliance, and some recently joined the Organisation for Economic Co-operation and Development (OECD), making alignment with OECD standards a focal point of tax policy in the region.

Then came the COVID-19 crisis. The region has generally been hard-hit, and many economists are predicting a resulting 5.3% contraction, with a recovery expected to follow. The responses to the pandemic among Latin American countries have included economic relief and tax changes, such as allowing taxpayers to defer tax payments or make instalment payments, and providing tax exemptions, credits and incentives. Some countries in the region are also considering wealth taxes to help shore up revenue in economies that have been battered by the pandemic.

Looking ahead, while each country’s path will vary, the region overall is expected to face increasing fiscal deficits. More efforts at tax collections, increased enforcement and audit activity, and potential litigation may be the short-term response. Trade developments may also shape the region’s policies, as companies may look to “nearshore” their supply chains in Latin American countries that might have favorable labor costs and currency values. Additionally, the OECD’s activities are likely to play a role as more Latin American countries align their policies with the organization’s varied and evolving proposals.

Given these rapid shifts in the regional tax policy environment, companies need to understand what is driving tax developments in the region as they plan for a post-pandemic world. We take a look at the tax reform efforts, COVID-19 responses and tax policy outlook scenarios for seven Latin American countries to gain insights about what tax developments may be on the horizon.


Argentina

The COVID-19 pandemic and resulting lockdown in Argentina have deepened the economic crisis the country has been experiencing since 2018. Argentina had recently enacted tax reform measures and was already in recession when the pandemic struck, with inflation above 50% and more than a third of the country’s population living in poverty.1 Argentina has responded to the pandemic with a number of tax-related emergency measures, including extending some filing due dates, providing social security tax relief to employers and offering compensation support and zero-interest-rate loans directly to some individuals.

Key tax reform highlights

Status: Enacted December 23, 2019; effective January 1, 2020

  • Delayed a corporate income tax rate reduction from 30% to 25%, maintaining the 30% rate for tax years starting Jan. 1, 2020.
  • Maintained a dividend withholding tax rate of 7% for one more year for profits accrued during tax years starting Jan. 1, 2020, instead of applying a 13% rate as previously established under the law.
  • Allocated the inflation adjustment for income tax purposes for tax years 2019 and 2020 equally over six years (instead of allocation in three years as previously established under the law).
  • Increased the tax on the net equity value of stock owned by Argentine individuals and foreign individuals or entities from 0.25% to 0.50%.
  • Exempted assets with a value of ARS 2 million or less from the personal assets tax applicable to local individuals and applied new higher progressive tax rates ranging from 0.5% to 1.25% to assets with a value over ARS 2 million.
  • Extended 5% export duties on services until December 31, 2021, without limit (previously a maximum limit applied of ARS 4 per each US dollar of the amount arising from the invoice).

COVID-19 response

  • Reduced 95% of social security contributions for 90 days for employers in the health industry beginning March 20, 2020, and expected to continue for the duration of the crisis.
  • Reduced tax rates on debits and credits in bank accounts for employers in the health industry from March 20, 2020, and expected to continue for the duration of the crisis.
  • Required electronic filing until August 31 for certain proceedings.
  • Reduced social security contributions, accrued from April 2020 to July 2020 for companies. engaged in nonessential activities, which is expected to be extended monthly for the duration of the crisis.
  • Provided a compensatory allowance, which is expected to be extended, equal to 50% of net salary from April to July 2020 to employees of companies engaged in nonessential activities, and zero-rate loans up to ARS 150,000 to self-employed workers and certain small business taxpayers.
  • Extended due dates for certain tax filings and payments.
  • Prohibited dismissals of employees without cause, for lack or reduction of workload or force majeure from March 31, 2020 through September 30, 2020.

Tax policy outlook

A tax amnesty is expected to be enacted during 2020, as well as a new promotional regime for the knowledge-based economy. While there is a possibility of an increase in taxes for corporations and individuals in the near future, and the idea of a wealth tax has been suggested, at this point it is not clear how such an increase or new tax might be implemented.

¹ United Nations Development Programme, “Social and Economic Impact of COVID-19 and Policy Options in Argentina,” April 2020.


Brazil

Before the COVID-19 pandemic, the Brazilian government had been discussing several tax reform options and had created a tax reform commission to prepare a proposal based on prior efforts. Those reform efforts resulted in a four-phase tax reform plan. For the first phase, the government proposed a new federal value-added tax (VAT) on July 21, 2020. The enactment of the proposed VAT and any other tax reform, however, may be affected by the country’s response to the pandemic. 

Key tax reform highlights

Status: On July 21, the Brazilian government proposed a bill that would replace two taxes — the Program of Social Integration (PIS) and Contribution for the Financing of Social Security (COFINS) with a single tax, the Contribution on Goods and Services (CBS). The CBS, intended to function as a federal VAT, would be a flat 12% tax on gross revenue (reduced by taxes due on revenue). Both chambers of the National Congress still need to vote on the CBS measure, and the timing is unclear. The government indicated it intends to implement more comprehensive tax reform, in phases:

  • Phase I — replace PIS and COFINS with CBS
  • Phase II — replace federal excise tax with a selective tax
  • Phase III — change the income taxation of legal entities and individuals, with a shift toward taxing dividend distributions (which are currently exempt)
  • Phase IV — reduce the payroll tax

COVID-19 response

  • The Brazilian Minister of Economy has presented proposals to counter the economic slowdown; some of these proposals have already been approved by Congress, some are still pending analysis, and others are already being considered for potential extension.
  • Tax proposals are focused on helping small businesses and reducing the tax burden on local acquisitions and imports of products needed to counter COVID-19. The proposals: 
    • Would simplify and accelerate the customs clearance process and licensing of certain products.
    • Would postpone deadlines related to collection assessments for 90 days.
    • Would allow taxpayers to join a debt program.
  • The Central Bank has reduced interest rates.

Tax policy outlook

The COVID-19 crisis has dramatically changed Brazil’s economic situation, and likely its tax reform outlook. The second quarter of 2020 saw a 9.7% contraction in Brazil’s GDP, and economists are estimating GDP could drop more than 5.1% for the year.2 While steps are being taken to advance tax reform, the large-scale reform that had been expected may take longer and will depend on the state of the economy and the relationship between the Congress and Administration going forward. Incremental steps may be more likely in the near term. 

One policy area to watch could be digital services taxes. Brazilian Congressman João Maia proposed legislation to establish an annual federal digital services tax targeted to larger digital groups on May 4, 2020, and Brazil’s Chamber of Deputies is discussing another digital services tax proposal. Both proposals would be targeted at large digital groups. Likewise, the CBS proposed in July also targets certain digital transactions and digital platforms/marketplaces. Both chambers of the National Congress have yet to approve these bills. The legislative process usually takes time in Brazil, and the bills may change during the process. Further developments should be monitored.

² “Brazil government keeps 2020 GDP forecast at a record 4.7% fall,” Reuters, September 15, 2020.


Chile

Chile enacted significant tax reform in February 2020, with many provisions going into effect in 2020. But like other countries in Latin America, Chile has since been hard hit by the COVID-19 pandemic. Lockdown measures have contributed to a steep decline in the country’s economic activity, and unemployment was at a 10-year high in June 2020.3 On April 2, 2020, Chile enacted the Remote Work Law and, on April 6, 2020, the government enacted employment measures to mitigate the spread of COVID-19. These measures allow companies to suspend employment contracts or negotiate reduced work schedules with their employees. If an employment contract is suspended, employees are eligible for unemployment insurance. During the suspension, companies must continue paying social security contributions.

Key tax reform highlights

Status: Enacted February 24, 2020; most provisions effective in 2020

  • Repealed the “attributed” tax regime and makes the “semi-integrated” tax regime mandatory for dividend distributions from large Chilean companies to their non-Chilean shareholders: 
    • An overall 35% withholding rate applies to dividend distributions from Chilean companies to their non-Chilean shareholders.
    • Shareholders may credit the corporate tax (27% rate) paid against the 35% withholding tax unless the countries in which the shareholders reside do not have a signed income tax treaty with Chile, in which case shareholders will only be allowed to partially credit the corporate tax paid by the Chilean company against the withholding tax, triggering an overall tax rate of 44.5%.
  • Modified VAT and other taxes applicable to non-Chilean holding companies, with a 19% VAT on digital services that went into effect June 1, 2020, a new simplified VAT registration process for non-Chilean entities providing digital services, and a 19% VAT on services used in Chile that are not subject to or exempt from withholding tax.
  • Established a (reduced) 30% withholding tax rate applicable to dividend distributions of retained taxable earnings generated before 2017, with shareholders allowed to credit the company’s corporate tax paid against the withholding tax; preferential withholding tax rate available until April 2022. 
  • Expanded the types of expenses a Chilean company may deduct from corporate taxable income.
  • Gradually prohibits Chilean holding companies in a tax loss position from claiming a refund of the corporate taxes paid by local subsidiaries remitting dividends (with full implementation in 2024).
  • Established a temporary accelerated depreciation regime. 
  • Established a new tax regime for small businesses. 
  • Created a new 40% income tax bracket for high-income individuals.

COVID-19 response

The Chilean Government is providing $11.75m in funds and support (4.7% of Chile’s GDP) to small and medium-sized businesses. It has also launched new online Chilean IRS tools to help taxpayers manage monthly taxes and obtain tax IDs. In addition, the Congress is discussing a new bill that would aim to reduce the corporate tax rate for small and medium-sized companies. Other measures include: 

  • Allowing immediate amortization of 100% of certain intangibles acquired from June 1, 2020 to December 31, 2022, for corporate income tax purposes.
  • Expanding and simplifying the depreciation incentive enacted as part of Chile’s tax reform.
  • Allowing deferral of VAT payments for three months, with deferred payment payable in 12 interest-free installments.
  • Allowing deferral of real estate taxes due in April 2020 until December 31, 2020 (for small/medium-sized companies and individuals owning real estate valued at less than $170,000).
  • Allowing small/medium-sized companies to defer annual income tax returns until July 2020.
  • Waiving penalties and interest and offered other relief measures to small/medium-sized businesses for tax debt to incentivize payment agreements.
  • Suspending monthly advance corporate tax payments for three months.
  • Exempting stamp tax for operations carried out between April and September 2020.
  • Allowing deductions for COVID-19-related expenses incurred by Chilean companies.

Tax policy outlook

The Chilean government’s main COVID-19 responses have focused on providing relief to small and medium-sized companies and not as much on revenue-raising mechanisms, although this could change in the next year. Currently, there is a discussion in the Congress about establishing a new equity tax that would apply to individuals in higher-income tax brackets.  

³ “Chile’s economic activity in April posts ‘historic drop’,” Reuters, June 1, 2020.


Colombia

Colombia enacted significant tax reform benefiting corporate taxpayers at the end of 2019. Before the COVID-19 pandemic hit, its economy grew 3.3% in 2019, according to the World Bank. In an attempt to mitigate the pandemic’s economic impact, the government has enacted numerous economic relief and tax measures, including deferrals of tax payments and tax credits and incentives. 

Key tax reform highlights

Status: Enacted December 27, 2019

  • Reduced corporate income tax rate from 33% for tax year 2019 to 32% for tax year 2020, 31% for tax year 2021, and 30% for tax year 2022 and beyond.
  • Gradually eliminates presumptive income tax (an alternative corporate income tax based on a percentage of the last year’s net equity).
  • Increased personal income tax rate from 33% to 39% for highest income bracket.
  • Allows individuals receiving income from sources outside their employment to reduce their taxable basis with costs and expenses related to their income-producing activities.
  • Increased dividend withholding tax from 7.5% to 10% on distributions to foreign non-resident entities and individuals.
  • Established a 7.5% withholding tax on distributions between Colombian companies.
  • Allows foreign providers of digital services to opt into a VAT withholding collection system through debit and credit card issuers.
  • Does not require foreign non-resident providers of digital services to issue Colombian invoices.

COVID-19 response

  • Granted extensions for certain tax installment payments; reduced tax rates, provided three-day VAT exemption and fast-tracked procedures.
  • Authorized the Colombian tax authorities to automatically issue income tax and VAT refunds to taxpayers that are not categorized as high-risk taxpayers and at least 25% of whose costs or expenses or VAT credits are supported on electronic invoices until December 31, 2020.
  • Enacted a number of VAT exemptions and reduced rates.
  • Exempted companies reorganizing (similar to a Chapter 11 process) from income tax withholding or self-withholding, and subjects them to VAT withholding at 50% of the usual rate, through the end of 2020; for tax years 2020 and 2021, reorganizing companies should treat reductions or discounts obtained during the process in accounts payable as capital gains, subject to a reduced capital gains rate of 10% (compared to general rate of 32%).
  • Reduced the investment threshold for the “mega investment” regime from 30 million tax units to 2 million tax units for taxpayers that invest in Colombian air transportation; benefits of this regime include a reduced income tax rate of 27% instead of 32%, a two-year depreciation period and no 10% dividend tax.
  • Reduced 4% withholding tax will apply to domestic payments of fees and commissions to taxpayers engaged in certain cultural and entertainment activities.

Tax policy outlook

Colombia’s president has ruled out tax increases in the near term, and there is an expectation that the economy will recover once the pandemic subsides.4 On April 28, 2020, the OECD announced that Colombia had formally completed the accession process to become the 37th OECD member. Now that Colombia is a member of the OECD, taxpayers should expect Colombia to further align its legislation with OECD guidelines in the future.

4 “Colombia’s president bets on ‘speedy recovery’ after coronavirus shock,” Financial Times, June 7, 2020.


Ecuador

Ecuador enacted tax reform at the end of 2019 generally aimed at simplifying the tax system and raising revenue. Since then, with a continuing debt crisis and an economy already affected by the decline in crude oil prices, the country has been hit hard by the COVID-19 pandemic. In April 2020, the country’s president proposed establishing a new tax to fund humanitarian support in light of the crisis, only to then ask that the National Assembly not consider the measure. 

Key tax reform highlights

Status: Enacted December 30, 2019

  • Imposed (for tax years 2020 through 2022) a temporary tax of 0.10% to 0.20% on gross income, applicable to companies with gross income of US $1m or more in tax year 2018.
  • Created a single income tax for agricultural activities.
  • Imposed a 12% VAT on digital services.
  • Taxed the import of digital services (importer would treat tax as a cost).
  • Does not allow individuals earning more than US$100,000 of net income to deduct personal expenses.
  • Repealed tax exemption for dividends, except those paid to other Ecuadorian entities and those paid to entities in tax havens.
  • Does not allow interest paid since January 2020 on loans requested for dividend payments to be deductible if granted from September through December 2019 and if the interest rate is higher than the Central Bank of Ecuador’s rate.

COVID-19 response

  • Small businesses and companies that are airlines or are in the tourism or agriculture industries may defer income tax and VAT payments for six months. This provision also applies to exporters. 
  • Financial institutions and telecommunications companies must withhold 1.75% of their total income and pay it to the Ecuadorian tax authority.
  • Companies with state contracts for exploration and exploitation of hydrocarbons, or companies that transport crude oil, must withhold 1.5% of their total income and pay it to the tax authority.
  • Tariffs on imported medical products needed to address the pandemic are eliminated.
  • To assist with COVID-19 relief efforts, the Ecuadorian president once again ordered certain taxpayers to pay estimated income taxes for fiscal year 2020 on or before September 11, 2020, rather than paying the entire tax by the April 2021 deadline. The Ecuadorian Constitutional Court had previously declared the president’s first order unconstitutional. The new order addressed the court’s concerns, and taxpayers were required to pay the taxes in one installment, with any delays subject to fines. 

Tax policy outlook 

Ecuador is facing health, economic and social implications and complexities triggered by COVID-19; therefore, new tax laws and regulations are frequently being enacted, and the tax system is in constant flux. Recurrent reforms in the law were taking place even before the present world health crisis; therefore, it is important that companies constantly monitor Ecuador’s changing tax rules. 

Ecuador’s legislation provides several tax relief measures, abatements, exemptions and benefits for new foreign investors, with a focus on strategic sectors that can benefit both the public and private sectors. This call for new and foreign companies to invest in Ecuador is projected to continue over the next several years since relevant projects are expected to be launched soon, and the private sector’s participation will be critical.


Mexico

In December 2019, Mexico enacted a significant tax reform aimed at strengthening compliance and challenging base erosion and profit shifting. Mexico’s economy, one of the largest in the region, was already in recession in 2019. In part due to COVID-19, Mexico´s economy has contracted by 18.9% in 2020.5

Key tax reform highlights

Status: Enacted December 9, 2019, in force for the most part as of January 1, 2020

  • Imposed net interest deduction limitation equal to 30% of adjusted taxable income on taxpayers with more than MXN 20 million of net interest expense (certain exclusions apply).
  • Disallowed deductions of any payments made to related parties whose income is subject to a low-tax jurisdiction (LTJ), with exceptions if the LTJ recipient is engaged in a business activity with the necessary personnel and assets to conduct it.
  • Amended controlled-foreign-corporation rules and rules for investments through foreign entities that are transparent for tax purposes (in force starting on January 1, 2021).
  • Required resident and non-resident digital platforms to withhold income taxes regarding certain income obtained by Mexican individuals who use the platforms to render services or sell goods.
  • Required non-resident digital service providers to charge, collect and remit VAT on digital services considered to be rendered in Mexico.
  • Introduced a general anti-avoidance rule that allows tax authorities to recharacterize a transaction (single-step or multiple-step) for tax purposes if it lacks business purpose.
  • Introduced mandatory disclosure rules for a specific list of reportable tax arrangements. 

COVID-19 response

  • The Government extended the deadline to file individual tax returns for FY2019 until June 30, 2020, and temporarily suspended some other deadlines, including administrative appeals, ongoing tax audits and permits. 
  • However, tax audits and the general functions of the Tax Administration Service (SAT) were not interrupted. No relief measures in the form of extended deadlines or reductions were given for enterprises.
  • Some states are providing relief or deadline extensions for local taxes.

Tax policy outlook

While the tax policy and audit environment has always been somewhat challenging in Mexico, recent developments suggest a shift in the tax authorities’ posture toward a more aggressive approach to both domestic and multinational taxpayers, with a focus on the steel, pharmaceutical, food, cars, mining, retail and energy sectors. 

President Andrés Manuel López Obrador has appointed an official known for her commitment to enforcing compliance, Raquel Buenrostro, to be the head of the SAT, with the main task of aggressively boosting collection. In recent months, she has secured tax settlements from multinational companies that amount to more than US$1b.

The president’s political party, the National Regeneration Movement, still holds the majority within Congress and state governments, which enables a swift path for any proposed tax policy amendments. 

5 “Ravaged by coronavirus, Mexico’s GDP falls record 17.3% in second quarter,” Reuters, July 30, 2020. 


Paraguay

Paraguay was in a state of economic recovery when the COVID-19 pandemic hit, and had enacted a tax reform in September 2019. Despite the country’s early adoption of aggressive social distancing measures early on in the COVID-19 pandemic and its success in limiting the spread of the disease,6 the economic outlook, like that of other countries in the region, is likely to include contraction in the near term with growth to follow, depending on conditions in the global economy. 

Key tax reform highlights

Status: Enacted September 25, 2019

  • Replaced income tax on commercial, industrial and service activities and the income tax on agricultural activities with a new 10% business income tax.
  • Included corporate income carry forward rules for a maximum of five tax years, limited to 20% of net income for each future tax period.
  • Established a 15% non-resident income tax applicable to income, profits or benefits obtained from the provision of services or investments; the taxable base will depend on the activity performed by the non-resident.
  • Modified the personal income tax to include the provision of personal services and capital gains obtained by individuals.
  • Provided separate tax rates for capital gains (8%) and income from personal services (progressive tax rate of 8%, 9% and 10%, depending on the total amount received by the taxpayer).
  • Established a withholding tax on dividends and earnings (8% for Paraguayan residents, 15% for non-residents), with transition rates during the year of enactment of 5% for Paraguayan residents and 10% for non-residents.
  • Established transfer pricing rules based on OECD standards, which will be in force beginning January 2021.

COVID-19 response

  • Suspended certain tax-related activities, extended some tax audit opinions and compliance certificates, and postponed deadlines for submission of certain tax returns, payments and books.
  • Established a payment regime for personal income tax, allowing payments until April 30, 2020, to consist of a minimum payment of 20% of the debt, a 0% annual interest rate and up to five monthly payments, with no penalties until June 30, 2020.
  • Established payment facilities for the corporate income tax and agricultural income tax, allowing a minimum payment equivalent to 20% of the debt, 0% annual interest rates and up to five monthly payments.
  • Extended until July 2020 the deadline for the first advance payment of the business income tax for FY2020.
  • Established a special VAT regime that applies to the provision of accommodation services in hotels, to restaurants and to suppliers of the local markets, as well as to the sale of tourist packages with destinations inside the country.
  • Temporarily modified the excise tax rate for certain products (e.g., alcoholic beverages, electronic products) until December 31, 2020.
  • Allowed refinancing of Social Security payments for up to 18 months.
  • Postponed the communication deadlines for the Administrative Registry of Legal Persons and Structures and the Administrative Registry of Final Beneficiaries.

Tax policy outlook

No additional significant changes are expected in Paraguay’s tax policy this year, since the tax reform already took place in 2019. Although further temporary measures could potentially be implemented in response to the pandemic, the Government has not indicated it plans to introduce measures other than those mentioned above.

6 “In Paraguay’s coronavirus war, isolation centers exact a heavy toll,” Reuters, June 11, 2020.


Conclusion

The COVID-19 pandemic has contributed to a significant economic contraction in Latin America. As governments face this new reality, they will have to consider how to fund economic and social programs amid higher deficits, a shifting trade landscape and uncertain global political dynamics. Tax policies are likely to factor into these considerations. Now is the time for companies to begin analyzing how Latin American economies and tax policies may reshape in a post-COVID-19 world, and to position themselves to navigate the challenges and make the most of the opportunities ahead.  

Summary

Companies need to understand what is driving tax developments in Latin America as they plan for a post-pandemic world. We take a look at the tax reform efforts, COVID-19 responses and tax policy outlook scenarios for seven Latin American countries to gain insights about what tax developments may be on the horizon.

About this article

By Americas Tax Policy

Cross-functional team that identifies and analyzes tax policy trends and developments affecting businesses.

Related topics Tax