Introduction

The digitalization of the economy challenged the foundational principles of international taxation, particularly the concept of a permanent establishment as the basis for allocating taxing rights. Large digital platforms are able to generate significant economic value in jurisdictions where they lack a physical presence, thereby eroding the tax bases of market economies.
In response to this phenomenon, the Organization for Economic Co-operation and Development (OECD), through the BEPS 2.0 project, launched an ambitious reform process structured around two pillars. Pillar One aimed to partially reallocate taxing rights to market jurisdictions, while Pillar Two introduced a global minimum corporate tax.

However, despite years of technical negotiations, Pillar One has stalled, and its effective implementation remains highly uncertain. This partial failure has reignited interest in unilateral solutions, particularly digital services taxes. While such measures have proliferated in Europe, their adoption in Latin America has been limited and fragmented.
This paper analyses the structural causes of Pillar One’s failure and examines, from a comparative and regional perspective, why Latin America has largely opted for other tax approaches, with particular attention to the Brazilian case.

OECD Pillar One

Pillar One emerged in response to the international tax system’s inability to adequately tax large digital multinationals. Its core element, known as Amount A, seeks to reallocate a portion of the residual profits of certain multinational groups to market jurisdictions, even in the absence of physical presence. Initially designed for highly digitalized companies, the scope of Pillar One was subsequently expanded to cover most sectors, excluding only the extractive and regulated financial services.

From a technical standpoint, the design of Pillar One is extraordinarily complex. Key elements – such as the determination of residual profits, the determination of global revenue thresholds, mechanisms to eliminate double taxation, and dispute resolution procedures have generated extensive debate. This complexity has likely contributed to reluctance in both developed countries and emerging economies, many of which are concerned about their administrative capacity to implement such a system effectively.

More fundamentally, however, I believe the main obstacle appears to be political. The United States, country of residence for most of the large digital platforms affected, has shown increasing resistance to reallocating taxing rights to other jurisdictions. The absence of ratification by the U.S. Congress has effectively blocked the entry into force of the multilateral instrument necessary to implement Pillar One. This has seriously undermined confidence in the multilateral process and encouraged a return to unilateral measures.

Digital Services Taxes from a Global Perspective

In response to the stalemate surrounding Pillar One, numerous countries have maintained or reintroduced their digital services taxes. These taxes are generally levied on gross revenue rather than on profits, and they target activities such as digital advertising, platform intermediation, and the sale of user data.

The European experience shows a clear correlation between the stagnation on Pillar One and the persistence or extension of new national digital services taxes. This is reflected, for example, in transitional agreement between countries such as Spain, France, Italy, Austria, the United Kingdom, and the United States, which sought to bridge the gap between unilateral DST and the anticipated multilateral solution proposed by the OECD and the G20[1].

The Case of Latin America

Unlike Europe, Latin America has shown a preference for taxing the digital economy through indirect taxation, primarily VAT on digital services provided by non-resident suppliers.

In my view, this strategy may be driven by several structural factors. First, Latin American tax systems rely heavily on indirect taxes, which may be easier to administer and less contentious from an international perspective. Second, many tax administrations have made significant progress in digitalization, which facilitates VAT cross-border enforcement in digital transactions[2].

In contrast, the introduction of taxes on digital service based on the gross revenue of digital multinationals—poses greater technical and legal challenges. These include identifying the appropriate tax base, determining the geographical allocation of revenue, and managing  potential conflicts with double taxation treaties. Such challenges are especially in countries with limited administrative capacity.

Beyond the preference for digital VAT, there are several reasons that explain the limited implementation of digital services taxes in Latin America. In my opinion, first and foremost, there is a concern that such measures could generate tensions with key trading partners  or be perceived as infringing upon the tax sovereignty of other jurisdictions.

Second, DST are often passed through to consumers. Since they are often structured as taxes on gross revenue, digital services taxes tend to be passed on relatively easily to the end user. This can exacerbate regressive effects in economies characterized by high levels of inequality.

Finally, several Latin American countries appear to have chosen to adopt a cautious wait-and-see approach, maintaining flexibility while awaiting a potential multilateral solution—despite the current uncertainty surrounding Pillar One—in order to avoid further fragmentation of the international tax system.

The Special Case of Brazil and Its Digital Social Contribution

Brazil presents a particularly noteworthy case. Although it has not traditionally implemented an explicit digital service tax, in recent years various legislative proposals have been introduced aimed at taxing large digital platforms. Notably, complementary Bill No. 157/2025 proposes a 7% “Digital Social Contribution” on gross revenue derived from digital advertising and the commercialization of user data.

The design of this proposal  appear to clearly draws inspiration from European digital services taxes, but it also introduces distinctive elements. In particular, it explicitly links taxation to the use of Brazilian users’ personal data. This seeks to address the imbalance between the value creation generated by internal users and the low effective tax rate imposed on large foreign platforms.

Conclusions

The impasse of Pillar One highlights the limits of fiscal multilateralism in an increasingly  fragmented geopolitical context. The inability to reach an effective consensus has brought unilateral measures, particularly digital services taxes (DST). However, in my opinion, the Latin American experience shows that these measures are not easily transferable to all contexts.

In Latin America, in my view, the combination of trade dependence, certain administrative constraints, and a historical preference for indirect taxes has led the region  favor alternative approaches centered on a digital VAT.
Brazil illustrates both the possibilities and the challenges of going further. Its proposed Digital Social Contribution demonstrates the technical feasibility of a tax on digital services while also revealing the enormous political and economic obstacles involved.

In the absence of a credible multilateral solution, the debate over taxation of the digital economy is likely to remain open. Latin America will have to decide whether to continue refining indirect approaches or to move, as Brazil suggest, towards exploring more ambitious measures that strengthen fiscal sovereignty in the global digital economy.

References:

[1] Spain France, Italy, Austria, the United Kingdom, and the United States agree to transition from the current digital taxes to the OECD’s multilateral solution and G20.That agreement emphasized the need to reach a comprehensive, multilateral agreement rather than resorting to unilateral measures; the failure of Pillar 1 meant that the digital services taxes in place at the time remained in effect.

[2] In this regard, the following is of interest, for example: COLLOSA, A.: “The Importance of Digital Transformation and Technological Innovation in Tax Administrations,” in Inter-American Center of Tax Administrations (CIAT), 2025.

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