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Tax Reform in Latin America: What It Means for Business?


Two of the regions that were hit hardest by the COVID-19 pandemic are Latin America and the Caribbean. Though a World Bank study projects that the regions' economy would grow this year, it would still not make up for the 6.7% pandemic-induced regional economic slump. This is due to the regions’ lower standard of living and healthcare infrastructure. When the virus hit, the economy was paralyzed. Worse still, the regions' growth is expected to slow down by 3% owing to recent inflation, production drop, and logistical bottlenecks. As such, at the 2022 World Bank Annual Meetings, panels of experts met to discuss ways to bring Latin America and the Caribbean back on their feet; one recommendation stands out—tax reform.


ENVIRONMENTAL TAX

The critical area in the World Bank’s suggestion is for the regions to levy environmental taxes. Granted, Latin America and the Caribbean contribute to less than 10% of global total carbon emission; still, having little environmental tax infrastructure means governments are missing significant potential revenue. The World Bank, therefore, recommends taxing corporations that contribute emissions more than 50% of the regional average. As international conglomerates with branches in Latin America and the Caribbean produce the bulk of the said emission, experts did not expect this proposal to affect SMEs and local producers much. With newfound revenue, the regions’ policymakers would have more rooms to maneuver. The World Bank further recommends allocating budgets to improving education, healthcare, and domestic research and development. This is so that if another pandemic were to come, the regions would be more prepared—being able to reduce damages to their people and the economy.


BUSINESSES NEED TO ADAPT

In the past, international companies might be able to invest in carbon reduction in Latin America and the Caribbean less than they do in other areas due to favorable tax laws. However, if the regions are to adopt the World Bank’s recommendation, businesses will need to change. If firms do not want to incur more tax, they must cut emissions. Though this means governments could levy less tax—the tax which contribute to the developmental funds—it presents an alternative, which are voluntary carbon reduction and regional improvement action via Public-Private Partnerships (PPPs). If corporations opt for this route, governments might not get as much tax as planned. However, instead of having the governments in charge of the entire scheme, businesses that reduce emissions can partner with the public sector as PPPs. These, in turn, could be the driving force of the developmental programs as suggested by the World Bank, thus, creating changes across the board.


Inclusive development happens when every key player plays its part toward the growth of all. In this case, PPP would mean capital and expertise of corporations and area knowledge of governments could intertwine to make growth in Latin America and the Caribbean sustainable and inclusive.


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