The surge in e-commerce following the COVID-19 outbreak has emphasised the importance of applying Value Added Tax (VAT) effectively to digital trade. A new toolkit released today offers timely and valuable assistance to tax authorities in the Latin America and the Caribbean region for the effective collection of VAT revenues from e-commerce activities.
The VAT Digital Toolkit for Latin America and the Caribbean (LAC) provides detailed guidance for the successful implementation of a comprehensive VAT strategy directed at e-commerce. It is designed to help governments secure significant VAT revenues and to ensure a level playing field between brick-and-mortar stores and foreign online sellers.
Latin America has been home to the fastest growing e-commerce market in the world, with sales last year rising an estimated 36.7%, followed by 31.8% in North America and 29.1 percent in Central and Eastern Europe, according to a study from e-Marketer. Although VAT is the largest source of tax revenue on average in the LAC region, VAT reform in response to e-commerce growth has remained relatively limited.
The main VAT challenges relate to the strong growth in online sales of services and digital products to private consumers (such as “apps”, music and movie streaming, gaming, ride-hailing, etc.) and to the exponential growth in online sales of low-value imported goods, often by foreign sellers, on which VAT is not collected effectively under existing rules.
Latin America and the Caribbean could increase tax collection by $3 billion by applying the valued-added tax to e-commerce, according to estimates from the Inter-American Development Bank (IBD), one of the institutions involved in the development of this toolkit.
The Digital VAT Toolkit will pave the way for an adequate taxation of digital services and goods sold online, following the internationally accepted principle of taxation at destination. In addition to bolstering revenue collection at the critical postpandemic period, it will level the playing field between digital businesses and brick-and-mortar firms. Also, the toolkit follows international best practices, which means that it will reduce compliance costs to a minimum.
The toolkit is directed at all types of e-commerce and takes account of the specific circumstances in LAC countries. It includes detailed guidance on designing policy and legislation, on the administration of effective collection mechanisms and on a comprehensive audit and enforcement strategy. In addition to building on the internationally agreed OECD standards, it draws on expertise and best practices from jurisdictions that have already successfully implemented these standards. It has been developed in close consultation with LAC tax authorities and regional organisations.
About the Toolkit
This toolkit is the first in a series of three Regional VAT Digital Toolkits, produced by the OECD in partnership with the World Bank Group (WBG), with editions for Asia-Pacific and Africa currently under development. The Inter‑American Center of Tax Administrations (CIAT) and the IDB have contributed considerably as regional partners for the LAC region.
The Regional VAT Digital Toolkits are being developed in response to a growing number of countries, particularly developing and emerging economies, expressing interest in more detailed practical guidance for the effective implementation and administration of the OECD’s international VAT standards and recommendations. The toolkit will be presented to tax administration Commissioners of the LAC region in the framework of CIAT’s 2021 General Assembly jointly with DEC, the open software tool that is based on the guidelines. This work is also part of a wider strategy of the OECD to address the tax challenges arising from the digitalisation of the economy.
More information on the toolkit, including a brochure outlining the core recommendations is available here.
IDB and the Digital Economy
The digital economy is one of the key pillars of the IDB’s response to accelerate the economic recovery in Latin America and the Caribbean in the post-pandemic era, a strategy detailed in the document Vision 2025. The Bank, the biggest source of multilateral financing in the region, is working closely with its borrowing member countries to modernize and strengthen its institutions to leverage the digital economy to promote sustainable and equitable development.
The Inter-American Development Bank is devoted to improving lives. Established in 1959, the IDB is a leading source of long-term financing for economic, social and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research and provides policy advice, technical assistance and training to public and private sector clients throughout the region.