Although I was one of the founders of the CIAT Blog (which by the way has exceeded all our expectations in terms of bloggers and the readers), I do not usually publish in this space to avoid that some personal position could be interpreted as an official position of the CIAT Executive Secretary.

On this occasion, however, this post precisely reflects the official position of the CIAT Executive Secretariat. It summarizes our effort to invite countries not only to face but even to benefit from the important challenge that the taxation of the digital economy represents.

Undoubtedly, one of the issues that have occupied and still continue in the discussion among stakeholders of tax policy and administration is the impact of the digital economy that we understand, for our purposes, as the activities of highly technological companies that carry out operations in a country without having physical presence in it.

In the direct taxation field, the topics of discussion include new business models, the creation of value, the definition of a new nexus, the implementation of unilateral measures as an alternative in the absence of international consensus, the opposing positions of different actors on issues such as source and residence or the resolution of disputes or even, beyond the digital economy, the search for a minimum level of taxation aimed at avoiding harmful competition. There is still a path to walk in the search for a consensus that would be marked, probably, by intermediate positions where winners and losers neither win much nor lose by much.

In the field of indirect taxation, however, the divergences are not so great. On the one hand, the idea of the principle of destination to define taxing rights is accepted. On the other hand, it is admitted that digital service provision operations, the commercialization of intangible goods or intermediary services provided by platforms that facilitate peer-to-peer operations do not compete in the same conditions as local operators, also damaging the collection of taxes in the jurisdiction. In fact, the indirect taxation of the digital economy represents today, in our opinion, a relevant opportunity to generate additional tax revenue in times of crisis, with a potential that will only grow as the new business models are consolidating and expanding.

In this scenario, together with our colleagues from the World Bank, the IDB, and with the leadership of the OECD, we are working on the creation of a set of guidelines to allow the collection of indirect taxes in the digital economy, aimed at Latin American countries and the Caribbean, that will be available in a very short time. In summary, the proposal focuses on requiring those companies to voluntarily adhere to the mechanism, collect the corresponding taxes in B2C-type operations (with consumers) and carry out the transfer of corresponding funds; all supported by a simplified mechanism for registration, declaration, and provision of information that would not require any physical presence either. The mechanism could be complemented by a withholding on the means of payment for transactions made with companies that are unwilling or unable to join. In addition, a country may decide sovereignly, based on the general approach, how to define specific characteristics, such as the type of economic activity covered, the information elements for registration and declarations, the procedure to follow in case of overpayments, the establishment of minimum thresholds of total operations to be incorporated into the regime, or of minimum limits for individual operations to require additional details on the transaction, and so on.

A country, in order to implement the recommendations of the guidelines with its own adaptations and parameters, needs to adjust its legal framework to tax these operations and allow for registration and declaration without physical presence; design or adjust processes and procedures so that the different actors are aware of their responsibilities, the means to communicate and make requests; and, very importantly, to have a technological solution that allows implementing and articulating the above two elements. It is precisely at this point where the subjects mentioned in the title of this post come in: the Norwegian Cooperation (NORAD) and CIAT.

Given the novelty, the tax administration needs a new development or at least a set of adjustments to its IT platform. For some administrations this may be a minor issue; Others would require allocating significant resources in relation to their budget, which would mean the postponement of the application of the system, paying an opportunity cost that, given the growth estimates of the digital economy, would increase in the coming years.

With the financial support of NORAD, to whom we reiterate our gratitude, we have developed a technological solution to fill this gap, and we build it with the vision that it will be a public good for the tax administrations of CIAT member countries and even for non-members that request it.

This application is designed to run both in the cloud and in the facilities of the tax administration, which allows implementing it in a short time. The application is highly parameterizable, to allow adjustments according to the specific design that a country makes.

It has two main interfaces: one for the taxpayers, that is, the companies abroad, and another for the tax administration. The application is multilingual, allowing, for example, a company in one country to interact in English and another, from another location, in Portuguese, and, of course, incorporates the highest computer security standards to ensure the privacy and accuracy of the data provided. On the other hand, as it is a standard interface, it facilitates voluntary compliance by companies in the countries where it will be implemented, significantly reducing their compliance costs.

In the coming weeks, the procedure will be available for those who want to evaluate the application or directly implement it. It will be available to any interested tax administration after we complete the implementation of the first pilot and the system has been adjusted based on real conditions tested in the field. In some of its first implementations, we already know, we will have the support of NORAD and EUROsociAL+ and, possibly, other donors, depending on the requests that reach CIAT.

For now, we invite you to watch three short videos that provide a clear and objective idea of how the system operates. The videos are available with subtitles in Spanish, English, Portuguese and French.

• Simplified registration of a taxpayer. 3 minutes.
• Submission of a taxpayer’s declaration. 3 minutes.
• The official’s interface. 8 minutes.

As it cannot be otherwise, when something or someone is born, it requires a name. This application is called DEC – Digital Economy Compliance. The image illustrating this post is its official logo.

We hope that there will be several, if not lots, of tax administrations that will explore this solution.

See you soon!

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