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Foreign investors’ views on Latin American taxation

When it comes to capturing money from foreigners, Latin America does a very poor job of dealing with tax collection. Through diverse tax policies, Latin American governments plan to boost commerce and foreign investment, but these tactics often do not achieve their goal.

A recent study, commissioned by the IDB, on multinational companies’ perceptions of tax management in Latin America shows that the region lacks experience in the area of international taxation. There is not even some concern about how general procedures of tax management are adapted to the particular needs of foreign investors.

During a presentation at IDB headquarters, Iñigo Cristóbal, IDB consultant and Telefónica Internacional’s fiscal manager for its Latin American branches, presented the results of this study based on a direct poll of foreign investors, interviews with multinational companies and officials in tax administrations, and field work as well.

How tax administration is handled in the country of investment is crucial for foreign investors, given that a poorly managed tax administration or one that overlooks the peculiar needs of foreign investors can impose a heavy burden on them, or even repel foreign investment, Cristóbal said.

If governments are looking to attract foreign capital, it makes sense to take into account the selection criteria of foreign investors when choosing a country in which to do business. The most important thing for foreign investors is “that the rules of the game don’t change,” said Cristóbal. 

Among the main problems highlighted by the investors are excessive red tape that becomes a burden to investors, lack of technical assistance and foreign language skills for processing documents, computer system problems, difficulties in obtaining refunds, and the failure to issue residency certifications so that investors can take advantage of the tax benefits of residency.

Investors also perceive in general an excessive focus on audits of multinational companies. But they have noted increasing progress among tax administrations regarding transfer prices to solve problems of double taxation, according to the survey.

With the exception of Mexico, it is surprising to see at the regional level the lack of a field of specialization dealing with audits of non-residents, or those persons or legal entities who are not considered to be residents under the internal tax legislation of each country in the region, says the report.

In conclusion, the situation is the same across the region: the countries with major weight and more open to free trade are usually most developed in the field of tax administration, but there is a need to adapt it to the reality of international taxation, without limiting it only to transfer prices.

The reality of the foreign taxpayer

Cristóbal highlighted the importance of understanding the reality of the foreign taxpayer, starting with the language. Among the main problems perceived by foreign investors are the lack of specialized training for tax administration officers in different countries, many of whom are unfamiliar with the concepts of the economic sector in which they work, and even with legal concepts of international commerce relevant for the cases.

The stability of the tax administration and agreements on double taxation and on tax stability are examples of things that contribute to strengthen the legal framework, which allows investors to engage in long-term financial planning.

The bottom line for companies is to do business, and comply with the laws, Cristóbal said. “Investors want flexible systems,” he noted. “For the foreign investor, the stability of the legal framework is fundamental.”

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