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LAC Countries’ Revenues Declined in 2020 but Rebounded in 2021

Posted on Apr. 28, 2022

Latin American and Caribbean (LAC) countries experienced an 8 percent decline on average in tax revenues during 2020 because of the COVID-19 pandemic, but revenues recovered for many in 2021, according to the OECD.

Of the 26 countries covered by "Revenue Statistics in Latin America and the Caribbean 2022," released April 27, 20 experienced a reduction in tax-to-GDP ratios in 2020, with an average decline of 0.8 percentage points. The report was jointly published by the OECD Centre for Tax Policy, the OECD Development Centre, the U.N. Economic Commission for Latin America and the Caribbean, the Inter-American Development Bank, and the Inter-American Center of Tax Administrations.

The average tax-to-GDP ratio in the LAC region in 2020 was 21.9 percent, according to the report. All LAC countries except for Barbados and Cuba documented a tax-to-GDP ratio below the OECD average of 33.5 percent. That figure indicates a 0.1 percentage point increase over 2019. The gap between the LAC and OECD tax-to-GDP averages widened from 10.7 percentage points in 2019 to 11.6 percentage points in 2020, according to an OECD release.

According to the report, in 18 LAC countries, cumulative revenues from personal income tax, corporate income tax, VAT, and excise taxes in January through August of 2021 rose 4.6 percent from the same period in 2019 as economies recovered. Sebastian Nieto Parra, a coauthor of the study and head of the LAC desk at the OECD Development Centre, said consumption and demand for goods have gone up in Latin America since the first year of the pandemic, which could explain the rebound in tax revenues, particularly for VAT.

Antigua and Barbuda, Argentina, Barbados, El Salvador, Mexico, and Uruguay were the only countries surveyed to see a bump in their tax-to-GDP ratios between 2019 and 2020, according to the release. Cuba, Trinidad and Tobago, and Belize saw the largest declines, but Cuba’s tax-to-GDP ratio remains higher than the OECD average.

A structural issue that likely contributed to falling tax-to-GDP ratios in LAC countries is that the “tax base in Latin America is highly dependent on VAT and corporate tax,” said Nieto Parra.

Taxes on goods and services were most affected by the pandemic, decreasing by 0.7 percent of GDP on average, according to the release. LAC countries tend to rely more heavily than OECD countries on taxes on goods and services (like VAT), which make up a little under half of tax revenues on average, according to the report. In contrast, personal income tax made up just 9.2 percent of total tax revenues in the LAC region in 2019, while in OECD countries, it accounted for 23.5 percent of total tax revenues on average.

Latin American countries are feeling the crunch of rising energy prices because of supply issues and the war in Ukraine, said Nieto Parra. Since public condemnation of rising energy prices took root before the pandemic — seen in anti-government protests in Ecuador in 2019 over the cancellation of fuel subsidies — governments will need to address energy tax and VAT compensation for the most economically vulnerable groups, he said. Some are already offering reimbursement for VAT to poor households to address the regressivity of the tax, he said.

On the green agenda, Nieto Parra said LAC revenues from environmental taxes are half of what they are in OECD countries on average, coming in at 1 percent of GDP in 2020 compared with the OECD average of 2 percent of GDP. Revenues from energy taxes in LAC countries represented 0.7 percent of GDP on average in 2020, according to the report. Hydrocarbon revenues dipped from 3.1 percent of GDP in 2019 to 2.1 percent of GDP in 2020 but rebounded to 3 percent of GDP in 2021, the release says. Mining revenues also rebounded in 2021 to 0.6 percent of GDP, after dropping from 0.4 percent in 2019 to 0.3 percent in 2020, the report says.

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