DSTs Are Double-Edged Swords in Growing Latin American Economies

Countries around the world are grappling with how to tax multinational enterprises that generate profit within their borders without a traditional physical presence. The slow progress of the OECD’s Pillar One proposal to reallocate some of that profit has led to unilateral digital service taxes.

For Latin American governments, DSTs represent both an opportunity to capture revenue from global tech players and a convenient justification to expand an already complex tax landscape.

The result has been a cascade of DST-style levies that blur the line between genuine digital levies and conventional withholding measures, creating compliance challenges and double-taxation risks.

Latin America’s embrace of DSTs highlights both the urgency felt by developing economies and the shortcomings of incomplete multilateral solutions. Yet these taxes, layered atop long-standing withholding regimes, risk exacerbating double taxation and discouraging digital innovation.

DST as Antidote

The US foreign tax credit rules compound the challenge, leaving multinational groups to confront uncreditable DST liabilities. Brazil and Colombia exemplify this trend.

Brazil’s gross revenue tax on cross-border technology and services effectively acts as a DST. Recent proposals target large digital platforms with a 1% levy, while other proposals allow Brazil to raise a tax against US tariffs.

Colombia’s system extends traditional corporate income tax obligations to nonresident digital service providers, effectively functioning as a DST while framed as a nexus rule.

Both measures are emblematic of Latin American DSTs being justified as antidotes to Pillar One inertia. Until the Organization for Economic Cooperation and Development’s two-pillar solution materializes, these domestic levies fill a perceived vacuum.

Latin American tax systems have long relied on withholding income taxes that apply to nearly all outbound payments, from dividends and interest to royalties and service fees. Unlike many European jurisdictions, Latin American governments view withholding as a convenient way to guarantee at-source collection.

DSTs in Latin America have been grafted onto a system already built around broad withholding. The net effect is that Latin American DSTs often resemble high-rate withholding taxes more than the narrow “click-through” or “user-participation” levies in some European countries.

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Layering Models

Developing economies in Latin America have seized on the momentum around DSTs to introduce additional levies, even when existing withholding already captures most outbound payments.

• Mexico adopted an advertising services withholding rule that applies to online advertising expenditure by Mexican residents, effectively creating a DST-like obligation atop a broader withholding regime.
• Argentina extended its value-added tax to cover foreign digital services, requiring platforms such as Netflix and Spotify to collect and remit VAT at 21%.
• Chile introduced a leaner 19% DST on revenue from digital services, although it raised withholding rates on outbound royalties, creating overlapping layers of tax.

What motivates this layering? Fiscal necessity and administrative convenience.

Governments see DSTs as easy to administer, often requiring reporting obligations and standardized calculations that plug into existing withholding frameworks. From a political standpoint, DSTs are cast as efforts to ensure “Big Tech pays its fair share,” even when in reality they add complexity to an already burdensome tax environment.

Companies providing digital services now navigate a patchwork of local registration requirements, annual filings, and sometimes multiple effective tax rates, while their European counterparts rely on clarifying EU guidance and multilateral treaties.

Credibility Concerns

As DSTs proliferate in Latin America, the question of creditability looms large.

Unlike a typical corporate income tax, DSTs don’t necessarily align with traditional income-tax definitions. They often resemble excise taxes on gross revenues, which many tax authorities exclude from foreign tax credit eligibility. The US particularly has imposed strict regulations on the creditability of foreign DSTs and ancillary withholding taxes.

US regulations generally stipulate that only taxes “imposed on net income”—or deemed to be on net income—qualify for foreign tax credit. Because most DSTs are levied on gross receipts or impose nexus without reference to profitability, the US treats them as ineligible for credit.

In addition, US rules restrict tax credits for foreign withholding taxes that act as “equivalent” income taxes only if they meet treaty standards or are backed by transparent legal provisions. The result: US multinationals often can’t claim credits for the DSTs paid abroad.

Worse still, some Latin American countries structure their DSTs to coexist alongside existing withholding regimes, meaning that a single digital transaction might incur a local withholding tax, a VAT-style levy, and a DST—none of which qualify for US tax relief.

Consequently, US firms face double taxation not only at the corporate level but also within their disaggregated credit pools, leading to “locked-out” foreign tax credits that can’t offset US tax liabilities.

This creditability gap has economic consequences. Companies may adjust their digital service pricing to end-users, reducing incentives to invest or innovate in local markets. Smaller digital startups, lacking the sophisticated tax teams of large multinationals, may struggle to navigate these overlapping DST-withholding-VAT regimes, chilling digital competition in emerging economies.

Moreover, the perception that Latin American DSTs are merely “revenue grabs” can undermine the legitimacy of broader tax reform efforts, especially when local businesses still face onerous compliance costs and administrative bottlenecks.

Striking a Balance

From a policy perspective, Latin American governments must reconcile the need to tax digital activities with the risk of isolating their jurisdictions from global trade flows. Effective DST implementation should involve clear rules on calculation, transparent credits, and alignment with existing withholding structures to avoid cascading taxes.

Governments might consider modular approaches, such as offering unilateral DST credits to offset withholding taxes or adopting “top-up” taxes that aim only to capture residual profit shifts rather than taxing gross revenues at a flat rate.

As Pillar One negotiations continue, Latin American policymakers should aim to harmonize DSTs with existing income tax and VAT frameworks, ensure creditability, and minimize compliance burdens.

Only by striking this balance can emerging economies harness the benefits of the digital economy without unduly penalizing the very players poised to drive growth and innovation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Rafael Benevides is senior tax counsel at Meta and director at the GTECS Association of Tax Professionals in Tech, specializing in international taxation, compliance, and tax controversy within the technology sector.

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