Over the past decade, economies across Latin America and the Caribbean have been caught in a trap, according to the U.N. Economic Commission for Latin America and the Caribbean (ECLAC). That “trap” is punishingly stagnant economic growth, which averaged just 1 percent between 2015 and 2024, according to the organization.
The good news is that economic growth is projected to accelerate this year — ECLAC projects it will hit 2.4 percent. But the organization says it’s not fast enough for a region that has chronically underperformed for so long. This begs the question: What can countries in this region do to extricate themselves from this trap? ECLAC says increasing tax revenue and boosting public finances will be paramount. This looks like reviewing tax expenditures; tackling tax evasion; and implementing progressive income, property, and wealth tax changes, according to ECLAC.
ECLAC is eyeing tax revenue because there’s more that can be done in Latin America and the Caribbean (LAC). In 2022 tax revenue as a percentage of GDP averaged 21.5 percent across the entire region, according to the OECD. It’s a figure that has remained static over the past few years, much like the region’s economic growth. And the tax-to-GDP ratio remains much lower than that of say, the European Union, which clocked in at 40 percent of GDP in 2023. To improve this situation, regional cooperation is needed in the LAC, particularly on matters of taxation. Several governments are already collaborating on a regional approach to tax.
In summer 2023 a group of LAC countries created a new collaborative body on tax: the Regional Platform for Tax Cooperation in Latin America and the Caribbean (PTLAC). Creating the PTLAC makes sense not just from a regional perspective but also from an international one. Over the past decade, some regional tax bodies like the African Tax Administration Forum have grown their voice and influence on the international tax policymaking stage, but LAC countries have not had such a robust, coordinated voice. The PTLAC is supposed to correct that. The organization is now in its second year of operation, an ideal time to review its policies, priorities, and whether (and how) it is achieving those goals.
The Lead-Up
In early 2023 José Antonio Ocampo, then Colombia’s minister of finance, issued a call and a challenge to his fellow LAC countries. Although countries in the region vastly differ in their profiles, ranging from large, upper-middle income countries like Brazil, smaller middle-income islands like Barbados, to low-income countries like Haiti, Ocampo contended that LAC countries do experience common challenges in navigating the digital economy and other elements of cross-border taxation.
“We share the same problems, but we have not shared our views and technical strengths to come up with common solutions. Therefore, our interests have not been visible enough in the international tax policy debate so far, and this must change,” Ocampo said.
Ocampo described three areas where the collective LAC voice could be stronger: reallocation of taxing rights, tax competition, and taxation of the wealthy. He announced that LAC countries would meet in Colombia later that year to discuss whether this collaboration could be possible and whether the region could establish a permanent, tax cooperation body. Six months later, over a dozen countries gathered in Cartagena for a July 2023 summit that established the first ever platform for tax cooperation in the region.
First Summit
Sixteen governments — about half of LAC’s 33 countries — attended the Cartagena Summit, where they formally agreed to create a regional platform and memorialized it with the Declaration of Cartagena de Indias.
The fact that the signatory countries were able to implement this endeavor in less than a year from Ocampo’s initial announcement underscores just how much that specific group desired their voices and priorities to be heard. The declaration affirms this:
“[We Ministers are] convinced that the Latin America and Caribbean region has much to contribute to the construction, articulation, and development of regional positions for a better, inclusive, equitable, and sustainable international tax system,” the document says.
These principles — inclusivity, equity, sustainability — raise two key questions. First, what does it mean to support those values internally within the LAC region? Second, what does it mean to support those values internationally?
As for the first question, creation of the PTLAC is a promising start toward building regional unity. However, despite its best efforts, the PTLAC has a ways to go with this goal. The platform as it stands receives more participation from Latin American governments than Caribbean ones. This is reflected in the fact that only two of the 16 summit participants were Caribbean countries — Haiti and the Dominican Republic. Also, the summit’s organizers — Brazil, Chile, and Colombia — are all Latin American countries. Lastly, the group’s first, and now second, pro tempore presidencies were held by Latin American countries — Colombia and Chile respectively.
While it’s difficult to conjecture why Caribbean countries have been slow to warm up to the regional platform, it’s worth noting that they have organized on tax matters in the past. Historically, Caribbean countries have largely organized through the Caribbean Community, a consortium of 21 member and associate member countries in the Caribbean and South America. Notably, in the thick of the pillar 2 negotiation process, these countries gathered in 2021 to try to make sense of what a 15 percent minimum rate would mean for them. At the time, the group pledged to release a unified statement, but the statement never materialized, at least not publicly. It’s unclear why this happened, but a unified position may have been difficult to craft for a region where member countries diverge sharply on several different metrics, from zero-tax countries like the Cayman Islands to countries with 40 percent corporate rates like Guyana.
It’s possible that there could be a Latin American-Caribbean divide caused by various factors, including language barriers, differences in population, and economic differences. Even if there isn’t a divide per se, there’s also the reality that a majority of LAC countries — be they Latin American or Caribbean — have not yet signed the Cartagena de Indias declaration. As is standard for international declarations of this kind, it’s likely that other countries will sign on with time. However, the relatively small uptake shows that most countries in the region perhaps aren’t yet ready to fully participate.
The First Year Work Plan
What exactly could “a better, inclusive, equitable, and sustainable international tax system” look like? At the 2023 summit, delegates developed an ambitious work plan overseen by the Colombian presidency and with support from ECLAC, which serves as technical secretariat for the platform.
The work plan set four main goals: addressing the progressivity of the tax system; reviewing tax benefits across the LAC region; looking at environmental taxation; and discussing digital taxation and new forms of work.
Tax Progressivity
Tax progressivity is an important topic for LAC countries, considering that governments across the region largely rely on consumption taxes for revenue, which are generally regressive. In the region, about 48 percent of total taxes are derived from indirect measures, according to the most recent Latin America Economic Outlook report. This is starkly different from the tax breakdown in OECD countries, where income taxes predominate (note that some of the OECD’s 38 member states are classified as LAC countries).
The initial goal of the progressive tax workstream was to study the progressivity of income and property taxes in Latin America, the Caribbean, and globally to analyze how those systems can be improved. And the working group sought to offer some nonbinding solutions and ideas for LAC governments to consider. The idea was to provide a resource that governments can consult as they evaluate options that fit with their unique characteristics.
Over the course of its study, the working group noted that capital income earned by high-income LAC taxpayers experiences fewer tax burdens than income generated from labor. Also, income taxes are less distributive than they are in other regions of the world. Taxing the informal sector is another issue because more than half of the region’s workers are employed in informal jobs, according to the latest OECD Latin American Economic Outlook. Stakeholders from the private sector urged the working group to discuss potential best practices to bring the informal sector into the tax net. They said that those could look like simplified tax frameworks for small taxpayers and simplified electronic invoicing.
The working group offered suggestions that fall into three categories. First, LAC countries should consider wealth taxes, partially based on current tax disparities between capital income and labor income. Second, countries should consider whether it might be possible to increase tax rates on individual taxpayers in the highest income brackets. That’s based on findings that maximum marginal rates have declined across the region over time.
Revisiting tax exemptions and benefits is another endeavor that LAC countries should consider, the working group said. “Many . . . have lost their original relevance and now disproportionately benefit the highest income strata,” the working group said in a final report.
Lastly, the working group advised that LAC countries reconsider their reliance on consumption taxes, although it did not provide any advice on the best path forward.
Tax Expenditures
Why discuss tax expenditures? They can create distortions and inefficiencies, and the working group wanted to assess the transparency of tax expenditures in some selected LAC countries and compare them with countries in other regions, according to a final report. To do this work, the working group analyzed a Global Tax Expenditures Transparency Index (GTETI) issued by the Council on Economic Policies and the German Institute of Development and Sustainability and conducted a diagnostic survey of several PTLAC member countries. The GTETI examined how various countries around the world are designing and managing their tax expenditures and evaluated how countries are publicly reporting their expenditure programs. It assigned countries a score and found the following results. Globally, the transparency average is 47.6 points out of 100. The good news is that Latin American countries are slightly above this average. Out of 16 Latin American countries surveyed, the average was 48.2 points. Some Latin American countries, like Ecuador and Costa Rica, scored much higher than this, exceeding 60 points. According to the PTLAC report, this demonstrates that transparency isn’t necessarily tethered to economic development, because low- and middle-income countries can perform well in this area.
The initial goal for the tax benefits workstream was to consider experiences within specific LAC countries, the region as a whole, and global trends in measuring and designing tax expenditures. The working group also pledged to consider how tax benefits might interact with the OECD’s pillar 2.
The working group analyzed expenditures in seven countries: Bolivia, Brazil, Chile, Colombia, the Dominican Republic, Ecuador, and Peru, also suggesting some best practices. Among the seven LAC countries, some governments rely substantially on tax expenditures. In Colombia, for example, tax expenditures account for nearly 8 percent of the GDP. Others, like Bolivia, rely on them much less. There, tax expenditures account for about 1 percent of the GDP. In every country except Bolivia, expenditures must be legally reported and most publish reports on an annual or semi-annual basis. The major problem, according to the report, is that most of the group do not place caps on their expenditures. Colombia, which maintains some quotas, is an exception. Because of this, one of the most important things that LAC countries should do is design methods to calculate the cost and benefits of their expenditures, and then they should calculate their economic losses from those incentives, the workstream found.
Environmental Taxation
The PTLAC is concerned about environmental taxation given the LAC region’s vulnerability to climate change. In the environmental tax working group, countries there largely discussed carbon taxes and national, regional, and global experiences in navigating these measures.
The working group considered four proposals, which differ considerably in their levels of ambition and feasibility. The most ambitious idea — and least likely to be implemented — is a global corporate income tax on the world’s top 100 companies with the highest gross revenues. According to the working group, that tax would fund global climate action and biodiversity conservation. The second option, which is also ambitious but likely more feasible, is a regional LAC multilateral carbon tax treaty that could either harmonize tax treatment of carbon across the region or create a minimum floor for the taxation of activities that generate carbon emissions. The third option, which is very feasible, is creating a guide outlining best practices for eliminating fossil fuel subsidies. This would be based on Colombia’s 2022 decision to remove the country’s gasoline fuel subsidies. Lastly, the least controversial proposal is to design a matrix of environmental tax measures adopted by countries in the LAC region, so their peers can consult that compilation as a guide.
Digital Taxation
As for the digital tax workstream, the PTLAC said its work in that area is pending, as countries await the final outcome of the OECD’s pillar 1. Hence, it did not develop a report on this topic.
Education and Outreach
Concurrently with these working groups, the PTLAC engaged in a series of educational and capacity building meetings for its members, hosting eight training and webinar sessions over its first year. They included a webinar on the inclusion and effectiveness of international cooperation in tax matters, and a U.N. Development Programme-South Centre Capacity Building Workshop on international taxation, minimum taxation, and digital taxation. These events are notable mainly because they seem to offer an initial step in helping member countries understand the international tax policy landscape before the PTLAC officially develops its regionwide voice.
Conclusion
Looking back on the PTLAC’s first year, much of the work the group conducted can be classified as surveillance or stock-taking work. This makes sense: before the group can take official positions on the world stage before international bodies like the OECD and U.N., its members must fully understand their regional tax landscape and global dynamics. While the first year served as a sort of incubation period, the PTLAC has bigger plans for its second year, which is ongoing. Chile holds the current pro tempore presidency, and it is focusing some of its work on the U.N.’s framework convention process and on the development of nonbinding coordinated positions at the U.N. It is also working on the same for the U.N.’s upcoming fourth international conference on financing for development. All of this suggests that the international tax world should expect to hear more from the LAC region in the coming months.
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