International Tax Cooperation

December 9, 2020

This blog reflects on an issue as current and complex as the control of the digital economy by the Tax Administrations (TAs). The topic is very important in Latin America and Caribbean because it is the most unequal region in the world with extreme poverty. The prevalence of informal economy in Latin America and Caribbean requires that controling the digital economy and combating tax evasion be a priority for the region.

Digital Economy and Taxation in Latin America

The primary objective of this post is to highlight the importance and gravity of the existing tax evasion in Latin America and the Caribbean today. A study conducted by Santiago Diaz de Sarralde Miguez reports that Latin America and the Caribbean are characterized by a relatively low tax burden, which averages 22.8% of GDP. That is 11.5% less than the OECD (2015). While it is true that there are large differences between countries, as the tax burden varies from 12.4% in Guatemala to 38.6% in Cuba.

As long as national tax systems develop in response to unique social and administrative pressures, jurisdictions will continue to rely on tax systems that exhibit at least as many differences as similarities. Tax harmonization represents the traditional answer to that entropic pressure, reflecting a confidence that nations can avoid international tax conflicts by becoming more like one another. Unfortunately, in part because many of the jurisdictions that populate today's international tax landscape have little in common, it seems that harmonization is no longer equal to the task. This Part introduces the concept of deharmonization, an alternative to harmonization that may be more robust.

Developing countries are currently disadvantaged in the international tax regime. The control of the developed countries in the tax regime is evidenced in their influence in the creation of the major model tax treaties that are used as the starting point for nearly all bilateral tax treaties today. With the rise of multilateral tax instruments and an awareness of the dubious flow of tax revenue out of already disadvantaged countries, developing countries should consider renegotiating their bilateral tax treaties to ensure a more balanced international tax system that is designed for their benefit.