Challenges of the U.S. and Mexico tax systems with regards to the cross-border digital economy. Dra. Lillian Sumi Imaoka

Transcription

1 Challenges of the U.S. and Mexico tax systems with regards to the cross-border digital economy Dra. Lillian Sumi Imaoka

2 Antilles Holding For Tax Administrations Digital Economy is not a single-industry challenge Netherlands Antilles Dividend Netherlands Related Party Dutch.com Country A Related Party Country B Related Party Country C Related Party Country D Services and equipment Other countries Mexico Mexican Suppliers Services Assets Mex Co. Services Mexican Customers Mex Co. is a Mexican Project Management Company with industry-specific sales.

3 Antilles Holding Netherlands Antilles Dividend Dividend payment Netherlands The compensation agreed in the intercompany transaction is an initial subscription payment per user, and a fixed fee per click or download of online information: - Intellectual property $$$ - Services / Technical Assistance $S - Training $ Dutch.com Royalty/Services payment However, the content is available online is not entirely developed by Dutch.com Other countries Mexico Mex Co.

4 Dutch.com Functions / Activities Dutch.com offers users (related parties exclusively) access to an online platform with technical information useful globally to any operative company within the Multinational Group, including: Intellectual property. Know-how based on previous experiences from any operative company. Technical assistance. This information is constantly updated with users experiences (operative companies). Technical Assistance Available to Operative Company Training Dutch.com Online platform develop. & maintenance IP, Technic al info. Knowhow Local Adapt. Data analysis and classif. Information and experience gathering / storage Update or Input of new data Know-how

5 Tax Administration s Challenges Regardless of the industry, Tax Administrations face BEPS issues caused by Digital Economies singularities: Permanent Establishment Is there significant economic presence? Revenues Interaction with users Characterization of payments Services (Art. 7 business profits). Know-how, IP (Art. 12 royalties) Software license Database user access A combination? Functional/DEMPE Analysis Creating value in the intercompany transaction: Users experience Online platform Gathering/storage functions Data analysis and classification Know-how development How to attribute value?

6 Taxation challenges on Digital Economy Gabriela Pellón, Galicia Abogados, S.C. Edgar Klee, Haynes & Boone Raúl Navarro, Chevez, Ruiz, Zamarripa y Cía., S.C. Moderator: Raúl Villarreal Garza, Procopio

7 The digital World is perceived differently The World s biggest transportation company The World s biggest media company The World s most valuable retail company The World s biggest lodging company The videoconference company with the widest reach Hasn t got any vehicles Doesn t create content Doesnt s have any stock Doesn t own real estate Doesn t have telecomm infrastructure

8 Digital businesses and its characteristics

9 Digital businesses characteristics Multinational presence without physical presence. Digital business models enable companies to have economic presence in several countries without the need to have any physical presence on them. Reliance on intangible assets (Including intellectual property rights IP ). Digital business models invest and rely heavily on intangible assets, such as brands, patents, software or code property rights, copyrights. Data, user participation and synergy created with IP rights. Digital business models might rely on the interactions that their users maintain between them and the information shared by such users through a given platform.

10 1. E-commerce $ Products and content providers Product sale (B2B) Product resale (B2B) Customers $ Product price / fees for access to content.

11 2. Multilateral platforms Promote the network Customer management Intermediary services implementation Platform maintenance Fee payments Advertisement fees Data collection User / Provider User / Customer Controlled transaction

12 3. Vertical growth in digital businesses Digital businesses generate their own production chain. Example: Amazon (Warehouses and storage), Netflix (original productions). Commercializing company End customers

13 One Company, several business lines Digital economy is characterized by its dynamism and flexibility. Companies can easily create new business lines. New business lines = new value creation models, new legal relationships and income sources = new tax consequences. Example (Amazon): Sale Resale Commercializing Company (reseller) E-commerce Sale Final Customer Provider Intermediary (Source State) Multilateral business (network) Fee Services consideration Vertical Growth

14 Digital Economy Taxation - Legal Framework

15 Applicable framework - Mexico Income Tax Law OECD transfer pricing guidelines. Value Added Tax Law Digital Services Tax Law Bill Double Taxation Treaties framework OECD Model Tax Convention Commentaries on the OECD Model Tax Convention Multilateral Instrument - Action 15 BEPS

16 International Background Technical Advisory Group (TAG) reports OECD ( ) Action 1 Final Report Digital Economy Tax Challenges (Oct 2015) OECD international guidelines on VAT and sales taxes (Dec 2015) Unilateral taxation measures on Digital Economy emerge 2015 (India, UK, Italy) OECD interim report published Taxation challenges on the economy digitalization. (Mar 2018) European Union s Directives issue proposals for the to tax the Digital Economy (Mar 2018) Multilateral instrument to adopt preventive measures as regards to BEPS (Action 15)

17 Relevant aspects of the Digital Economy 1. Permanent Establishment 2. Tax Havens 3. Transfer Pricing 4. Payments characterization 5. Value Added Tax

18 1. Permanent Establishment Sales Co (Ireland) Software location Transactions proccesing Marketing strategy Services payment (i.e. $10) Payments (i.e. $100) Subsidiary Co (Mexico) Local marketing and product promotion Interaction with customers Significant negotiating role Customers (Mexico)

19 1. Permanent Establishment Dependent Agent Income Tax Law Article 2 Article 5 of the Tax Treaties under the OECD Multilateral Instrument Execute contracts in name and on behalf of the foreign resident for tax purposes Habitually executes contracts or habitually develops a substantial role in the execution of such contracts without being modified by the company

20 2. Tax Havens Patent Boxes Holding Co (Spain) Mantains owners, technical people and developers Charges fee for development to the Patent Box Co (costs+markup) Pays general corporate income tax (25%) Service fee payment (costs+markup) Patent Box Co (Switzerland) Hires development services from Holding Co Legally owns the software Charges to Clients around the World Pays taxes at a preferential rate (7% 8%) Pays royalties Software users at global scale Where the software is standardized off the shelf, there is no tax withholding on royalties payments

21 2. Tax Havens Mexico s Test 20%+ of net income comes from passive acitivies = Tax haven Where income is originated from services or goods sold out of residence country = passive income Holding Co (Mexico) Passive income test Is Patent Box Co a tax haven? Tangible goods commercialized out of Switzerland Services rendering from within Switzerland Services rendering out of Switzerland Services rendering through a digital platform (SaaS) SI NO SI? Pays Service fee Pays royalties Patent Box Co (Switzerland)

22 3. Transfer Pricing Patent Box Co (Switzerland) Is the owner of the software Licenses the software to a distributor in Colombia Pays taxes at a preferential rate (7% 8%) Royalties for the software licensing Low risk distributor (Colombia) Pays licensing royalties (3% sobre ventas) Sublicenses the software to Clients in Colombia Develops local marketing activities Promotes the platform to acquire new users Pays general corporate income tax (33%) Sublicensing royalties End users/clients (Colombia)

23 3. Transfer Pricing 1. BEPS actions 8, 9 and 10 main purpose is to align the transfer pricing results with the value creation. This is achieved when the value attribution for tax purposes is consistent with the economic activity that generates such value. 2. The OECD Council approved changes to the Transfer Pricing Guidelines in March, The income assessment regarding intangibles shall comprise the developed functions, used assets and assumed risks in the following: Development, Improvement, Maintenance, Protection and Exploitation of the intangible

24 4. Payments characterization Transaction/operat ion IT Withholding Tax treaties Examples Purchase/disposal of tangible and intangible goods No sourced income N/A Services 25% Business profits? 0% Software 25% 10%-15% except when standardized Publicidad 25% Business profits? 0%

25 5. Value Added Tax OECD Recommendation Destination principle The intermediary shall be obliged to be registered as withholding agent Recommendation is aimed to simplify VAT registry (accountability) to foreign residents Facilitate the imports VAT collection with the elimination of exemptions on low-cost products and collecting through post services and shipping companies VAT Law/ Customs Law / International Trade Regulations The importer is the legal and economic bearer of the VAT 1. Every taxpayer is obliged to have the same register. 2. PE presumption where an establishment is registered for VAT purposes. Exemption over low-cost goods (USD$300) (International Trade Regulation Exención sobre bienes de menor valor ($300 USD) (Reglas Generales de Comercio Exterior Merchandise shipping through postal services)

26 Data, data, data Transfer Pricing Tax Havens? Digital value creation Permanent establishment Withholding at source VAT Customers (World)

27 Data, data, data 2007 Anyone who lives in Philadelphia, studies philosophy and has between 18 and 22 years 2009 Anyone who lives in Philadelphia, studies philosophy and has 21 years 2014 Anyone who lives in Philadelphia, studies philosophy, has 21 years, purchased a blue shirt within the last year and owns a pair of white shoes Anyone who lives in Philadelphia, studies philosophy, has 21 years and purchased a blue shirt within the last year Anyone who lives in Philadelphia, studies philosophy, has 21 years, purchased a blue shirt within the last year, owns a pair of white shoes, earns more than USD$20,000 and is passionate about cars.

28 Unilateral Measures to tax Digital Economy

29 Initial Positions ( ) Significant economic presence Special taxes Anti-avoidance measures for multinationals Israel India India Italia Hungary Diverted profits tax in UK (google tax) BEAT in EUA

30 Directives Proposal European Union Directive Proposal.- Temporary tax on digital services: 3% tax rate over gross income obtained by a Company within the EU (regardless of its location), from the following activities: Online advertising; The utilization of a web platform that allows users to interact with each other, and can also facilitate the provision of goods and services between such users; Transmission of data collected from users and generated from the digital interaction of such users. The tax is only applicable to entities whose gross income exceed the following thresholds: Global income = EUR 750 million; EU income = More than EUR 50 million Directive Proposal.- Digital Permanent Establishment: Digital permanent establishment as a consequence of having a significant digital presence. An entity has significant digital presence if at least one of the following conditions are met: The proportion of the total income in any given Fiscal year obtained from the provision of digital services to users located within the member State exceeds EUR 7 million; The number of users that receive digital services within a member State in any given Fiscal year exceeds 100,000; The number of concluded contracts for the provision of digital services to users within a member State in any given fiscal year exceeds the amount of 3,000.

31 Measures in Mexico (Digital Services Tax Law Bill) Proposed bill on digital taxation services in Mexico 3% tax rate over net income (deductible items are not specified) obtained by a Mexican resident or a foreign resident with a permanent establishment in Mexico (regardless of the place in which the are generated) from the following activities: Online advertising; The utilization of a multilateral web platform that allows users to interact with each other, and can also facilitate the provision of goods and services between such users; Transmission of data collected from users and generated from the digital interaction of such users. The tax is only applicable to entities whose gross income exceed MXN$ ,000 (USD$ 5 260,000) Exempt activities: Streaming content, communication and payment services; Financial services; and Data transmission by financial services providers.

32 Measures in America Netflix, Uber Tax United States 6% 9% State Tax Peru 30% withholding on digital services Brazil 2% over gross income Argentina 21% VAT charged on users