Policies Regarding Taxes and Contributions for Contractors in LATAM
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Being an independent contractor provides a certain sense of freedom when it comes to doing business. Contractors get to choose who and when they work for and they don’t need to sign contracts for longer periods of time. They can also work for more than one client at a time.
In addition to this, contractors get to choose where and when they work from. This opens them to the global market, which has a lot of opportunities. Unfortunately, tapping into the global market presents its share of challenges for contractors. One of the most prominent ones is paying taxes in various parts of the world they’re receiving the income from.
This article is supposed to cover the taxes and contributions contractors can come across when working in Latin America.
Sole-proprietors, freelancers, and contractors are taxed at a progressive rate in Argentina. The income tax depends on their gross income generated in Argentina and ranges from 5% to 35%. Argentina doesn’t have a tax-free threshold. This means that a contractor making 5 Argentinian Pesos (ARS) is also subject to income tax.
Argentina has a comprehensive Social Security system that encompasses Social Health, Pension Fund, Family Allowance Fund, and Social Services. These contributions come to around 17% of gross income. Contractors do not have to pay these contributions.
- In Argentina, the Sales Tax (VAT) is 21%. VAT is paid with monthly tax returns. Self-employed contractors can also be subject to VAT.
- Residents are taxed on global-source income while non-residents are taxed solely for the income they made in Argentina.
- There are two types of residence permits- temporary and permanent. Temporary permits need to be renewed once a year and permanent every 5 years. With Permanent residency, contractors are liable for their worldwide income (in terms of income tax) and for Wealth tax (Bienes Personales).
- The 183 day rule doesn’t apply.
- Non-residents residing temporarily in Argentina (for 6 months or less) can deduct 30% of income to account for expenses in generating this income. The rest (70%) is subject to a 35% income tax. This equals an income tax of 24.5% of their total income before deductions
Contractors in Bolivia will be subject to a unified income tax, regardless of how much money they are making. The income tax equals 13% of their gross income. There is no tax-free threshold in Bolivia.
Retirement pension is contributed privately by self-employed contractors. It equals 12.71% of their gross income. Freelancer contractors don’t benefit from contributions in Bolivia.
- Sales tax rate in Bolivia is 13%.
- There is a monthly reimbursement for individuals registered for VAT with tax authorities. It equals 5% purchased goods and individuals can claim it as long as they have fiscal invoices.
- Both residents and non-residents are only taxed on income generated in Bolivia.
- Bolivia doesn’t provide residency for tax purposes and the 183 rule doesn’t apply.
This country regulates income tax using a progressive rate of up to 27.5%. All individuals making less than BRL1,903.98 in a single tax year are exempt from taxation.
In Brazil everyone is required to pay contributions to the Social Security System. Contractors, employees, sole-proprietors, or employers, everyone is taxed at a progressive rate. The values are in Brazilian Real (BRL). Self-employed contractors are obliged to pay 5%, 11%, or 20% of their gross income in contributions.
- VAT in Brazil is 17%.
- Non-resident contractors are taxed a flat rate of 25% of their gross income generated in the country. They can’t deduct anything from their income.
- Brazil offers a lot of options for obtaining a tax residency. The 183 day rule also applies.
- Calendar year is the fiscal year in Brazil.
In Chile, contractors pay the individual income tax with a progressive rate which goes up to 40%. It is calculated in annual taxable units ATU. The value of each ATU in Chilean Pesos is evaluated each month. Chile has a tax-free threshold of 13.5 ATU.
Most contractors in Chile aren’t subject to contributions. Self-employed contractors might be subject to 20% of their gross income in Social Security contributions, with a maximum of
- In Chile, the VAT is 19%.
- Non-residents are not obliged to pay contributions.
- Residents pay taxes on global-source income.
- The fiscal year is the same as the calendar year.
All persons or entities in Colombia doing business in Colombia must pay taxes on the income. Different entities are obliged to pay different amounts of income tax. The distinction is also made between personal and corporate income tax. A contractor operating in Colombia will have to choose between paying one of these taxes. If a contractor is operating as a business, they’ll be obliged to pay corporate tax. On the other hand, a contractor working as a sole trader or a freelancer will have to pay personal income tax.
In 2006 the Colombian government incorporated the taxing unit called Unidad de Valor Tributario or UVT for short. As of 2021, this unit is equivalent to around COP 39,575 for a single fiscal year. In Colombia, the fiscal year is the same as the calendar year. The taxes will be calculated on all the income made in this period.
Colombia also employs a progressive taxation system. This means that contractor taxes are calculated depending on the income they make in a year.
Additionally, Colombia has a tax-free threshold of 1090 UVT (36,140,040 Colombian pesos) for contractors, which amounts to around COP 36,140,040. Anyone making less than this will be exempt from taxation.
Progressive tax rates are calculated in UVT and apply as follows:
While all residents employed in Colombia are required to pay some contributions in addition to the taxes, this is not the case with all contractors. Self-employed and legally unemployed contractors can choose whether or not they’d like to participate in the program. If they opt to do so, they will pay contributions at different rates.
- Pension - 16%
- Health - 12.5%
- Solidarity Pension Fund - 1% to 2%
Other contributions include the Professional Risks and Payroll taxes. However, these contributions are paid by employers for regular employees. Contractors are not required to pay them.
- The VAT in Colombia is 19%. There are certain conditions that can exempt an entity from paying Value Added Tax on their products and services. The most important one is that the gross income for the previous tax year does not exceed COP 119,945,000.
- Contributions in Colombia are calculated from 70% of the integral salary. If a person being taxed is a contractor, the income tax is calculated from income after all the deductibles have been taken away. These deductibles can’t be more than 40% of the income, though.
- If a contractor is operating through a business (such as a sole proprietorship), the income tax is calculated after the business expenses have been taken away.
- Colombian residents are required to pay taxes on both the income acquired inside and outside Colombia. This means that global income is taxed according to the country’s taxes.
- Non-residents are taxed only on the income they made in Colombia unless they come from a country that has a double taxation agreement with Colombia.
In Ecuador, residents and non-residents are taxed differently. While residents pay income tax with a progressive rate up to 35%, non-residents pay a fixed rate of 22% on gross income. Additionally, self-employed contractors have to file income tax twice a year. The first half has to be submitted between July 10 and 28, and the other half between September 10 and 28. The exact date will depend on the contractor’s tax identification number. The income is calculated in US dollars and there is a tax-free threshold of USD 11,290 for the previous tax year.
Contractors aren’t required to submit any contributions in Chile. However, if they want to make contributions, they can do so at a rate of 20.6% of their gross income.
- VAT in Ecuador is 12%.
- If contractors need to keep accounting records in accordance with the tax legislation of Ecuador, they will need to pay a municipal asset tax of 0,15%.
- The fiscal year in Ecuador starts on January 1 and ends on December 31.
- Contractors working from outside of Equator and receiving payments from there are subject to a remittance tax of 5%.
- The 183 day rule applies.
- Both residents and non-residents are only taxed on income generated in Ecuador.
In Mexico, the tax-free threshold is MXP125,000 for non-residents on all income generated in Mexico. For residents, there is no tax-free threshold.
Even though both have a progressive income tax, the tax rates differ between residents and non-residents. For residents of Mexico, income tax ranges from 1.92% to 35%.
For non-residents, it is a different story. They can pay up to 30% of the income they made in Mexico, in taxes.
In Mexico, contributions are not required for all contractors. Self-employed contractors, like sole-proprietors, are obliged to pay 9.23% of their income. However, individual contractors (such as freelancers) are not required to do so. This means that they can’t enjoy the benefits of these contributions.
- Sales Tax (VAT) in Mexico is 16%.
- Residents are taxed on their global income while non-residents are only taxed on income generated in Mexico.
- A fiscal year in Mexico is the same as the calendar year.
In Paraguay, contractors would be subject to IRP (personal tax rate). This income tax rate goes from 8% to 10%, depending on the gross income. Paraguay doesn’t have a tax-free threshold.
Tax year is the same as the calendar year. Contractors need to submit their tax returns by the end of April for the previous tax year.
General contribution rates range from 25% for a Commercial Entity to 28% for a Financial Entity. Contractors are not obliged to pay contributions from their income if they are freelancers. But, if they are sole-traders, they may have to withhold contributions from their salaries.
- VAT in Paraguay is 10%.
- Paraguay doesn’t tax any income generated outside of the country.
- Residents and non-residents are taxed the same, and only for income made in the country.
- The fiscal year in Paraguay is the same as the calendar year.
Peru also employs progressive income tax which can range from 8% to 30% depending on your income for the previous tax year. This is measured in tax units (ATU=PEN 4,400). The tax year in Peru is the calendar year. There is no tax-free threshold in Peru.
Peruvian residents can choose between getting a private or a public pension fund to contribute to. The Private Pension System rates are around 12% of income. The National Pension System rate is 13% of the income generated in the previous tax year. This also goes for the self-employed in Peru.
Additionally, they can choose to be part of the National Health System or the Private Health System. This is taxed with an additional 9% of the gross income generated.
- Sales Tax Rate (VAT) in Peru is 18%.
- Contractors and other entities that do not withhold taxes from monthly salaries will need to pay the tax when submitting their annual income tax return.
- Residents need to pay income tax on global-source income.
- Non-residents are only obliged to pay taxes (30% flat rate)on income generated in Peru.
- The 183 rule applies in Colombia.
All contractors generating profit in the country must pay income tax. The tax-free threshold is 323,232 Uruguayan Pesos (UYU). If a contractor makes more than this in a fiscal year, they will be subject to a progressive income tax based on their grossed income.
Uruguay has a comprehensive taxing system that covers pensions, health insurance, unemployment insurance, and even sick pay. The contributions a contractor can choose to pay range from 20% to 25%.
- VAT in Uruguay is 22%.
- Residents and non-residents are taxed only on income generated in the country.
- Sole proprietors in Uruguay who earn less than 183,000 can apply for the Monotax. This is a unified taxing system that allows contractors and individual workers to enjoy the benefits of social security contributions. Monotax rates are lower than the usual rates.