Understanding VAT Compliance in Latin America

Latin America (LATAM) is increasingly becoming a vital market for foreign digital service providers, particularly following the implementation of Value Added Tax (VAT) on digital services in the mid-2010s. Despite the perception of LATAM as a cohesive region, the methods of VAT collection on digital services differ markedly across countries. This divergence presents both opportunities and challenges for foreign sellers looking to navigate the region's tax landscape. In Mexico, for instance, a VAT regime established in June 2020 mandates that foreign companies providing digital services to Mexican consumers must register with the local tax authority. These companies are required to charge VAT, file monthly returns, and remit the collected tax to the government. Additionally, they must appoint a legal representative in Mexico and submit various documentation to complete the registration process, which can be cumbersome. Other LATAM countries, such as Colombia and Chile, adopt a hybrid approach to VAT collection. In Colombia, foreign businesses can either register for VAT or utilize a withholding system. Meanwhile, Chile has introduced a requirement for intermediaries to withhold VAT on payments to foreign suppliers who fail to register. This system aims to ensure compliance while reducing the administrative burden on foreign sellers. Overall, while the tax registration approach offers a clear method for VAT collection, it imposes significant compliance responsibilities on foreign digital service providers. In contrast, the withholding approach simplifies the process, allowing foreign sellers to avoid direct interaction with local tax authorities, thus streamlining their operations in the region.