VAT the unknown and unwelcomed guest for US companies doing business in LatAm. By Leopoldo J Martinez and Carlos Contasti*

Imagine this dialogue between the CFO and the LatAm Tax Director: ¿Did you have someone look into the income tax withholdings or Permanent Establishment issues with our LatAm advisors? … Yes but they also suggested we consider some planning for VAT! … VAT? … Yes, an unexpected visitor.
VAT is an indirect and non-accumulative tax that levies consumption of goods and services. It is imposed on the amount of value added at each stage of the production process or the supply chain, thus, an exporter of goods, a service provider or a technology company providing a license or collecting a royalty must work around VAT.
VAT is one of the most important revenue sources for LatAm governments. Therefore its compliance is strictly enforced.  Accordingly, adequate VAT planning at the pre-business stage makes a difference.
Latin America countries differ from the European Union because there are no harmonized VAT rules and procedures. Each country has its own VAT system without any integration or collaboration between them. Moreover, some countries have a very complex indirect tax system, within the country. In Brazil, which is the largest economy in the region, the equivalent to VAT tax is disaggregated and distributed among its three territorial levels.  Industrial products sales are taxed at the federal level (IPI); all other goods are the subject of state taxation (ICMS); and services are a matter of municipal taxation (ISS). In addition, there are significant differences in tax rates for ICMS and ISS among the cities and states. As a result, there is a regional and local war to tax transactions when the fiscal base is established in low rate state or city, but the customer is located in another place.
The lack of regional harmonization represents an important challenge for services exported into LatAm. For instance, most of the LatAm countries would tax all services rendered within their territories regardless of the place of use or enjoyment, or the customer’s location.  In countries, like Venezuela, all services rendered within its territory, and services rendered from abroad (imported services), when used or enjoyed in Venezuela, are subject to VAT. Argentinean Law takes the approach of establishing that services rendered and used or enjoyed abroad are exempted from VAT. The use and enjoyment of the service approach is certainly an undetermined concept, and there are many different interpretations.
Normally, an exporter without an establishment or local presence deals with reverse VAT issues. Meaning that instead of collecting the tax from his client, the same is withheld by the client, who actually pays the tax. But other issues are relevant. In some jurisdictions it must be determined whether the transactions are a service or a royalty for intellectual property, in order to determine VAT exposure. Accordingly, contractually a license can be separated from related support services to optimize VAT exposure.
One key issue is VAT registration. In most LatAm jurisdictions it is prohibited that overseas companies register for VAT, unless they have some presence in the country, such as permanent establishment. However, in most of the countries in LatAm when a foreign entity permanently or habitually supplies goods or renders services it will be mandatory to register for VAT purposes.
There are some benefits associated with VAT registration. The potential benefits are: (i) the right to recover tax credits arising from export activities, (ii) the ability to manage VAT withholdings, and (iii) utilization of tax exemptions. Registration becomes particularly relevant when the company exporting services or goods into a VAT jurisdiction, for its commercialization or for support, is contracting with local providers charging VAT for their services, since VAT is estimated offsetting debits (VAT collected) with credits (VAT paid).  Particularly relevant in LatAm –and here is a fundamental difference with the EU system– a non-domiciled company, one not registered for VAT purposes, can not file a refund of tax credit. Using this rationale, big companies tend to do business with registered companies with the objective of recovering the VAT output generated in the transactions. Also, most of the VAT regimes exempt businesses with sales below a threshold established by the law Accordingly, VAT registration could be the basis of a VAT optimization strategy. When such decision is made, then a holistic approach to dealing with VAT and Income Taxation becomes necessary.
There are some countries in LatAm that have established certain VAT withholding methods, such as Argentina, Brazil, Colombia, Mexico and Venezuela.  Withholding obligations could take place when the taxpayer sells goods or renders services to the Federal, State or Municipal government or decentralized agencies, or because the transactions are made with a “special taxpayer”, normally a taxpayer with high revenues. VAT withholdings are not only a compliance problem; they represent a cash flow problem, because the final tax liability could result in a lower amount if there are VAT credits to offset the VAT debits.
VAT credits recovery is a practice in itself, whether from export activities, from inappropriate reverse VAT charges or from excess VAT paid as a result of a withholding imposed.
Finally, VAT compliance is an important issue to take into account. First, it represents an important cost. Second, non-compliance could trigger high penalties and business closures. Once more the lack of harmonization brings a complicated and entangled system. Commonly, compliance requirements such as bookkeeping, invoicing, record retention and return fillings are all treated in different ways, with some countries not accepting electronic invoicing (or requiring special approval for such practice). Electronic return filling has become popular in LatAm, but bookkeeping is especially entwined. In most of the countries there are books required by mercantile laws and specific books for VAT purposes.
VAT can certainly be an unexpected guest for U.S. companies doing business in Latin America. And without proper planning it can become a very unwelcomed guest.
Leopoldo J Martinez ( is the Principal of LMN Consulting LLC, a consulting firm specialized in tax, regulatory and compliance in Latin America, with operations in Washington DC, Dallas, Miami, Caracas, Mexico and Panama. Carlos Contasti ( is an Associate of LMN Consulting, with his practice based in Caracas-Venezuela.


Background. For several years the Venezuelan exchange control system excluded from its scope all transactions with “securities” allowing a very dynamic market of “USD denominated Bonds” to be swapped for Bs.F denominated bonds, thereafter sold for USD in the international secondary markets (know as the USD “permuta market”).

The USD “permuta market” offered a fluctuating alternative to access USD for those not eligible or not granted access to the pegged control rates through the CADIVI-Central Bank controlled system. After the devaluation and dual exchange system adopted early this year, President Chavez himself declared the war against the “price increases and speculative movements in the “USD permuta market”. As the crisis has evolved, and the CADIVI-Central Bank system has proven to be more inefficent, the market had shifted drastically to the flexible USD “permuta market” as a source to fund their foreign exchange needs. The increased demand has driven the implcit rate of exchange in the “permuta market” to tirpple and double the official pegged rates provided by the “dual controlled system” administered by the government.

Initially the government attempted to intervene this “permuta market” by influencing pricing in the bonds traded or swapped with the issuance of “Bonos Cambiarios” resulting in a lower implicit rate of exchange for the USD, and in an effort to provide more liquidity to he market. Lately, the gap kept widening showing “Bonos Cambiarios” placed at an implicit rate of BsF. 5 to 5.50 per USD, yet the “permuta market” kept pushing upwards the implicit value of the USD to almost BsF. 8 per USD. During the last quarter, the lack of efficiency of CADIVI to liquidate controlled USD petitions for imports and other essentials, has shifted most of the economy to this “permuta market” with a distortion affecting inflation. In an effort to control prices for essential goods and services, the government launched an aggressive consumer protection initiative” with an outcome including “expropriations”. The inflationary trend has not stopped, as well as the implicit devaluation of the USD in the permuta market bonds pricing. Scarcity of certain essential dietary items is resulting from the current situation, thus, activating a greater pressure over prices.

During the last few days the government has intervened several stock brokers and forex traders.

The Proposed Exchange Control Legal Reform. Today the National Assembly Finance Committee approved, for urgent discussion, a reform to the exchange control laws with the following proposed changes:

(i) To include “securities” in the scope of the law, thus treating “permutas” as a foreign exchange transactions covered by the exchange controls.
(ii) To include specific authority for the Central Bank to organize, intervene, regulate and control all forms of “foreign exchange transactions” including the transactions with USD denominated securities.

At the time of this LatAm Consulting Alert it is known that the legal reform proposed by the Finance Committee will come to the floor for discussion tomorrow. It is also known that cabinet members and Central Bank authorities are divided in regards to the next steps. Some voices claim the USD pemuta market should be made illegal, others, afraid of the practical implications, are promoting a “very regulated and institutionally organized and intervened market with the Central Bank as the clearing house for all transactions involving USD denominated securities”. The final outcome will depend on the regulations to be issued under the new law. Meanwhile uncertainty reigns.

Actions. We are recommending to monitor events closely and commence a complete review of repatriation strategies, debt service, importation and any other transactions involving foreign exchange. Also, we are recommending to act prudently with regards to pricing of inventories.

We will follow the developments closely and issue updated Alerts.