The digital economy has radically transformed the way companies operate, generate value, and interact with their customers. E-commerce platforms, cloud services, digital advertising, and electronic financial transactions are now part of everyday business in Central America. However, this change also brings significant tax challenges that taxpayers must understand to anticipate risks and take advantage of opportunities.
Traditionally, Central American tax systems have been based on the principle of territoriality, meaning that only locally sourced income is taxed. However, in the digital environment, it is increasingly difficult to determine where income is generated.
For example, a company in El Salvador may contract advertising on social media managed from Ireland or the United States. The key question for tax administrations is: Is that income from a Salvadoran or foreign source? The Costa Rican Tax Administration has begun to consider that certain payments abroad for digital services should be subject to withholding at source, which implies an additional cost for local companies that contract international digital services.
There is a legal certainty risk for taxpayers, given that the rules do not expressly regulate this, but administrative interpretation has been used to attempt to tax it.
Another area of impact is Value Added Tax (VAT) or its equivalent (such as the ITBMS in Panama). Several countries in the region have implemented mechanisms to tax digital services provided by non-residents to local consumers. Since 2020, Costa Rica has applied VAT to services such as Netflix, Spotify, and cloud software, using card issuers as collection agents.
The fact that digital multinationals bill from jurisdictions with low or no taxation creates international tensions. The OECD, through the BEPS (Base Erosion and Profit Shifting) project, is promoting rules to ensure that companies pay taxes where they generate value. For Central America, this means that unified taxation mechanisms for the digital economy could be established in the future, in line with Pillars 1 and 2 of the OECD’s global agreement.
Taxpayers should prepare for a scenario in which their digital suppliers are required to report and pay taxes in the region, which may result in higher costs. In this regard, taxpayers are currently advised to take the following aspects into account:
- Compliance: Verify whether your payments to foreign digital suppliers are subject to withholding tax or VAT.
- Tax planning: Assess whether your digital purchasing structure allows for optimization of tax deductibility and credits.
- Competitiveness: Consider that the tax burden on digital services could impact margins, especially in technology-intensive sectors.
- Regulatory trends: Anticipate legal changes resulting from international agreements by the OECD and the G20, which seek to limit tax base erosion.
The digital economy opens up enormous opportunities for Central American companies, but it also requires a greater degree of tax awareness and strategic planning. Business leaders who understand these implications will be better prepared to meet their obligations, avoid contingencies, and remain competitive in an increasingly globalized environment.