WSG Latin American Regional Meeting 2012 Panama City, Panamá

Transcription

1 WSG Latin American Regional Meeting 2012 Panama City, Panamá TAX HAVENS AND THE IMPACT OF BEING BLACKLISTED By Francisco M. Castillo Partner Hoet Peláez Castillo & Duque

2 At the end of 1999, the Venezuelan government issued a new Income Tax Law replacing its long standing territorial tax system with a worldwide system, thus joining at such time other key Latin American countries like Argentina, Mexico and Brazil in this trend. With respect to worldwide taxation the changes became effective on January 1 st, 2001, bringing new concerns on traditionally used offshore structures. With the prior territorial tax system, no tax was imposed on income derived from international sources, except if any of the elements of the source of the income was considered to have occurred within the Venezuelan territory. Before 1999, practically no planning was required, except that there should be no connection with the Venezuelan territory. Generally considered tax heavens were widely used, such as Panama, British Virgin Islands and to a lesser extent, European jurisdictions (i.e. Luxembourg, Channel Islands among others), to incorporate companies issuing bearer shares or various forms of trusts. The new rules on tax havens and the black lists are part of the anti-avoidance rules seeking to reduce tax evasion and tax deferrals with a series of presumptions which make very unattractive the use of tax havens referred to in the income tax law as low tax jurisdictions. The rules are therefore part of the change in the income tax system in Venezuela. 1. Worldwide Income As mentioned above, the Venezuelan income tax system had been governed by a territoriality principle. After 1999, income from any source earned by natural or juridical persons, residents or domiciled in Venezuela is taxed, adopting in this way the residence principle. Juridical entities created in Venezuela under Venezuelan laws and individuals who have stayed in Venezuela for more than 180 days, continuously or not, within a calendar year or the immediately preceding year to the taxable year are considered tax residents. Nonresident aliens and foreign corporations are also taxed, even when they do not have a permanent establishment (PE) in Venezuela, to the extent income is considered Venezuelan source, because one of the elements occurs or is considered to have occurred within the National Territory. In the case of foreigners having a PE in the country, they are taxed exclusively on income, in Venezuela or abroad, attributable to such a PE. Venezuelan Income Tax Law provides a definition for PE, which results to be broader than the OECD definition. For instance, the construction, installation, and assembly of works lasting a period exceeding six months (a 12-month threshold for these activities is contained in most treaties) will be considered a PE in Venezuela. Also the Income Tax Law taxes for the first time the exploitation of agricultural or fishery sites (which were activities exempt form the income tax under the overridden tax law). The Income Tax Law allows a tax credit against Venezuelan income tax to residents or legal entities and to nonresident aliens and foreign corporations having a PE within the country, for income taxes paid in other States on income earned abroad. The Law defines income tax, as any tax levied on income or any of its elements, including taxes on gains derived from the sale of movable or immovable property (capital gains), taxes on wages and, in case of any doubts, the Venezuelan Tax Administration should determine the nature of the tax credit.

3 The Law provides that the total amount of the foreign tax credit may not exceed the income tax resulting from applying the Venezuelan Income Tax Law and the tax which would result for such income under the Venezuelan legislation. In the case of foreign source income, the Venezuelan Law is applied to determine net income, instead of the laws of the country of source of such income. This means that any deductions, for example, are taken into account based on the Venezuelan Law. Moreover, foreign losses can only reduce foreign source income. In the case of financial institutions incorporated abroad and not domiciled in Venezuela, income obtained from loans is taxed at a flat tax rate of 4,95%. In this regards, in order to be eligible for this special tax rate the financial institutions must considered as such in its country of incorporation. The 1999 Income Tax Law also included for the first time an article regulating benefits provided by the Tax Treaties entered into by the Venezuelan government. In order to avoid the so called forum shopping or treaty shopping, a resident of a Contracting State is entitled to all benefits only if he proves that he is a resident of the Contracting State involved. 2. International Tax Transparency Rules. As part of the rules to implement an effective worldwide taxation for local taxpayers, including anti-deferral provisions, the Venezuelan Income Tax Legislation includes a complete chapter on International Tax Transparency Rules. The International Trust Tax Transparency Rules apply to any taxpayer that holds directly or indirectly, investments of any kind in a low tax jurisdiction (LTJ), and to all forms of foreign entities, including companies, partnerships and trusts. The Rules apply whenever the taxpayer has a controlling interest in the investment, considering as controlling interest when the taxpayer has the right to decide over the distribution of dividends or profits derived from the LTJ or whenever he has a managing control, directly or indirectly, over the investments. Furthermore, the Law presumes, unless proven otherwise, that the taxpayer has a managing control over the investments he holds in a LTJ. 3. Exceptions to the International Tax Transparency Rules. The rules on International Tax Transparency would not be applicable to: 1. Public sector: Investments made by the Venezuelan Republic, the states and municipal governments, directly or through entities controlled by the Venezuelan government. 2. Active income: Income derived from business activities in low tax jurisdictions when more than 50% of the total assets are assets used in business activities carried out in the low tax jurisdiction, except for what should be considered as passive income, that is the one derived from the lease of assets, dividends, interests, capital gains in the sales of assets or real state or royalties that represent more than 20% of the gross revenues obtained by the taxpayer from such low tax jurisdiction.

4 4. Low Tax Jurisdictions. Pursuant to the Income Tax Law, the low tax jurisdictions are those that shall be defined by the Tax Authorities by especial resolution. The first list was published in the Official Gazette on March 28 th, 2001 which included a long list of low tax jurisdictions. In addition, the resolution included a general definition by which jurisdictions where income tax is 0 or with a tax rate lower than 20% for individuals or juridical entities, shall be considered as low tax jurisdictions. The tax administration excluded from the list jurisdictions such as Trinidad and Tobago and Barbados, confirming that the International Tax Transparency Rules are not applicable to countries with which Venezuela has entered into a treaty to avoid double taxation. The current list is included as Annex A. The Tax Authority (SENIAT) is supposed to update this list every year, but the last list was published in 2004 and it remains unchanged since then. 5. Investments located in Low Tax Jurisdictions. Under the Income Tax Law, the investments are considered located in a LTJ when: 1. The accounts or investments of any kind are located in a LTJ. 2. There is a domicile or post office box in the LTJ. 3. The headquarters or main or effective management or a permanent establishment is located in the LTJ. 4. The entity was incorporated in the LTJ. 5. The entity has a physical presence in the LTJ. 6. Any kind of legal businesses executed, regulated or performed under the laws of the LTJ. 6. Special Transparency Rules In order to avoid dilution and to keep a tighter control, the Law considers that the following are investments property of a taxpayer in a LTJ: 1. Investments in a low tax jurisdiction property or beneficially owned by the spouse, concubine, ascendant or descendent, its attorney-in-fact or when any of these related persons appear as attorneys-in-fact or are authorized to sign or order transfers. 2. Unless proven otherwise, any transfer made or ordered by a taxpayer to a deposit, investments, savings or any similar account opened in a financial institution in a LTJ are considered to have been transferred to an account owned by the taxpayer. 7. Basis for Taxation. An important difference of investments made in a low tax jurisdiction with respect to investments made in other jurisdictions, even though they may all be considered taxable under the worldwide taxation system is that investments in a low tax jurisdiction are considered taxable on an accrual basis as opposed to when the income is actually received. The taxes will be applicable in proportion to the direct or indirect share ownership of the taxpayer, independently of the distribution of dividends or profits from

5 the LTJ. With this provision the Income Tax Law is piercing the corporate veil and considering tax transparent the entity holding the investment. Unless proven otherwise, any amounts received from a low tax jurisdiction would be considered taxable income received from such jurisdiction. The Venezuelan taxpayer may have a right to a deduction for expenses incurred at the level of the LTJ in proportion to his direct or indirect share of the investment; provided that he keeps the accounting records available to SENIAT and that he files a special information tax return. 8. Information Return. Taxpayers with investments in low tax jurisdictions are under the obligation to file an information return at the same time and jointly with their ordinary income tax return (within 3 months of the closing of the fiscal year). With this information return, taxpayers have to include all the statements of deposits, investments or savings accounts or any other document that confirms the investment held directly or indirectly in a low tax jurisdiction. The information must also include any withdrawals made from the LTJ. Finally, the Law also allows a tax credit for any taxes paid in a LTJ and requires special accounting to be kept on the investments made, income and taxes paid. 9. Transfer Pricing Rules An important issue with respect to investment in low tax jurisdictions is that any transactions made with an entity located in a LTJ is considered made with a related party, unless proven otherwise; so this implies that the taxpayer must file another special tax return and keep special accounting for all transactions with such entity as a related party under the transfer pricing rules. 10. Conclusion The International Tax Transparency Rules created the need for a complete revision of the investments held in low tax jurisdictions. The rules have completely changed the tax system and now income and gains obtained in a LTJ are now taxable whenever a controlling shareholders resides in Venezuela and the gain is considered realized for tax purposes on an accrual basis, independently if there is an actual distribution of the dividends, profits or benefits of any kind. The tendency has been to look for jurisdictions that are not considered as LTJ. Some of this structuring includes a trust with a trustee in a jurisdiction which is not considered a LTJ and subject to English Law. Latin Americans are generally reluctant to enter into irrevocable agreements, so usually the trusts are revocable, although this may raise issues on the transparent nature of the trust for tax purposes under Venezuelan Law. Most structures would then include an onshore company, usually a limited liability, which may include another company as part of the required structure. The structures are established as mentioned in high tax jurisdictions, but that does not include reporting

6 obligations in such high tax jurisdictions or impose a high tax for the type of investments kept in the accounts. Also, some other popular structures include the use of companies in high tax jurisdictions that are not taxable for investments kept outside of the high tax jurisdiction (such as the Spanish ETVE); others include structures in which you may have a vehicle that is considered a transparent vehicle, (such as a partnership), but may allow you to defer the applicable income tax under the worldwide taxation in Venezuela. At any rate, whether it is a more simple structure or a structure involving a trust and one or several companies, the tendency is to avoid at all costs any relation with low tax jurisdictions which may attract the International Transparency Rules with taxation as the gains are accrued, regardless of the fact that an actual dividend has not been received.

7 Annex "A" SENIAT'S administrative Decision N SNAT/2004/0232, dated April 24, 2004, published in Official Gazette N of April 26 th, Caracas, April 24 th and 144 According to article 194 of the Income Tax Law, the National Customs and Tax Superintendent SENIAT, Whereas Article 194 of the Income Tax Law states that the low taxation Jurisdictions will be those classified as so by the Tax Administration. Whereas The Third Paragraph from article 119 states that, unless proved otherwise, it is presumed that the operations among natural or legal persons, resident or domiciled in Venezuela and natural or legal persons, or institutions located or domiciled in low taxation jurisdictions are between related parties. Whereas Article 101 of the Income Tax Law states that the following will be subject to the international regime of tax transparence: Taxpayers who own foreign investments carried out directly or through a third person, in branches, legal persons, personal or real property, shares, bank or investment accounts, and any form of participation in entities with or without legal capacity, trust funds, unincorporated associations, investment funds, as well as in any other legal form with similar purposes, created or incorporated in accordance with foreign law, located in low taxation jurisdictions. Decrees as follows: ADMINISTRATIVE PROVIDENCE TO CLASSIFY LOW TAXATION JURISDICTIONS PURSUANT TO THE INCOME TAX LAW. Article 1. Low taxation jurisdictions are those where the taxation for income tax is null (that is to say, aliquot zero) or up to an aliquot equal or inferior to 20% for that concept. For such purpose, the tax legislation of the country referred to will be considered, and applicable to natural or legal persons, taking into account the nature of the entity that the operation was carried out with. Article 2. Without prejudice of the above, the following are considered as low taxation jurisdictions pursuant to the Income Tax Law: Anguila Antigua y Bermuda Archipiélago de Svalbard Aruba Ascención Belice Bermudas Brunei Campione D'Italia Commonwealth de Dominica Commonwealth de las Bahamas Emiratos Arabes Unidos Estado de Bahrain Estado de Kuwait Estado de Qatar Estado Independiente de Samoa Occidental Estado Libre Asociado de Puerto Rico Gibraltar Gran Ducado de Luxemburgo Granada

8 Groenlandia Guam Hong Kong Isla Caimán Isla de Christmas Isla de Norfolk Isla de San Pedro y Miguelón Isla del Hombre Isla Qeshm Islas Cook Islas de Cocos o Kelling Islas del Canal (Islas de Guernesey, Jersey, Alderney, Isla Great Sark, Herm, Little Sark, Brechou, Jethou Lihou Islas Malvinas Islas Pacifico Islas Salomón Islas Turcas y Caicos Islas Vírgenes Británicas Islas Vírgenes de Estados Unidos de América Kiribati Labuán Macao Malta Montserrat Niue Palau Pitcaim Polinesia Francesa Principado de Andorra Principado de Liechtenstein Principado de Mónaco Reino de Marruecos Reino de Swazilandia Reino Hachemita de Jordania República Árabe Popular Socialista de Libia República Dominicana República Gabonesa República Libanesa República de Albania República de Angola República de Cabo Verde República de Chipre República de Djibouti República de Guyana República de Honduras República de las Islas Marshall República de Liberia República de Mauricio República de Namibia República de Nauru República de Panamá República de Seychelles República de Túnez República de Vanuatu República del Yemen República Oriental del Uruguay República Socialista Democrática de Sri Lanka Samoa Americana San Kitts San Vicente y las Granadinas Santa Elena Serenísima República de San Marino Sultanía de Omán Tokelau Tristán da Cunha Tuvalu Zona Especial Canaria Zona Libre Ostrava Article 3. The countries or territories with which the Bolivarian Republic of Venezuela has an agreement to avoid international double taxation that contains information exchange clauses and is considered in force pursuant to the internal laws of Venezuela, shall not be considered as low tax jurisdictions with respect to the application of the Income Tax Law. The former will be applicable even in the cases in which those countries or territories may correspond to the facts foreseen in articles 1 and 2 of this Administrative Providence. Article 4. Notwithstanding the provisions of the previous article, those countries or territories that do not provide the information requested under the exchange of information clause of the respective agreement, shall be considered as low tax jurisdictions in respect to the application of the Income Tax Law. Article 5. This Administrative Providence will be in force from its publication in the Official Gazette of the Bolivarian Republic of Venezuela. Let it be notified and published. JOSE GREGORIO VIELMA MORA National Tax and Customs Superintendent.