As published on tax-news.com, Friday 15 May, 2020.
The tax burden in Latin America and the Caribbean (LAC) increased to a record 23.1 percent of GDP in 2018, according to a new OECD report. However, it warns the territories will face considerable financial pressures owing to COVID-19 because of their systems' reliance on indirect tax revenues.
LAC tax revenues remain far below the OECD average (34.3 percent in 2018). Against this background, the capacity to finance public goods and services and to cushion economic shocks in the region remains limited, the OECD said.
Tax-to-GDP ratios (measured as tax revenues, including social security contributions paid to general government, as a proportion of GDP) continued to vary widely across the region in 2018, from 12.1 percent in Guatemala and 13.2 percent in the Dominican Republic to 33.1 percent in Brazil and Barbados and 42.3 percent in Cuba.
Fifteen countries reported an increase in their tax-to-GDP ratios between 2017 and 2018, while seven recorded a decrease and three remained at the same level. Trinidad and Tobago recorded the largest increase in its tax-to-GDP ratio in 2018, up 3.3 percentage points, followed by Belize (up 1.4 percentage points) and Guyana (1.3 percentage points). The largest decreases were seen in Argentina (down by 1.3 percentage points) and in Nicaragua (0.8 percentage points).
The report says that the countries will need to strengthen their tax systems rapidly in response to COVID-19, to finance health and other services. It said weaker administrative systems for managing taxes and transfers relative to those in OECD countries reduce the range of tools available to the region in effectively responding to the crisis.
Although the region's tax structure has moved closer to that of OECD countries as a result of higher revenues from direct taxes and lower trade taxes, persistently low revenues from key taxes, such as personal income taxes (PIT), remain a constraint on revenue generation and a source of vulnerability, the report says.
At just 2.2 percent of GDP, the region's revenues from PIT in 2017 were far below the level in OECD countries (8.3 percent), while social security contributions amounted to four percent of GDP in 2017 compared to 9.1 percent in the OECD. At the same time, the region is far more reliant on taxes on consumption than OECD countries.
Since 2007, corporate income tax (CIT) revenues as a percentage of GDP have declined, whereas revenues from PIT have increased. In 2018, the LAC averages for CIT and PIT revenues as a percentage of GDP stood at 3.5 percent and 2.3 percent, respectively.
The share of VAT revenues in total tax revenues reached 27.8 percent in 2018, an increase of 11.6 percentage points since 1990.