As the calendar turns toward April 15th, everyone in the US knows what’s coming: tax day. While the Internal Revenue Service (IRS) has updated their systems, and there are dozens of tax management tech products, many people still have to file via a paper 1040 form that takes 6-8 weeks to process. Compare that to Chile, a less “developed” country according the most of the world, where paying taxes is as simple as logging on to the Servicios de Impuestos Internos (SII, Chilean IRS) website to see all your paychecks and spending from the year. On Chilean tax day, people can immediately if they’ll get a refund and how much it will be, which then shows up in your bank account automatically in 1-4 weeks.
Electronic tax filing systems are not unique to Chile. Colombia, Argentina, and Mexico allow people to pay taxes online or even via app, using a personal identification number like a Social Security number.
However, not all of Latin America is so progressive when the time comes to pay taxes. According to the World Bank, Brazil’s tax policy is one of the most complex in the world, so much so that doing taxes requires over 2000 hours per year, compared to 291 in Chile, 311 in Argentina, and Colombia with just 239. Latin American countries also have Value Added Tax (IVA in Spanish) that you have to pay monthly included in their totals.
Across the region, government ministries are rapidly introducing new methods to simplify and speed up the taxpaying process. Here are some of the ways Latin American governments are working to improve the often-painful process of paying your taxes.
Paying Taxes in Latin America Today
Tax regimes across the region vary widely, although most Latin American governments still depend on regressive VAT (IVA) that create a higher burden on the poor. Income tax regimes are usually split into three or more brackets based on monthly income and are paid directly by the employer. Other taxes, such as capital gains tax, vehicle registration, and property tax vary by country.
The Wilson Center found that IVA taxes grew across the region from 1992-2008 to 36.2% of tax revenues and 6.4% of GDP by 2008. By comparison, direct taxes, which can be more progressive, represent just one-third of tax revenues across the region. Personal income taxes in Latin America represent only 1.5% of GDP, whereas income taxes make up 9% of GDP across the OECD countries. In Uruguay, the country with the highest rate of personal income tax, income taxes make up just 2.2% of GDP (See Figure below). Corporate tax rates range from as little as 0% in Panama, a tax friendly country where foreign income is tax-free, to 40% in Brazil, the highest in the region.
With that data in mind, it is worth understanding how the average person does their taxes across Latin America. Here is a breakdown by country.
Paying Taxes in Argentina
Argentines pay taxes at the federal, provincial, and municipal level. Most citizens pay income taxes, VAT taxes, and excise taxes on specific items. You can file and pay all personal taxes through the Administración Federal de Ingresos Públicos (AFIP), where users enter a personal id number to file their taxes, then make a reservation at a public office, and pay their taxes in person.
Argentina is also tackling the informal economy by requiring all vendors to accept debit and credit cards, even for purchases as small as a pack of gum, allowing the AFIP to track all purchases to ensure it collects 21% IVA on all consumer goods.
Paying Taxes in Brazil
Paying taxes in Brazil is notoriously challenging. All taxes are accrued and paid through a permanent ID number (like Social Security) called Cadastro de Pessoas Fisicas (CPF), created by the Brazilian Federal Revenue Service, which allows the government to track payments.
Brazil tried to increase enforcement by recently implementing electronic invoicing combined in conjunction with the older system of paper documents stamped by the tax authorities. Brazil incorporated big data technology in their Public Digital Bookkeeping System (SPED in Portuguese) to allow authorities to cross-check information from e-invoices and run tax audits more efficiently.
Brazilians can pay their income taxes online through the Receita Federal. However, you have to send federal taxes through a form called the DARF, which asks for personal information which then gets sent collecting agent. The system is far from self-explanatory, and most foreigners should use an accountant to ensure they file their taxes correctly.
Paying Taxes in Chile
Chile was the first country in Latin America to try to prevent tax evasion by requiring mandatory electronic invoicing for businesses. Since 2004, some corporate taxpayers have used e-invoices, and citizens can pay their personal income taxes online via the website for Chile’s tax authorities, Servicios de Impuestos Internos. There is also an online system for employers to pay their employees’ taxes and other social services called Previred.
Now, Chile’s entire tax collection system is online, meaning paper filing is a thing of the past. It takes me just ten minutes a month to pay our taxes through SII. On tax day, we finish our taxes in half an hour. It is shocking how efficient this system is compared to the headache of filing taxes in the US.
Paying Taxes in Colombia
Colombia has recently followed in Chile’s footsteps by implementing mandatory e-invoicing for all businesses, which will gradually take effect over the next 4 years. Colombian tax residents can pay all their taxes online via the Dirección de Impuestos y Aduanas Nacionales (DIAN). You can even sign up for an identification number through the online platform, so you never have to go into a government office, much like filing for an EIN in the US.
All citizens are subject to income taxes between 10-33%, as well as VAT taxes on consumer goods.
Paying Taxes in Mexico
Much like in Chile, many people in Mexico can opt to have their income taxes paid directly by their employer. Mexico has a complicated, progressive income tax code with ten different income brackets, so getting taxes paid by an employer can considerably simplify payments. The Mexican IRS also uses e-invoicing to prevent fraud by electronically stamping them with an electronic seal. All online tax returns must be filed in a standardized XML format, which allows for more rapid accounting and analysis. Since 2014, reforms in Mexico have increased tax returns by around 1.3% of GDP.
You must have a Registro Federal de Contribuyente (RFC) number in order to pay your income taxes online through the Servicio de Administración Tributaria (SAT), which you obtain by registering through the local tax office. An RFC allows the government to attribute taxes to you quickly. If your employer pays taxes for you monthly, you need to sign into the SAT website on tax day to submit your declaration and pay any extra costs directly from your bank account.
KPMG reports that Latin America is a global leader in using new technology to combat tax evasion, requiring corporations and individuals to use electronic invoicing, making corporate spending much more transparent and simple to track and tax. By making tax information available digitally and in real-time, electronic invoices and public digital bookkeeping systems (like the one in Brazil) increase transparency and allow authorities to analyze and review taxpayer data quickly. Although tax collection systems are now overwhelmingly online, many Latin American countries still struggle to fully collect taxes. The persistence of efficient but regressive taxes like IVA that burden the poor more than the wealthy show that there is still significant room for improvement in tax regimes across the region.
While many Latin American governments can work to create more progressive tax systems and need to move away from informal economies, many countries have world class technology that makes tax collection easier than the “developed world.”