Latin America Regional Tax Cooperation Forum
Implications for Taxpayers
By Jimy Cruz, Partner, PKF Mexico and Leo Parmegiani, Partner, PKF O’Connor Davies
Para leer este artículo en Español, haz clic aquí.
Sixteen nations agreed to create the Regional Tax Cooperation Platform (LAC Platform) for Latin America and the Caribbean (LAC) at a two-day summit in Cartagena, Colombia in July. Organized by the Colombia Ministry of Finance the focus was to address certain terms in the Organization for Economic Cooperation and Development’s (OECD) global tax agreement, perceived to have eroded LAC nations’ legitimate share of tax revenue and some countries’ dissatisfaction with the OECD’s 2021 global tax agreement.
Background
The OECD is an international forum for the governments of 37 democracies with market-based economies to collaborate and develop policy standards, including international tax rules to promote sustainable economic growth. The U.S. is a member of the OECD but does not incorporate its tax rules into the Internal Revenue Code nor the regulations thereunder. Currently, four LAC countries are member countries of the OECD and discussions have opened up with other LAC countries to join. The OECD is currently negotiating and implementing multi-lateral tax protocols for intercompany transfer pricing rules, country-by-country reporting and a global minimum tax rate.
Key LAC Recommendations and Goals
The major recommendations of the LAC Platform are planned to strengthen global tax coordination and negotiation in economic governance and to achieve greater equity in the global tax system. This would require taxpayers to align their tax footprint with socio-economic values, such as gender inequalities and groups that were historically discriminated against and also to meet stringent human rights criteria.
The LAC Platform and its recommendations are seen to be in line with UN resolutions to foster regional and global integration on matters of international tax cooperation, fighting illicit financial flows and combating aggressive tax evasion and avoidance.
The LAC Platform also recommends various disclosure requirements for non-financial, environmental, social and governance (ESG) reporting to clarify the rights-based implications of the company’s tax planning in each jurisdiction in which taxes are paid. In addition, it emphasizes progressivity and equity in the region’s tax systems, departing from an overreliance on consumption taxes, as well on a reform of corporate taxation. This objective is contrary to the OECD’s recommendation that digital services should only be taxed at the point of consumption. Nine Latin American countries are currently levying VAT/indirect taxes on digital services and require the business to first set up a local establishment in the country. This is a different method of implementing digital taxes than the OECD’s Pillar One recommendation in which the non-domicile supplier bears the onus of accounting for the taxes due and income would be shifted to the point of consumption. The LAC Platform indicates this would create disadvantages because the taxpayer will need to navigate a complex compliance challenge and must avoid gaps and mismatches while negotiating multiple jurisdictions.
The LAC Platform also has more general Pillar One comments which seek greater redistributive potential.
The Platform’s goals also foster global tax governance that respects national sovereignty, given that some 27 percent of the wealth of the LAC region lies offshore, requiring much more diligent country-by-country reporting. This initiative draws on the Latin America Initiative established after the 2018 Punta del Este Declaration[1] signed by Argentina, Panama, Paraguay and Uruguay following a plenary meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
The Platform notes that small Caribbean islands are often stigmatized in the absence of objective criteria for what constitutes a “tax haven.” The Platform recommends that what it believes are biased and arbitrary policy decisions be replaced with assessments based on rigorous and predictable evidence. The methodology used by the Tax Justice Network for its Financial Secrecy Index and Corporate Tax Haven Index is suggested as a starting point.
LAC Forum Overall Objective
In conclusion, the LAC Forum believes it is imperative for taxpayers operating in the region to uphold human rights, especially within the context of their fiscal decision-making procedures and that regional tax jurisdictions guarantee that their tax policies align with their human rights obligations and relevant international standards. The discussions are also a good reminder that implementation of any OECD standards will be country-by-country and an important signal that the nations agreeing to the platform may look to follow a different path.
Contact Us
PKF O’Connor Davies and PKF Mexico work closely together on tax and accounting issues which affect companies conducting business in the U.S. and Mexico. We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, audit, tax or advisory matters relative to business in Latin America. Please call 212.286.2600 or email any of the Latin America Desk team members below:
Vic Peña, CPA, CGMA
Partner
Latin American Desk Leader
646.449.6380 I vpena@pkfod.com
Leo Parmegiani, CPA, MST
Partner
International Tax Practice Leader
646.699.2848 I lparmegiani@pkfod.com
Jimy Cruz Camacho
International Liaison Parter
Head of Transfer Pricing & Valuations
PKF México
jimy.cruz@pkf.com.mx
Ralf Ruedenburg, CPA
Partner
International Tax
646.965.7778 I rruedenburg@pkfod.com
Evelyn Bedoya
Supervisor
Financial Services
646.699.2872 I ebedoya@pkfod.com
[1]To establish a Latin American Initiative to maximize the effective use of the information exchanged under the international tax transparency standards to tackle tax evasion, corruption and other financial crimes.