Taxation of services: Some lessons from the Latin American experience – Part I

By Andrea Laura Riccardi Sacchi

This blog is part I of a series of blogs which reflects the author’s participation at the International Centre for Tax and Development (ICTD) conference: Global Tax Governance at a Crossroads, 5 to 7 June 2023, Nairobi, Kenya. The opinions expressed hereby are of the author’s and do not necessarily reflect the position of the institutions to which she is affiliated.


The digitalisation and servicification[1] of the economy have intensified long-standing difficulties in the taxation of cross-border services, leading to a wide range of issues that defy the efficiency of national tax systems: erosion of tax bases, revenue and fairness concerns that involve competition disadvantages for domestic service providers and informalisation of activities underlying digital platforms – the so-called “gig and sharing economy” – and, most importantly from the author´s view, great and undesired uncertainty on the tax treatment for both, taxpayers and tax authorities.

While finding a solution to the effective taxation of income derived from cross-border services, and in particular from those that are highly digitalized, is currently in the spotlight in the international tax arena, Latin America´s tax systems may contribute to inspire more streamlined and effective remedies.

Throughout this blog post, the author shares how the region has been reacting so far, highlighting key aspects of Latin American countries’ tax systems that underpin said response.

Latin America’s response to the taxation of (digital) services

While during these years many Latin American jurisdictions have introduced new provisions to their VAT legislation targeting cross-border transactions involving digital services, few have also taken measures in the field of direct taxation.

One of the main reasons that may explain why these jurisdictions have decided to mainly address indirect taxation challenges is the relevance of consumption taxes in the region’s tax mix. Indeed, VAT and taxes on goods and services are a major source of revenues for Latin American governments (around 50%). Other reasons for taking this course of action may comprise the following:

(i) the principles underlying indirect taxation are less controversial (this is, there is certain international agreement around the destination principle as envisaged in the OECD VAT/GST Guidelines and, in particular, in the VAT Digital Toolkit for Latin America and the Caribbean elaborated produced by the OECD in partnership with the World Bank Group and the contribution of the Inter American Center of Tax Administrations and the Inter-American Development Bank), and

(ii) the particular situation of each jurisdiction’s “OECD status” may have influenced its reaction, in the sense that jurisdictions may have decided to wait for the OECD/G20 Inclusive Framework on BEPS’s recommendations on business income taxation. Indeed, many of the Latin American jurisdictions are members of the IF and some are G20 countries (Argentina, Brazil and Mexico) and/or an OECD member (Chile, Colombia, Costa Rica and Mexico); four countries are part of the Steering Group of the IF (Argentina, Brazil, Colombia and Jamaica), not to mention the fact that Jamaica is as of 1st March 2022 Co-Chair of the IF; others, have been invited the same year to start conversations on accession (Argentina, Brazil and Peru).

Despite the fact that unilateral measures introduced at the national level[2] in Latin America to specifically capture profits from digital businesses are few, they may be worth analysing now that the IF’s recommendations may be about to crystallise into a multilateral convention that introduces an – as we explain infra – extremely complex “Amount A” mechanism.

Unilateral measures (other than VAT’s) in Latin America

Three aspects have been key in the design of the measures aimed at capturing the profits of cross-border digital services[3]:

(i) existing tax treaty networks in the region are quite modest in comparison to those of other countries, so the well-known limitation of the permanent establishment (PE) threshold for source taxation may be relatively small for Latin American countries[4];

(ii) though the region has been the cradle of some well-known digital platforms[5], in general Latin American jurisdictions are net importers of digital services and are not the seat of the headquarters of multinational groups, which, from an international income tax perspective, means they are mainly “source” or “market” jurisdictions;

(iii) there has been a historic tendency in the region to extend the definition of income of domestic source beyond the source of production concept. This tendency started in the 1970s for the case of income derived from technical services.

Within the reduced group of countries that have introduced measures beyond VAT legislation, we find:

(i) a quite visionary Peru whose solution is pre-BEPS, and in force as of January 2004;

(ii) Uruguay and Paraguay that introduced measures before the two-pillar discussion started in 2019, but after the 2015 report on BEPS Action 1, when no concrete measures were recommended by the IF; and more recently,

(iii) Colombia, by introducing via its tax reform of December last year a significant economic presence (SEP) test.

Though the measures targeting digital services vary in relation to the scope, to the form of collection (either directly from the foreign provider or via withholding by the payor or financial intermediaries), and to the tax burden imposed, they share a common characteristic. Contrary to what has been seen in other regions, for example in Europe, with digital services taxes or DSTs, these measures were introduced within each national corporate income tax system. This not only means that (i) no new taxes have been created but also that (ii) the effectiveness of these new measures may probably be conditioned by the distributive rules agreed in existing tax treaties. This shared characteristic is key under the IF Amount A mechanism, as seen later.

As mentioned, Peru was a visionary, as its measures are pre-BEPS. Indeed, as of January 2004, income arising from digital services economically used in Peru is considered to be of Peruvian source. However, this provision is limited to B2B and B2G transactions and the amount of the tax, which is collected via the mechanism of withholding, is set quite high, at 30% of the gross income paid to the foreign digital service provider.

Meanwhile the Uruguayan solution is partial as it refers only to certain categories of digital services. One of the first measures taken by this country refers to income from advertising services, including online advertising. From January 2016 onwards, income derived from advertising services supplied to local businesses (which are effectively taxed) is deemed to be of Uruguayan source and therefore taxed. Later, in 2017, the aim was to specifically address the taxation of digital platforms intermediating in the demand and supply of land passenger transport and, as from January 2018, more general rules were introduced, though still limited to two types of digital business models: (i) the intermediation in the demand and supply of services in general (not just land passenger transport); and (ii) the transmission of audio-visual content. These last measures, which were the outcome of a collaborative dialogue between digital providers, tax authorities and other interested parties, are comprehensive of B2B and B2C transactions and mainly rely on digital providers registering themselves in Uruguay and paying directly the corresponding tax via simplified compliance procedures in relation to registration, documentation and payment requirements.[6] The tax burden that may arise amounts to 12% on the Uruguayan gross income, which can be 100% or 50% of the amount paid to the foreign provider,[7] so the effective tax rate is either 12% or 6%, respectively.[8]

The Paraguayan response which has a broader scope in terms of the types of digital businesses covered than the provisions adopted by Uruguay foresees an effective tax burden of 4.5%: the 15% general tax rate applies to the net income of Paraguayan source which is deemed to be the 30% of the value of the digital service.

While the three countries mentioned above have exercised their taxing rights by simply extending the definition of income of domestic source, either totally or partially, to that derived from the provision of digital services from abroad, Colombia not only extended the definition of income of domestic source but added a significant economic presence (SEP) test. Indeed, according to the new legislation (that, in principle, will be operative as of January 2024) income derived from the sale of goods and/or the provision of services by non-residents to clients and/or users located in Colombia is income of domestic source as long as there is an SEP of the foreign provider in Colombia. For digital services, there is an in Colombia when there is a “deliberate and systematic interaction with customers and/or users located in Colombia”. The legislation presumes that such condition is satisfied when (a) there is an interaction during the previous or current fiscal year with 300.000 or more Colombian customers and/or users, or (b) when prices are expressed or can be visualized in Colombian pesos or payment can be made in Colombian pesos. As a result, non-resident providers may have to pay tax on the income arising from transactions with Colombian customers/users, by either presenting a tax return in the country and paying 3% of gross income or by accepting a withholding tax of 10% on gross income.

In a second part of this blog post, the author continues analysing the Latin American experience and providing some feedback on the implications the UN and OECD initiatives may have and the next steps the region may take.

[1] According to the United Nations Conference on Trade and Development (UNCTAD), “servicification” is a phenomenon that consist of manufacturing activities and competitiveness increasingly depending on services (Services, Trade and Development | UNCTAD).

[2] Subnational measures will not be addressed in this blog post.

[3] A detailed analysis of the tax treatment of services in Latin America can be found in: Riccardi Sacchi, A.L., Una solución global a la imposición sobre la renta societaria: la revitalización de la fuente, Tirant lo Blanch, Valencia, 2021.

[4] Riccardi Sacchi, A.L., “MLI Implementation and Impact from the Latin American and the Caribbean Perspective: Some Lessons for the Future”, in Rocha, S & Christians, A (Ed.): A Multilateral Convention for Tax: From Theory to Implementation, Wolters Kluwer, Alphen aan den Rijn, 2021.

[5] To mention a few examples: Mercado Libre in Argentina; PedidosYa or Dlocal in Uruguay; Rappi in Colombia.

[6] Flexibilization of general requirements were introduced, such as the possibility to pay on a quarterly basis, instead of a monthly basis, and the possibility to present tax returns and make payments in US dollars.

[7] Further details on the determination of these notional percentages can be found in: While in the quest for the Holy Grail… Uruguay is already taxing income from Uber and Netflix – GLOBTAXGOV (

[8] It may be relevant to bear in mind than gross income is the tax base and 12% the general tax rate under the non-residents income tax (residents corporate income tax is levied at 25% on net income).

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.