Inter-American Development Bank (IDB): How can development partners assist to facilitate reforms of cross-border e-commerce taxation; the Latin American experience

Abstract

Updating VAT systems to the digital economy is needed for two reasons: stopping the loss of revenue, currently as much as US$ 3 billion per year in Latin America (Pineda – González, 2021), and protecting the integrity of the VAT, the most efficient of all taxes in many developing countries, and certainly so in Latin America (OECD et al. 2022). But countries willing to achieve these goals run the risk of believing this is just another ordinary reform. This is not the case; a digital VAT transformation is a multi-layered process involving legislation, administration, and engagement with the private sector. In fact, tax administrations face a challenge they have never confronted before: addressing taxpayers that are domiciled beyond the countries’ borders, who do not have a permanent establishment therein, and often are large global corporations. Surmounting this difficulty calls for new instruments, skills and even a change in tax administrators’ mindsets. Carrying out such a cultural change may be difficult for developing countries, which is where support from international partners is required, and development banks are ideally placed. This contribution discusses the challenges presented to countries when designing and implementing a system to effectively secure the stream of revenue corresponding to cross-border B2C e-commerce, arguing why regional development banks are a good resource. To illustrate the case, we refer specifically to the IDB and Latin America