In the midst of a regional dynamic of fiscal adjustments, this tax becomes the epicenter of economic debate in the region. While several countries follow the global trend of increasing it or expanding its coverage, questions rise about the rationale behind these moves.
The Value Added Tax (VAT), or the General Sales Tax, is one of the most important levies in Latin American tax regimes. In recent months, several countries in the region are following the global trend of increasing the tariff or expanding its coverage. Why?
“It is the most collected tax due to its low susceptibility to evasion,” explained Juan Carlos Martinez Lázaro, economics professor at IE Business School .
According to the law firm Baker & McKenzie, the average VAT charged worldwide is 15%, while in Latin America that percentage drops to 9%. However, in Uruguay and Argentina, as well as in European Union countries, the tariff reaches 22% and 21%, respectively, and their tax regimes relies predominantly on this levies.
“47% of the tax revenue we have had so far this year comes from VAT, which is problematic because it is a regressive tax,” commented Germán Deagosto, a Uruguayan economist .
This is because people with lower incomes tend to spend a greater proportion of their salary on basic goods and services compared to people with higher incomes, so the burden of the tax falls disproportionately. Colombia faces a similar problem, where large companies pay proportionally less income tax than small and medium-sized companies (SMEs), according to the latest report from the Fiscal Observatory of the Javeriana University.
The complexity of the tax system, characterized by various rates and exemptions at the federal, state and municipal levels, significantly impacts countries such as Brazil and Peru. In Ecuador, the VAT was increased from 12% to 15% in April, extending its reach to essential products such as fuels and domestic gas. On the other hand, Mexico is ahead of the curve by debating the taxes that actors involved in online purchases should pay .
“The challenge is to move from an indirect tax to other direct progressive taxes,” said Deagosto.
Within the framework of the discussion in the country and global levels, the approach to "second generation reforms" to find tax relief focuses on options such as the "personalization" of VAT and the implementation of more specific tax measures.
CUSTOMIZED VAT?
The standard VAT rate in Uruguay is 22%, which is comparable to countries such as Argentina (21%), Chile (19%) and Brazil (which has multiple rates of 17% to 25%).
However, the first two nations show notable disparities, especially when it comes to tourism from Salto, Uruguay, to Concordia, Argentina, through the General Artigas international bridge.
Seven months ago, basic foods were 180% cheaper in Argentine territory. Even today, crossing the border is convenient due to a 54% discount.
“This disparity raises the question of what economic policy tools, particularly in tax terms, can be used to mitigate the impact on coastal economic activity,” said Germán Deagosto.
According to Statista, Uruguay has the highest cost of living in Latin America, and ranks 37th among 146 economies, above Japan (47) or Spain (54), according to the collaborative database Numbeo.
Various specialists explain that it is due to the sum of a high tax burden, regulations, cross subsidies and macroeconomic factors, such as the exchange rate delay and restrictive monetary policy to combat inflation. But the main reason lies on the lack of good trade agreements, resulting in tariffs between 25% and 35%. Furthermore, by including a 5% consular fee, an imported product may face a total tax burden of 50%.
“By taking advantage of technological tools and information, we can move towards a 'personalized VAT' solution that distinguishes situations at a socioeconomic level,” explained the Uruguayan economist.
In the trend of globalization, it is not 'crazy' to think that the number of companies with activities but no physical presence in a country will increase, he continued, which is why it is necessary to adapt national tax systems to particular types of social and economic situations, so that the most vulnerable populations are not affected.
Currently, Uruguay offers discounts on VAT if payment is made by debit card, as well as a 10% discount on selected products. Additionally, there is the commercial use of "VAT-Free Days". In contrast, after seven years of exemptions, the tax on the purchase of chicken, pork and lamb has been reinstated.
Meanwhile, Argentina recently began charging VAT on services in general, which were not previously taxed.
INEQUALITIES IN THE SYSTEM
The role of VAT in Colombia has been the subject of intense debate in recent years, especially in relation to its impact on the economy and tax collection. Since 2017-2018, the country has adopted a proactive stance by taxing digital services and purchases on electronic platforms, becoming a regional benchmark in terms of collection.
One of the main advantages of this approach is the ease of collection it offers, especially in an increasingly digitalized world.
“Platforms such as Uber, Airbnb, Netflix, Amazon and Alibaba have been contributing to VAT, since the tax is assumed by the client, which guarantees a constant flow of income to the National Treasury,” explained Lisandro Junco, former director of the Directorate of National Taxes and Customs in Colombia (DIAN) .
For its part, Chile projects revenue of US$ 241 million a year from 2024 onwards on the back of the tax on streaming platforms enacted into law in February 2020. Along the same lines, Peru's Minister of Economy and Finance, José Arista Arbildo, indicated last April that he estimated collection of around US$ 310 million per year from VAT charges on streaming services.
“The tax rate is already there, it is 18%. What happens is that in this case the supplier is external. When the VAT Law was made, it was always thought that the service provider was domestic,” he explained on the delay in the implementation of the tax in the country.
However, just as it is increased, there are demands for the VAT to be refunded. In April, the Government of Chile presented the Draft Law on Measures for the Reactivation of Tourism, which aims to boost the sector through measures such as refunding the VAT to foreign tourists on goods purchases made in the country.
In the case of Colombia, the current structure “ahead of its time” has been the subject of criticism, especially with regard to exempt goods, such as basic foods (meat, fish, rice, milk and eggs) which has generated imbalances. and criticism on its effectiveness as a progressive tax.
The fact that certain products, such as fine cuts of meat and seafood, are not subject to VAT has led to questions about the fairness of the system. It has been proposed to tax these products and refund the VAT through social transfers, but this measure has not been approved, leaving the country behind compared to other nations in the region.
It also impacts agriculture and the manufacturing industry. A controversy recently emerged after it was revealed that large companies can benefit from VAT deductions when selling exempt products, while small producers may not have the same ability to take advantage of these deductions, which generates inequalities.
“In this sense, it has been proposed to change the classification of certain products from exempt to excluded, which would eliminate the need for VAT declaration and refund, thus benefiting small producers,” Junco explained.
This is a problem that Peru also faces as filing taxes digitally means is a challenge for SMEs, which account for 99.6% of all companies in the country, according to the National Institute of Statistics and Informatics (INEI). Furthermore, it should be considered that a tax like the VAT is not so beneficial for Peru, a country where 78% of employment is informal.
The debate over the most efficient type of tax has led to comparisons between the VAT and a consumption tax.
“Although the consumption tax can be more efficient in terms of collection, it can discourage the national industry by taxing the inputs used in production. On the other hand, the VAT allows companies to deduct taxes paid on inputs, which can reduce the final cost of products and improve their competitiveness,” argued the former director of the DIAN.
The VAT is a tax with a role in Latin American countries. For this reason, and because countries implement it for different products and services in different years, Deagosto considers that the “personalization” of VAT is the solution that is proposed as a standard for all countries, since it looks after each person by considering socioeconomic factors.
“Maybe with today's level of technology and information, we can even talk about a basic rate [and avoid adding confusing and undetailed exceptions to the mix],” he said.
This proposal has been floating around the Uruguayan Congress for a couple of years, without materializing or marking a start, he concluded.
The evolution of the VAT, in its form and application, will continue to be a key indicator of how Latin American countries adapt their economies to contemporary realities, seeking a balance between collection and social justice.
