2013 tax policy outlook for the Americas

June 20, 2013

The group of 18 Americas countries within Ernst & Young´s review of tax policy in 60 countries in 2013 is very mixed, with few strong policy trends pervading the region.

That said, data show that while the overall economic performance of the region is broadly similar to that of Asia-Pacific, the Americas finds itself on a policy track where (across corporate, personal and indirect taxes) anticipated tax burden increases outnumber anticipated decreases in 2013 by a factor of more than four to one.

Following underlying trends elsewhere, indirect taxes are the most popular way to increase revenues, according to our responders. Although increases outnumber decreases, a majority of Americas countries are projected to remain in a holding pattern in 2013, continuing to repair annual deficits (only 2 of the 18 delivered a surplus in 2011, the last year for which actual data is available) by maintaining the tax burden where it was in 2012.

More than half of the responses across all tax types note no anticipated changes in 2013.

Sovereign debt in the Americas

Much has been made of emerging markets’ ability to weather the global financial crisis with minimal damage and then to fare equally well through Europe’s sovereign debt crisis during 2012. With many of the 18 Americas countries falling into the emerging markets category, one might expect the region to have pivoted more sharply away from increasing sovereign debt and deteriorating annual deficits.

While the economic data would seem to align to this concept, the projected changes in tax burden tell a slightly different story. For the period 2011 to 2017, the International Monetary Fund (IMF) projects that 8 of the 17 Americas countries (or around 47% of them) for which data are available will see an overall net increase (of more than 1% of GDP) in their gross debt, while the same number will see an overall net decrease.

Only Mexico will see a change of less than 1% either way. Across the 17 countries, the average unweighted gross debt in 2017 is projected to be around 43.8%. Once Japan (where gross debt in 2017 is projected to run at more than 250% of GDP in 2017) is excluded from the Asia-Pacific data, the Americas (43.8%) is in broad alignment with the unweighted Asia-Pacific region average (38% of GDP) in 2017.

Annual deficits

As might be expected, the relatively mixed sovereign debt picture across the region is accompanied by similarly mixed projections for the health of annual budgets in most of the 18 countries. Overall, 8 out of the 18 countries in this report are projected to experience an improvement in deficit levels over the 2011 to 2017 period, while 8 see a net deterioration of 1% or more.

Only Mexico projects overall net change of less than 1%, while IMF data was not available for Puerto Rico. The sole country projected to be in annual surplus by 2017 is Peru, while four countries (Canada, Chile, Nicaragua and Panama) are all projected to be within 1% o f achieving an annual surplus b y 2017.

Costa Rica (with a projected deficit of 6.6% of GDP) is the weakest performer by 2017. The economic performances of Peru and Costa Rica at each end of the spectrum would seem to be directly aligned to ongoing tax policy measures in both countries, demonstrating the unquestionable link between economic performance and short-term policy stance.

Economic performance drives tax policy decisions

Although the overall economic performance as a region merits broad comparison with that of emerging-market-laden Asia-Pacific, the comparison would seem to end there. Overall, across all three tax classes tracked (CIT, PIT and VAT/GST/sales tax) in all 18 Americas countries (resulting in a total of 54 measurement points), 17 of the 54 classes (or approximately 35%) are projected to see an increase in overall tax burden in 2013, with only 7 classes projecting a decrease in tax burden in the same year.

The increase in tax burden projected to affect about 35% of the tax classes tracked seems to be at odds with the Asia-Pacific region, where only four tax classes overall (three of which are related to indirect taxes) are projected to see an increased tax burden in 2013.

Given such mixed economic fortunes, it is perhaps unsurprising that the outlook for corporate taxation in the region in 2013 is equally mixed. Of the 18 countries,  5 (Colombia, Guatemala, Nicaragua, Panama and Peru) projected an increase in CIT burden in 2013, 1 projects a decrease, and 10 see no overall change in burden for the year.

Of the 5 countries pursuing an increase in CIT burden, only Guatemala is anticipated to do so via a headline rate increase, expanding its General Tax Regime, which applies on a gross receipts basis (as opposed to the Optional Tax Regime, which applies on a net income basis) from 5% to 6%.

The others follow the more widespread global trends of broadening the tax base via increased tax enforcement (Peru, Panama and Nicaragua) or by limiting other deductions (deductibility of expenses in Guatemala and limitation on the deduction of goodwill amortization in Colombia). Although Colombia’s headline CIT rate falls from 33% to 25%, the overall CIT burden increases in 2013 due to other base-broadening measures.

While not affecting 2013 outlook, the Dominican Republic plans successive CIT rate cuts in 2014 and 2015, from today’s 30% down to 28% and 27%, respectively. PIT is expected to follow the same overall trajectory in the region in 2013. Of the 18 countries tracked, 10 anticipate no overall change in tax burden, while 5 (Canada, Colombia, Dominican Republic, Guatemala and Nicaragua) anticipate an increase in burden and only 3 a decrease.

Of the five, all utilize different policy measures to achieve their results. Canada, for example, shows a continuing focus on high net worth individuals and new prohibited investment rules for tax deferral plans, while the Dominican Republic introduces a new 10% withholding tax on interest.

As is the case in other parts of the world, indirect taxes (VAT, GST, sales tax) borne by the ultimate consumer attract favor as a policy tool of choice, with seven countries (Argentina, Canada, Colombia, Dominican Republic, Guatemala, Peru and Puerto Rico) reporting a potential increase in the indirect tax burden in 2013.

Only the Dominican Republic sees a headline VAT rate increase (from 15% to 18%), and Colombia sees base broadening by introducing VAT (at 10%) on immovable property leases and lodging. Only a single country (Nicaragua) anticipates an overall decrease in this tax class in 2013.

Political landscape

There is much to watch on the Americas political horizon in 2013. In Chile, there will be presidential elections in December, and tax will likely be a central topic for all candidates as the country demands more government services and the longer-term policy goal of a balanced budget is pursued.

While not a presidential election year, 2013 will see elections for legislative office in Argentina in which one-third of both houses of parliament will be replaced. Nicaragua, like many other countries in the region, has a raft of ongoing tax proposals in play, including in the areas of transfer pricing, telecommunications taxation and customs duties.

And of course, 2013 will be another important year for tax in the United States, with focus on sequestration, the possible extension of business and tax provisions set to expire at year-end, the continuing international tax reform debate and preparation for the key provisions of the Affordable Care Act, which will go into effect in 2014.

Read more: The outlook for global tax policy in 2013

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