How To Strengthen Digital VAT In Latin America And The Caribbean

A productive consumption tax that requires proper design

Taxing digital services with VAT is fiscally sound, yet it is not without debate or technical difficulties. The main concern is the impact on lower-income consumers. VAT is often considered regressive because low‐income households devote a higher share of their budget to consumption than wealthier households.

Moreover, if digital services – educational platforms, entertainment services, access to information – become more expensive due to the tax, there is a risk of widening digital inclusion gaps in the region.

Finally, there are concerns about its effects on innovation and entrepreneurship: overly complex tax frameworks or excessively low registration thresholds may discourage investment in startups and emerging business models, precisely when the region urgently needs to accelerate its digital transformation.

A toolkit to support digital VAT design

The solution lies in careful design. The IDB Toolkit (developed jointly with the World Bank, CIAT, and the OECD) provides governments with clear legal frameworks, reasonable registration thresholds, and realistic implementation timelines.

The toolkit allows governments to incorporate protections for goods and services with high social value, such as Argentina's exemption for digital books or Colombia's exemption for online education services.

As UNCTAD notes, Digital VAT should not be seen as a barrier to the knowledge economy, but as a tool that levels the playing field between physical and digital activities, generating the resources needed to finance infrastructure, education, and inclusion.

Global standard for Digital VAT implementation

The main advantage is the international consensus on the right to tax. Unlike direct taxation of digital activities without permanent establishment, where no global standard exists, the OECD International VAT Guidelines

For cross‐border digital trade, the OECD recommends simplified registration and online compliance mechanisms that allow foreign suppliers without physical presence to declare and pay VAT directly, without the need for a local representative or bank withholding.

Latin America and the Caribbean need to change their traditional approach

Despite these recommendations, most countries in the region have applied traditional VAT techniques: requiring non‐resident suppliers to register under the general VAT regime, appoint local representatives, and file periodic returns. In addition, since payments are largely channeled through the banking system, several countries have implemented final withholding mechanisms at financial intermediaries.

Some countries – such as Argentina, Brazil, Colombia, and Uruguay – adopted rules in 2017–2018, prior to the OECD guidance and the Toolkit, making divergence understandable, but others enacted legislation afterward.

All countries should now consider the Toolkit's recommendations for taxing platforms in an environment of mutual trust and simplified compliance and extend cooperation to address new forms of fraud.

When legislating the place of taxation for Digital VAT, in line with the destination principle, countries are encouraged to follow the OECD International VAT/GST Guidelines and to adopt the general rule that taxation should occur at the place of consumption.

This rule should be operationalised through clearly defined presumptions based on objective indicators, such as the IP address, the SIM card country code of the mobile device, the jurisdiction of issuance of the payment instrument, and the billing address. It is essential that tax administrations engage in structured consultations with representative industry associations to ensure that the rules are clear, proportionate, and administratively feasible, as simplicity and legal certainty are key to achieving higher levels of compliance and improved revenue outcomes.

Toward Digital VAT 2.0: Opportunities for improvement

For Digital VAT to be an effective revenue instrument, it must be adopted in a coordinated manner across the region to avoid regulatory arbitrage.

Countries must strengthen enforcement mechanisms for foreign suppliers and ensure effective application of Digital VAT to business‐to‐business transactions, particularly software and cloud computing services. In federal countries such as Argentina, Brazil, and Mexico, preventing double taxation across national, state, and municipal taxes is critical.

To address these challenges, it is important to implement a reform agenda along three complementary dimensions.

• At the national level, countries that do not yet have a specific regime should prioritise its adoption by applying the Toolkit, which is fully aligned with the International VAT/GST Guidelines. There is no need to reinvent the wheel: the accumulated regional experience – systematised by CIAT in its Working Paper WP 05 2025
• At the technical level, the digitalisation of registration and collection processes-through API based interfaces between suppliers and tax administrations-can significantly reduce compliance costs and enhance real-time control. In this regard, CIAT offers the Digital Economy Compliance (DEC) system free of charge, a technological solution designed to address the challenges of the digital economy.
• From a fiscal policy perspective, beyond the collection of Digital VAT, platforms constitute a key source of information on the operators that use them-such as delivery workers, drivers, or merchants-who may be subject to tax and social security obligations. Accordingly, the OECD recommends establishing cooperation mechanisms with platforms to exchange information, with a view to improving the tax compliance of these operators.

The IDB's Added Value: Turning knowledge into action

The IDB is not only a co-author of the Toolkit-it is the trusted advisor that ministries of finance in LAC need to turn this manual into real reforms. We support up‐to‐date country diagnostics, provide technical assistance to overcome bottlenecks, and facilitate regional cooperation.

There is a clear window of opportunity. With the Toolkit in hand, available technological tools, careful design that protects vulnerable groups, and the IDB's technical and financial assistance, the region has everything it needs to act.

• Download our toolkit

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