Tax certainty—the predictability and stability of tax rules—is a critical factor in attracting foreign direct investment (FDI), as it shapes investors’ expectations for returns and long-term engagement. This is underscored by a recent ECLAC report on FDI in Latin America and the Caribbean (LAC), as well as 2024 PwC Pulse Survey, where 61% of tax leaders identified complexity or uncertainty as their primary challenge.
To help bridge the estimated $1.5 trillion financing gap in emerging markets, effective investment attraction strategies must be underpinned by governments committed to transparent and predictable tax systems. Unfortunately, this commitment appears to be lacking in Latin America and the Caribbean (LAC), where unresolved international tax disputes are on the rise. These disputes are driving up compliance costs for companies and investors—many of whom could play a pivotal role in integrating the region into global and regional value chains.
According to the OECD , unresolved Mutual Agreement Procedure (MAP) disputes in LAC have risen by 30% since 2019, largely due to audit adjustments related to the Base Erosion and Profit Shifting Agreements (EPS). As cross-border transactions and revenue demands grow, governments need to create a more certain tax environment. This will help prevent the costly snowballing effect of disputes for both taxpayers and the state, ultimately benefiting the investment climate in LAC.
In this post, we will discuss the benefits of stable tax rules, mechanisms to increase tax certainty, and recommendations for key reforms to enhance investor confidence in the predictability of the region’s tax systems.
Latin America Needs Tax Reforms That Simplify Rules and Increase Certainty
In LAC, large firms spend about 317 hours per year on tax compliance, nearly double the 158 hours in OECD countries, according to the World Bank. Simplifying tax rules can significantly enhance investor confidence, especially since 72.2% of firms report that uncertainty about the effective tax rate on profit is a key determinant in their investment location decisions, according to a 2022 Oxford University study.
As a result, governments need to think of tax reforms in broader terms. In addition to boosting efficiency and collection, these reforms should also enhance stability and simplicity of the rules and promote stable and effective institutional frameworks. These elements are key to unlock private investment, as noted by former U.S. Federal Reserve Chairman Ben Bernanke in his account of the 2008 global financial crisis.
Countries can also improve predictability with cooperative compliance programs, like in Chile and Brazil. Under such programs, tax administrations and large companies work closely together so firms can voluntarily comply with their tax obligations. These programs foster trust between taxpayers and tax authorities by providing greater transparency into how the rules will be applied and how taxes will be calculated.
Mechanisms to Mitigate International Tax Disputes
Governments in the region can enhance tax certainty for investors by implementing joint audits, participating in the International Compliance Assurance Programme (ICAP), or strengthening cross-border cooperation to minimize the risk of disputes—as demonstrated by recent efforts in Peru.
Joint audits represent a collaborative process where two or more tax administrations from different jurisdictions join forces to examine the tax affairs of a taxpayer. This approach typically involves multinational enterprises (MNEs) operating across borders, fostering a coordinated effort to address complex tax issues. By working together, these audits can significantly boost tax certainty, providing clarity and reducing disputes for both governments and businesses.
The ICAP complements joint audits by engaging MNEs in a proactive, assurance-focused process. Launched in 2018, ICAP is a voluntary, multilateral initiative developed by the OECD’s Forum on Tax Administration (FTA) to enhance tax certainty and prevent disputes for MNEs.
Under ICAP, MNEs voluntarily participate in a pre-audit risk assessment conducted simultaneously by multiple tax authorities. This process is less investigative and more preventative, focusing on early detection of high-risk issues—such as transfer pricing or permanent establishment risks—before they escalate into formal audits.
Peru’s performance in MAP highlights the benefits of coordinated tax cooperation in LAC: 80% of MAP cases were resolved between 2017 and 2022, with an average resolution time of 12.5 months – well below the 24-month standard. This success highlights the importance of early, multilateral collaboration among tax authorities – not limited to ICAP or joint audits – on significantly enhancing tax certainty, reducing dispute risk, and fostering investor confidence.
Dispute Prevention in Transfer Pricing: Advance Pricing Agreements
Another key institutional mechanism is the use of Advance Pricing Agreements (APAs), which help prevent disputes between MNEs and tax authorities. Through these agreements, MNEs and local tax administrations agree in advance on the transfer pricing methods to be applied to transactions involving goods or services exchanged between the MNE’s domestic and foreign entities.
The Dominican Republic’s sector-wide APA for the hotel industry standardized profit margins cut audit burdens and improved transparency. This APA methodology helped reduce the estimated annual tax leakage (through transfer pricing) by roughly US$100–125 million. Globally, Singapore stands out for its efficient APA management, resolving cases in an average of 12 months compared to 24 months in many jurisdictions.
Digital Transformation of Tax Administrations Can Improve Predictability
The digital transformation has revolutionized taxation, enhancing tax certainty through transparency and efficiency. The OECD’s Tax Administration 3.0 framework highlights the roles of technology in reducing information asymmetries, especially for multinational companies, and guides tax authorities toward a proactive, taxpayer-centric model – embedding compliance into digital platforms and reducing manual intervention
A study by the IMF analyzing Peru’s adoption of mandatory VAT e-invoicing found that within the first year of implementation, reported firm sales and purchases rose by approximately 7% and 5%, respectively. The analysis also observed a 5–7% increase in total payroll amounts—a proxy for business formalization and tax compliance—suggesting a meaningful shift in firms’ reporting behavior.
These improvements reflect how digital tools not only enhance administrative efficiency and revenue monitoring but also help level the playing field. By incentivizing formalization and accurate tax reporting, e-invoicing reduces unfair competition from non-compliant firms, fosters transparency, and contributes to a more predictable and equitable business environment—critical for attracting responsible investment.
Practical Recommendations to Create a Predictable Tax Environment and Increase Certainty
Based on the examples and instruments described in this post, we recommend countries to consider the following actions to improve tax certainty and reduce disputes:
- Map out the areas for improvement.
Countries should assess the maturity level of their tax administration in preventing and resolving tax disputes by using the Maturity Model developed by CIAT, IDB, and FIAP/EUROsociAL+. This tool helps identify institutional strengths and areas for improvement, set measurable goals—such as reducing unresolved MAPs cases—and design strategies tailored to local contexts. These efforts can be guided by international best practices and informed by OECD data and benchmarks.
- Build institutional arrangements and mechanisms to prevent disputes.
Consider implementing a cooperative compliance program and adopting APAs to foster a collaborative and a more predictable tax environment for MNEs.
- Collaborate with other jurisdictions.
LAC tax authorities should enter bilateral talks with key trade partners to launch joint audits to provide certainty to the MNE income allocation bilaterally or multilaterally.
- Be efficient in the resolution of disputes.
LAC tax authorities should consider implementing mandatory binding arbitration under BEPS to ensure timely dispute resolution, following global best practices.
- Use digital technology to get better insights.
Countries should adopt AI-based tax platforms to integrate MNE country-by-country reporting to get better insights and cut tax administration costs.
IDB Support
Tax certainty is a fundamental pillar for creating a more business-friendly environment in LAC. As part of its institutional strategy, the IDB supports governments in building robust and stable institutions to attract greater investment and foster sustainable economic growth across the region.
In this context, the IDB’s Fiscal Management Division has been a key partner in strengthening fiscal institutions and advancing critical reforms to make tax systems more transparent, efficient, and predictable for investors.
This support includes technical assistance for modernizing legal frameworks, implementing risk-based audit systems, promoting cooperative compliance programs, and investing in digital tools such as e-invoicing and data analytics to enhance dispute prevention and tax transparency.
Additionally, the IDB provides capacity-building initiatives and funding to help countries develop tailored tax policies that reduce compliance costs for businesses. By fostering public-private dialogue, The Bank helps align tax reforms with investor expectations—enhancing trust and encouraging sustained investment flows into the region.
To learn more about the IDB’s work, please visit our Fiscal Management page.
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