Tax Treaties

The aim of this contribution is to suggest some courses of action for Latin America and the Caribbean (hereinafter, LAC) in relation to the taxation of the digital economy. For this purpose, after a brief description of the international background on direct and indirect taxation, I refer to the state of play in the LAC region, making a few preliminary considerations and presenting some generalities on the measures that have been adopted. Finally, I will share some thoughts and recommendations.

On August 23, 2018, Sebastián Piñera, president of Chile, with the general support of all political actors, sent to the Congress a Bill proposing a new tax, on the supply of digital services rendered by digital platforms. This Bill was introduced with a general objective, included in its title, to “modernize the Chilean tax system, intending to incorporate the best practices observed at the international level, as well as taking care of the challenges and particularities that technological advances imply, such as the digital and collaborative economy”.

Developed and developing countries have committed to implement global standards as developed by the OECD with the political mandate of the G20 including standards that provide for exchange of information among tax administrations. Some of  the reasons for this exchange to take place, is the need to provide tax administrations with the relevant information on taxpayer’s activities/assets abroad, as well as to ensure that taxpayers including multinationals pay their fair share of taxation. Exchange of information is the key instrument for tax administrations in order to prevent tax evasion, tax fraud, and aggressive tax planning.

By ensuring that highly digitalized businesses have nexus, these multinational corporations will cease to be “free-riders” leeching off the domestic taxpayers. It is also envisaged that this approach will ensure that highly digitalized businesses contribute to the social contracts of the societies from where they are making profits and whose public goods they are using for this purpose.

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.

African countries should consider alternatives to the arm’s length principle. A viable alternative to the arm’s length principle: the unitary taxation (formulary apportionment) approach should be considered. This approach looks in detail at the economic activities resulting into the profits of MNCs for tax purposes. Under this approach, tax authorities in Africa will justifiably impose corporate income taxes on “actual” profits of MNCs accruing form economic activities carried out in their jurisdictions, thereby eliminating the opportunities for base erosion and profit shifting in Africa.