WELCOME TO OUR WEBINAR FOREIGN TAX UPDATE WEBINAR SERIES LATIN AMERICA

Transcription

1 WELCOME TO OUR WEBINAR FOREIGN TAX UPDATE WEBINAR SERIES LATIN AMERICA Thursday, May 27, :30 p.m. EST If you cannot hear us speaking, please make sure you have called the teleconference number on your invitation. US participants: Mexico: Chile: Brazil: The audio portion is available via conference call. It is not broadcasted through your computer. *This webinar is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

2 Panelists Introduction of Panelists John Guarin Project Manager International Tax DLA Piper United States Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper Brazil Ricardo Leon Santacruz Partner Sánchez-DeVanny Eseverri, S.C. Mexico Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Chile Foreign Tax Update - Latin America May 27,

3 Brazil Transfer Pricing Update Methods amendments / proposed Tax Havens Privileged Tax regime Economic Substance Test Thin Cap Rules Guido Vinci Rio de Janeiro May 2010

4 Brazil Methods Amendments / Proposed Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper Substitution of the resale price less profit of 20% (trade) or 60% (industry) by the sales price less profit using a unified statutory profit margin of 35% for both industry and trade. Additional requirement for the use of the Independent Comparable Prices method: if a company uses its own transactions with unrelated parties to determine the benchmark, they must represent at least 10% of the import transactions subject to control in the base period. Differentiated rulings regarding applicable profit margins by the State Minister of the Treasure by type of activity, regardless of request from the taxpayer. Situations in which the authorities may impose a method of their choice. Foreign Tax Update - Latin America May 27,

5 Brazil Tax Havens Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper Definition of tax haven expanded by Law /08 and applicable as of January 1, 2009: Countries or regions that do not tax income or impose a rate lower than 20%; or that do not allow public access to information regarding ownership breakdown or regarding the identification of the effective beneficiary of income attributed to nonresidents. TP rules for tax deduction and higher WIT (25%) on remittance. Expectations in regard to Delaware LLCs. Expectations in regard to the issue of a formal black list by the IRS. Foreign Tax Update - Latin America May 27,

6 Brazil Privileged Tax Regime Law also provided for privileged tax regimes, which present any of the following characteristics: Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper (i) do not tax income or impose a rate lower than 20% (ii) grant tax advantages to a non-resident individual or legal entity: a) without requiring the development of a substantial economic activity in the country or territory or b) conditioned upon the non-exercise of it; or (iii) do not tax the earnings generated outside its territory or imposes a rate lower than 20% ; or (iv) do not permit the access to the information related to the corporate structure, the ownership of goods or rights, to the economic transactions performed or to the effective beneficiary of the income attributed to non-residents. Interpretation of the extent of the definition: TP x WIT. Foreign Tax Update - Latin America May 27,

7 Brazil Economic Substance Test Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper The deductibility of amounts paid to residents of tax havens or benefiting from privileged tax regimes now also requires: a. the identification of the effective beneficiary of the foreign company receiving the amounts; b. proof of operational capacity of the individual or entity for the execution of the transaction; and c. documental evidence of the payment of the price and of the receipt of the services, goods or rights paid for. Definition of effective beneficiary: individual or entity not incorporated with the sole or main purpose of tax saving, receiving the amounts on its own behalf (not as an agent, administrator, attorney-in-fact, etc.) Foreign Tax Update - Latin America May 27,

8 Brazil Thin Cap Rules Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper Limit the deductibility of interests paid: To foreign related party which holds equity interest in the Brazilian company and is not domiciled in tax haven: The amount of indebtedness verified upon accrual of the interests cannot exceed twice the value of equity held by the related party in the local entity. To foreign related party which does not hold equity interest in the Brazilian company and is not domiciled in tax haven: The amount of indebtedness verified upon accrual of the interests cannot exceed twice the value the Brazilian company s net worth. The sum of the overall indebtedness with foreign related parties verified upon accrual of the interests cannot exceed twice the sum of the total equity interest held by all related parties in the local entity. Exception made in case of indebtedness exclusively with foreign related parties with no equity interest, in which case, the sum of the indebtedness with all such related parties shall not exceed twice the value of the Brazilian company s net worth. To company domiciled in tax haven or with favored tax regime: the amount of indebtedness with residents of tax havens or with companies subject to favored tax regimes must not exceed 30% of the company s net worth. The limits above apply also when the foreign party is an intervenient (guarantor, co-signatory, attorney-in-fact etc.) Foreign Tax Update - Latin America May 27,

9 Sanchez-DeVanny Eseverri, SC Mexico IETU Background Amparo Ruling Creditability Compliance and Enforcing Rules Mexican Tax Consolidation Ricardo Leon Santacruz Monterrey, Mexico May 2010

10 Mexico IETU Background Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico BACKGROUND Flat Tax or IETU entered in force on January 1, 2008 and replaced the Asset Tax. It was conceived as an alternative minimum tax. Key to IETU is its recognition as a creditable tax for foreign tax purposes in the international context. After its enactment, Asset Tax (a.k.a. IMPAC ) had to be revised to ensure its creditability. IMPAC was an alternative minimum tax levied at on the company or PE s net asset worth. During the tax lifetime the rate fluctuated between 2% and as low as 1.25%. Taxpayers calculated both Income Tax and IMPAC and paid the higher of the two. IMPAC could be carried forward and offset against income tax in future years with the ultimate effect of acting as advanced payment of Income Tax. Foreign Tax Update - Latin America May 27,

11 Mexico IETU Background (continued) IETU was conceived as a direct tax with the following main attributes: (1) minimum exemptions; (2) low rate; (3) deductibility of expenses necessary to create income Methods Interaction between Income Tax and IETU Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Purpose of tax Income Tax Taxes net profit and it is levied on an accrual basis. IETU Taxes the return of investment on production factors and it is levied on a cash basis. Rate 30% for 2010 to 2012, 29% for 2013 & 28% for 2014 and thereafter 17.5%, but, as part of its phase in, the rate was reduced to 16.5% for 2008 and 17% for 2009 Foreign Tax Update - Latin America May 27,

12 Mexico IETU Background (continued) Interaction between Income Tax and IETU Income Tax IETU Taxable income Income from whatever source derived received in cash, kind, services or credit, inflationary gain-loss, and exchange rate gain-loss Income from the sale of goods or services and leasing or letting the use of assets of any kind assessed on a cash basis. Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Deductions Business expenses which are strictly indispensable to the development of the taxpayers business, gradual depreciation or amortization of investments, and COGS for inventories Business expenses, investments, and inventories all fully deductible upon payment thereof Nondeductible items Interest paid by independent or related parties, royalties paid by related parties, payroll (tax credit granted instead), labor benefits Foreign Tax Update - Latin America May 27,

13 Mexico IETU Background (continued) Interaction between Income Tax and IETU Income Tax IETU Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Annual calculation Taxable Income (-) Deductions (-) Mandatory profit sharing payments (-) NOLs BASE / PROFIT * Rate (30% for 2010) (-) Estimated monthly Income Tax payments INCOME TAX OF THE YEAR Taxable Income (-) Allowable deductions (-) Additional deductions (3rd Trimester 07) BASE * Rate (17.5% as of 2010) FLAT TAX DUE (-) Credits of deductions in excess of income (-) Credits for salaries and social security (-) Credits for attributes (-) Credits for inventories (-) Credit for 05, 06 and 07 qualifying NOL s (-) Income tax of the year FLAT TAX OF THE YEAR (-) Estimated monthly Flat Tax payments Balance payment or favorable balance Foreign Tax Update - Latin America May 27,

14 Mexico IETU Background (continued) Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Is IETU really an alternative minimum tax? There are structural differences between Income Tax and IETU (i.e. cash flow vs. accrual basis, different deductions, different rates). Taxpayers must assess their Income Tax and IETU liability. If Income Tax results higher then no problem, but if IETU results higher taxpayers will pay both (IETU in the portion that exceeds Income Tax). Usually IETU will result higher than Income Tax if a proper balance between these taxes (in lieu of their structural differences) is not achieved. For example: Foreign Tax Update - Latin America May 27,

15 Mexico IETU Background (continued) Is IETU really an alternative minimum tax? Income Tax IETU Taxable basis* Tax rate 30% 17.5% Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Tax due Final tax due * A difference in the taxable basis might occur: (1) if taxpayer deducted an item for Income Tax and not for IETU purposes (e.g. interest, royalties paid to related parties), (2) if taxpayer recognized as income a significant cash inflow for IETU purposes that had already been accrued for Income Tax purposes in another tax year, or (3) if taxpayer deducted payroll for Income Tax purposes that could not be credited for IETU purposes. Foreign Tax Update - Latin America May 27,

16 Mexico IETU Background (continued) Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Is IETU really an alternative minimum tax? Unlike IMPAC, effectively paid IETU will not offset Income Tax in the forthcoming years. Profit that has paid IETU does not add up to the Net Profit Account meaning that if dividends are distributed out of this profit, additional Income Tax would also be paid on the dividend distribution. There is no tax consolidation for IETU purposes. Ultimate effect: IETU impacts as an additional tax rather than as an alternative minimum tax. Foreign Tax Update - Latin America May 27,

17 Mexico IETU Amparo ruling Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Transitory provisions of IETU Law foresee that the tax authorities will review this tax by 2011 to conclude whether it should replace Income Tax or it should be repealed. RECENT AMPARO RULING ON IETU As a consequence of the severe distortions generated by IETU, several taxpayers filed an Amparo (constitutional injunction) as soon as it entered into force to fight the unconstitutionality of this tax. Given the importance of the matter, the Supreme Court of Justice ( SCJ ) ruled on the case. Foreign Tax Update - Latin America May 27,

18 Mexico IETU Amparo ruling (continued) Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Besides denying all taxpayers arguments, the SCJ openly recognized that: IETU is not a new version of the Mexican Income Tax. IETU does not need to recognize the same deductions as the ones allowed under the Mexican Income Tax Law. Expenses such as salaries, interest and royalties paid to related parties do not play an important role in the calculation of IETU regardless of the fact that they do for Income Tax purposes. Tax base for IETU should not be identified as a profit in the traditional sense of the concept under income tax principles mainly because both taxes are different in substance. Foreign Tax Update - Latin America May 27,

19 Mexico IETU Creditability Abroad Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Since IETU entered in force, Mexico managed to get its treaty partners to recognize it as Tax Covered under the relevant Double Tax Convention before renegotiation. Mexico has been renegotiating some of its Double Tax Conventions thereby achieving express recognition of IETU as a Tax Covered under the treaty. Double Tax Conventions entered into by Mexico after IETU entered in force already include IETU as a Tax Covered. The US is a different story! Foreign Tax Update - Latin America May 27,

20 Mexico IETU Creditability in the US Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Affected US taxpayers: (i) PEs in Mexico of US companies (e.g. branches); and (ii) US companies receiving dividends from Mexican tax resident companies. Notice (published on December 10, 2007): (i) further study was required to determine whether IETU will be deemed to be a creditable tax for purposes of Article 24(1) of the U.S.-Mexico Double Tax Treaty; and (ii) US taxpayers were allowed to assume the position of IETU creditability until the relevant study is concluded. Foreign Tax Update - Latin America May 27,

21 Mexico IETU Creditability in the US (continued) Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Most probably, IRS will wait until 2011 (when Mexican tax authorities are supposed to review IETU according to the relevant transitory provision of IETU Law) to render a final decision. Tax Havens Recent SCJ s may ultimately affect the analysis of the IETU being undertaken by the IRS on the creditability of IETU: Foreign Tax Update - Latin America May 27,

22 Mexico IETU Creditability in the US (continued) US rule Net gain rule. Foreign tax predominantly similar to an income tax in the US sense, i.e. tax base is calculated by subtracting from gross proceeds the costs necessary to generate such proceeds SCJ position Tax base for IETU should not be identified as a profit in the traditional sense of the concept under income tax principles mainly because both taxes are different in substance. Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico In lieu of tax rule. Foreign tax imposed in substitution (not in addition) of Income Tax, e.g. withholding tax on US residents receiving Mexican sourced income By recognizing that expenses such as salaries, interest and royalties paid to related parties do not play an important role in the calculation of IETU, SCJ is indirectly accepting that IETU should not be creditable under the in lieu of tax rule. Under IETU s mechanic of calculation, denial of these deductions could lead to payment of IETU in addition to Income Tax. IETU does not work as an alternative minimum tax. Foreign Tax Update - Latin America May 27,

23 Mexico Compliance & Enforcement Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico The Tax Administration Service has begun a very aggressive and carefully planned campaign to attach aggressive tax shelter structures: A number of tax firm s have been identified as developers and promoters of aggressive tax shelters; The shelters basically avoided-evaded tax withholdings on taxes payable on salaries and social securities quotas thereon. The structures essentially shifted the employees to partnership in cooperative structures, or the like, and the distributions to employees were tagged as social welfare benefits and alimony type payments, which were argued to be exempt. This saved employers the cost of social security quotas, employee profit sharing payments and the tax savings were split between the service provider, the employer and sometimes, the worker himself. Foreign trade enforcement Transfer pricing, tax withholdings, technical assistance/royalty payment re-characterization, head office pro-rata expense deduction challenge, etc. Foreign Tax Update - Latin America May 27,

24 Mexico Compliance & Enforcement (continued) Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico The Tax Administration Service has also strengthened its audit capabilities and is focusing on: Transfer pricing Tax withholdings Technical assistance/royalty payment recharacterization Head office pro-rata expense deduction challenge Debt-push-down structures Cost of goods sold integration Thin-capitalization Foreign trade, origin and customs compliance Others Foreign Tax Update - Latin America May 27,

25 Mexico Tax Consolidation Regime Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico BENEFITS OF TAX CONSOLIDATION Individual Net Profit Account ( CUFIN ) balances are combined into a single consolidated CUFIN account; Tax-free flow of dividends not deriving from CUFIN between entities belonging to the consolidated group; Immediate application of NOL s generated by a controlled entity to the consolidated results, regardless of whether these NOL s have been amortized at the level of the controlled entity having generated them; Immediate application of losses derived individually from the transfer of shares. Foreign Tax Update - Latin America May 27,

26 Mexico Tax Consolidation Regime Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico Until 2009, benefits of consolidation could virtually last forever provided that none of the events foreseen under law for a deconsolidation occur, e.g. among others, loss at the level of a controlled entity of the right to amortize its NOLs (that flowed into the consolidated results) having elapsed the legal term to do so TAX AMENDMENT Benefits of the tax consolidation regime were limited to a 5-year term. The controlling entity is obliged to calculate and pay income tax after this term has elapsed regardless of whether an event for deconsolidation occurs or not. Foreign Tax Update - Latin America May 27,

27 Mexico Tax Consolidation Regime (continued) Effects of the amendments cover 1999 to 2009 tax years. Retroactivity - obligation of calculating and paying income with respect to deferred taxes from prior years (when these new rules were not even in force). Calendar of payments: Deferred tax from Ricardo Leon Santacruz Sanchez-DeVanny Eseverri, SC Mexico % 25 % 05 0% 25 % 20% 15% 15% 25% 20% 15% 15% 06 0% 0% 25% 25% 20% 15% 15% 07 0% 0% 0% 25% 25% 20% 15% 15% 08 0% 0% 0% 0% 25% 25% 20% 15% 15% 09 0% 0% 0% 0% 0% 25% 25% 20% 15% 15% 10 0% 0% 0% 0% 0% 0% 25% 25% 20% 15% 15% Foreign Tax Update - Latin America May 27,

28 Sapag & Gonzalez, Abogados Chile Proposed Earthquake Recovery Tax Reform Chile & US Tax Treaty Sergio Sapag Santiago de Chile, Chile May 2010

29 Chile Proposed Earthquake Recovery Tax Reform Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Chile Corporate Income Tax Rate Temporary rate increase 17% % in ,5% in % 2013 onwards Royalty on mining activity Changes to progressive table Tax on mining production and sale Progressive rate depending on value of sales Progressive value table is modified with an impact on effective payable royalty Foreign Tax Update - Latin America May 27,

30 Chile Proposed Earthquake Recovery Tax Reform Stamp Tax 2010 rates become permanent Payable on payments of foreign loans Existing regime Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Chile % per month or fraction thereof capped at 1.2% 0.5% on loans payable on demand % 2010 (only applicable until ) and 0% thereon 0.05% per month or fraction thereof capped at 0.6% 0.25% on loans payable on demand Proposed reform 2010 rates become permanent Foreign Tax Update - Latin America May 27,

31 Chile Proposed Earthquake Recovery Tax Reform Property Tax Surcharge A 0.275% surcharge will apply to real estate property with tax value in excess of USD180,000 Tobacco Excise Tax Rate Increase Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Chile Foreign Tax Update - Latin America May 27,

32 Chile US Tax Treaty Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Chile Signed February 4, 2010 Enters into force January 1 following ratification date US Model Income Tax Convention with Chilean dividend clause Withholding rates Dividends Interests 4% - 10% Royalties 2% - 10% Other business profits 0% Comprehensive LOB provisions 5% - 15% ( Chile Clause ) Extensive exchange of information and bank secrecy provisions Foreign Tax Update - Latin America May 27,

33 Chile WHT & Capital Gains Table Chilean WHT & Capital Gains Table Tax Haven Non-Tax haven related party Non-Tax haven, non related party US resident when treaty comes into force Royalties Qualified Services Non Qualified services Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Chile Capital gain on SA held for > 1 year Capital gain on SA held for < 1 year or sold by broker Capital gain on Limitada Dividend Determined lease payment may qualify as royalty payments and benefit of lower withholding rates 2 Certain royalties, such as brand licenses are always subject to 30% rate even if they are paid to a non tax haven, non related party 3 The general rate is 10%. 2% applies to payments for the use, or the right to use industrial, commercial or scientific equipment 4 Qualified Services refers to engineering, technical or professional services rendered by an individual or an entity knowledgeable of a science or technique provided through consulting, report or diagrams 5 Certain service charges can be treated as a commission depending on legal nature of service provider. 6 35% wht applies and credit is given for 17% CIT. Foreign Tax Update - Latin America May 27,

34 DLA PIPER US LLP Latin America & Caribbean Tax Update John Guarin New York May 2010

35 South America Argentina Congress deadlock Recent discussions: John Guarin Project Manager International Tax New York DLA Piper Withholding tax on dividends Repeal of Tax on financial transactions 0,6% in deposits/withdrawals Federal / Provincial? Criminal tax law Value threshold to evade x10 but Overall annual value vs. per tax consideration TP Audits Foreign Tax Update - Latin America May 27,

36 South America Colombia John Guarin Project Manager International Tax New York DLA Piper Audit efforts Transfer Pricing From Economic Analysis to Sub-Direction of International Tax Audit TP audit to out of range Assessment to median range Customs audit VAT & import duties on royalty component Treaties In force: Spain & Chile Signed: Mexico & Canada Negotiated: Belgium and Czech Republic Stagnated: UK (negotiation) Switzerland (ratification) Presidential elections A) to increase tax B) to maintain current scenario Foreign Tax Update - Latin America May 27,

37 South America Peru & Venezuela John Guarin Project Manager International Tax New York DLA Piper Peru Implementation of capital gains tax on shares disposition Peru/Brazil OECD Model tax treaty US Free trade agreement Venezuela Tax reform following XXI Century s Socialism Guidelines Plan evasion cero Foreign Tax Update - Latin America May 27,

38 Central America Trends John Guarin Project Manager International Tax New York DLA Piper Tax Reforms / Costa Rica/ El Salvador, Honduras, Panama & Nicaragua Revenue base increase Anti-evasion and stronger audit powers (incentives) Transfer Pricing Provisions Enacted Interpreted Expected OECD Tax transparency mode Tax transparency divisions at local tax authorities Tax treaty negotiation / Panama ahead of the pack Foreign Tax Update - Latin America May 27,

39 Central America Tax Reforms / Highlights John Guarin Project Manager International Tax New York DLA Piper Costa Rica Free Trade Zone Regime ( F User) reduced CIT rate, Special Credits & Deferral Tax Authorities Restructure TP interpretation El Salvador First enacted TP regime in the region Salvadorian FMV determination method Honduras WHT on dividends and retained earnings (10%) Asset revaluation tax (6% on FMV vs. Bookvalue) Excise and consumption taxes Foreign Tax Update - Latin America May 27,

40 Central America Tax Reforms / Highlights John Guarin Project Manager International Tax New York DLA Piper Nicaragua Income tax determination highest 30% NTI vs. 1% gross income (vs. avg assets value) WHT on dividend and interest (10%) Panama CIT: FY09 30%, FY % and from FY11 25% CIT: FY %, FY % and from FY14 25% for power generation and distribution; telecom; insurance, bank and financial; cement plant; mining and gambling Dividend WHT on foreign source income TP announced Double tax treaties negotiation ITL / BELG / BDOS / NTH / MEX / QATAR & SPAIN CHILE / GER / INDIA / HUNGARY / KOR & JAPAN Foreign Tax Update - Latin America May 27,

41 Caribbean Trends John Guarin Project Manager International Tax New York DLA Piper OECD Tax transparency mode Tax information exchange treaties 2009/2010 Barbados Double Tax Treaties mode (15 and counting) Austria Botswana Canada CARICOM China Cuba Finland Mauritius Mexico Norway Sweden Switzerland UK US Venezuela More to follow (Targets Argentina, Brazil, Chile & Colombia) Foreign Tax Update - Latin America May 27,

42 Q&A Thanks for attending today s webinar! Foreign Tax Update - Latin America May 27,

43 Today s Presenters John Guarin Project Manager International Tax DLA Piper New York Guido Vinci Partner III Tributario Rio de Janeiro Campos Mello Advogados in cooperation with DLA Piper Brazil Ricardo Leon Santacruz Partner Sánchez-DeVanny Eseverri, S.C. Mexico Sergio Sapag Founding Partner Sapag & Gonzalez, Abogados Santiago de Chile, Chile john.guarin@dlapiper.com gvinci@dlapiper.com rls@sanchezdevanny.com sergio.sapag@sapagycia.cl Foreign Tax Update - Latin America May 27,