2014 Latin America Tax Summit

Transcription

1 2014 Latin America Tax Summit

2 Expanding operations through acquisitions Arco Verhulst Global Head of Mergers & Acquisitions Tax, KPMG in the Netherlands Ignacio Sosa Corporate Tax Partner, M&A and Financial Services Leader, KPMG in Mexico

3 Arco Verhulst Global Head of Merger & Acquisitions Tax KPMG in the Netherlands Panelists Ignacio Sosa Corporate Tax Partner, M&A and Financial Services KPMG in Mexico Rodrigo Stein M&A Tax Partner KPMG in Chile Ericson G Amaral International Tax, Partner KPMG in Brazil 3

4 Agenda Case study Expanding Operations through acquisitions Common tax issues identified in the DD Main tax considerations in structuring an acquisition CFC rules 4

5 Case study Expanding operations through acquisitions

6 Case study Description Mexico Brazil Chile There are various opportunities to invest in LATAM, however, adequate structuring is essential to avoid adverse tax consequences in the region. Given the complexity of the LATAM tax/legal environment, investing through acquisitions of shares in other companies as opposed to an acquisition of assets tend to be a very common route. In this case study, an an group will be acquiring 3 (three) target companies, one in Mexico, one in Brazil and the other in Chile. The targets (in Chile, Mexico and Brazil) have investments in other LATAM jurisdictions. 6

7 Common tax issues identified in a Due Diligence

8 Common tax issues in M&As in Mexico Many companies are in the process of being formally institutionalized. Few companies are considering to pursuing an international M&A strategy. The challenge for executives is to develop an international vision in order to grow their companies abroad. Common tax issues would involve: New regulation or amendments to the Law Complexity of tax compliance Notable increase in scrutiny by the tax authorities Special focus on CFC operations and BEPS Labor liabilities 8

9 Common tax issues in M&As in Brazil Common tax issues would involve: Asset deals are very rare. Accounting numbers are IFRS based (different from tax GAAP). Quality and availability of tax information may differ significantly. Indirect taxes are a major area. Succession of tax liabilities / Jointly responsibility are almost inevitable. Existence of special tax regimes/ incentives. Labor and Social Security is an area of concern. 9

10 Common tax issues in M&As in Chile Except for very large or publicly listed targets, quality and availability of financial and tax information is problematic. Withholding obligations for buyer Common tax issues would involve: Related party transactions and transfer pricing support Formal and documentation support for expenses Withholding taxes and compliance with requirements for application of DTTs and exemptions VAT cash refunds Labor liabilities Stock options, bonuses and variable compensation Deductibility of voluntary benefits Status of independent contractors 10

11 Main tax issues

12 Share deal vs. Asset deal Mexican tax aspects In Mexico, shares acquisition is preferable Identify jurisdictions and forms of business enterprises If applicable, use of Mexican tax treaties In a share deal, acquirer inherits tax attributes Asset acquisition Could trigger permanent establishment in Mexico Mexico Analyze the viability of using a Mexican subsidiary Acquisition of assets does not avoid succession of tax risks/liabilities.(escrow negotiation) Other taxes on assets acquisition VAT Real estate acquisition tax (local tax on market value of real estate transfer) Tax planning for future sale of shares or assets 12

13 Share deal vs. Asset deal Brazilian tax aspects In Brazil, share deal is the dominant approach. Goodwill / premium Simpler tax procedures (acquirer inherits tax IDs, licenses, tax incentives, tax attributes from seller). Acquisition of assets does not avoid successor risks/liabilities issues. Brazil Indirect tax burden on the acquisition of assets. The sale of a Business Unit (asset deal) is commonly proceeded by (1) a carve-out of the BU to a NewCo, and followed by (2) sale of NewCo s shares. The share deal might also be more advantageous for the seller. 13

14 Share deal vs. Asset deal Chile tax aspects In Chile, a share deal is usually preferred More simple to execute from legal perspective Tax attributes of target (e.g. tax losses, tax credits) may be preserved Step up in tax basis of assets up to FMV may be achieved Change in goodwill amortization rules May be preferred from seller's perspective as well Chile Asset acquisition Could trigger permanent establishment in Chile Convenience of forming local acquisition vehicle Purchase price in excess of FMV of assets may not be amortized Acquisition of assets may not avoid succession of tax risks/liabilities in all cases VAT and other indirect taxes Registration costs for certain type of assets (e.g. real estate, mining property, licenses, vehicles) 14

15 Funding acquisition Equity Equity contribution LATAM countries normally do not levy stamp/capital duties on equity injections. No stamp duties in Mexico In Brazil there is an IOF financial tax (0.38%) on equity contributions. Equity vs Debt Funding Annual Municipal Tax in Chile at 0.25% to 0.5% on net equity capped at app. USD 600k per year Minimum share capital may be required. Brazil Chile Mexico No minimum share capital in Mexico, Brazil and Chile. Some LATAM countries require compliance with Central Bank rules (e.g. Brazil, Argentina, Colombia). Decision on how to fund acquisition may also depend on the tax impacts on the repatriation of the investment. 15

16 Funding acquisition Equity Equity contribution Relevant tax considerations from an an perspective include: Deduction of interest expenses on external funding taken up to finance equity contribution in LATAM investment Equity vs Debt Funding Brazil Chile Mexico 16

17 Funding acquisition Debt Intercompany Loan (debt instruments) Acquisition may be also funded with debt. WHT is levied on the repatriation of interest. Brazil 15% WHT (or 25% if paid to tax haven) Mexico Domestic law 4.9% to 35% WHT Equity vs Debt Funding Chile Domestic law 35% general and 4% banks and financial institutions 15% IWHT under most tax treaties Brazil Chile Mexico Deductibility rules need to be observed. Transfer pricing rules. Brazil: Not fully OECD based. Thin capitalization rules. FX variations may also trigger taxation. 17

18 Funding acquisition Debt Intercompany Loan (debt instruments) Relevant tax considerations from an an perspective include: Interest income taxable in hands of the an lender some an countries still provide possibility to achieve a lower effective rate on such income Equity vs Debt Funding Withholding tax generally creditable against corporate income tax, but limitations may exist Brazil Chile Mexico 18

19 Repatriation of funds Payment of dividends may trigger WHT. Mexico: 10% WHT / Tax treaties in force Brazil: payment of dividends is exempt from WHT Chile: 35% minus imputation credit. Rules changing starting in 2017 under recently enacted tax reform In Brazil, there is a possibility to pay interest on net equity (also known as JCP ). Brazil Chile Mexico Repatriation in the form of services fees / royalties is not tax efficient. Deductibility may be limited. WHT tax is levied at the source of the payment. Indirect tax burden may also arise (e.g. Brazil). 19

20 Repatriation of funds Relevant tax considerations from an an perspective include: Full exemption of dividends and capital gains or not (partial exemption or credit treatment) Is use of local holding company in alternative an country beneficial from a tax treaty perspective? Implications of interest on equity deduction Brazil Chile Mexico 20

21 Exit strategies Disposition of investment Mexico: 25% WHT on the transaction value (without deductions) or 35% rate on the gain obtained if certain requirements are met. 10% WHT on dispositions through stock exchanges (specific rules). Deferred tax for corporate reorganizations (specific rules). Brazil Chile Mexico Transfer of Shares or Assets Brazil: 15% WHT in the sale of shares (or 25% if seller is located in a tax haven). Exemption for the sale of listed companies and FIP quotas. Chile: Current preferential tax regime for long term capital gains is eliminated. 35% tax rate on net gain applicable starting 1 January 2017 Capital gains under tax treaties Mexico: Exemption and reduced tax rates apply considering specific participation periods (generally > 1 year) and low participation in the capital (generally < 25%) Brazil: Limited treaties opportunities. Chile: a reduced tax rates may be available if conditions are met. 21

22 Exit strategies Capital gains for indirect dispositions Mexico: taxation is applicable only when indirect participations is represented by immovable property located in Mexico. Brazil: No specific rules dealing with indirect sales of Brazilian assets/shares. Brazil Chile Mexico Transfer of Shares or Assets Chile: disposition of foreign entity with direct or indirect investment in Chile or Brazil may be subject to tax depending on circumstances. Limited exception for group reorganizations. Withholding obligations for buyer. Relevant tax considerations from an an perspective include: Full exemption of capital gains or not. Is use of local holding company in alternative an country beneficial from a tax treaty perspective? 22

23 Local CFC rules

24 Mexican CFC rules Income accrued by controlled, pass-through and by some special purposes vehicles in low tax jurisdictions of a Mexican tax resident If income is not subject to taxation abroad If tax is less than 75% of Mexican tax liability Mexico (< 22.5%) Passive income represents more than 20% (e.g. dividends, interest, royalties, capital gains, etc.) Foreign Subsidiary Foreign Subsidiary 40% WHT (without deduction) Exceptions: Certain royalties Lack of effective control Alienation of shares (same group) Operating Income Other concepts 24

25 Brazilian CFC rules Brazil New CFC rules (Law 12,973) will enter into force as from January, Based on the new rules, profits/losses of direct and indirect foreign controlled companies have to be generally taxed in Brazil on an individual basis, i.e. on a company-by-company basis. Temporary Consolidation Regime: Foreign Subsidiary Foreign Subsidiary Until 2022, it is possible to consolidate profits/losses of the foreign subsidiaries. Only net result of the foreign investments would be taxed. Some conditions need to be observed (e.g. active income of 80%). Cannot consolidate foreign controlled companies located in low tax jurisdictions. 25

26 Brazilian CFC rules Brazil Taxation on foreign profits is due in the end of the year (regardless of profit distribution). If certain conditions are met (e.g. active income), Brazilian parent company may be allowed to tax foreign profits in 8 (eight) years. At least of 12.5% of the profit has to be offered to taxation in the first year. Foreign Subsidiary Foreign Subsidiary Presumed credit of 9% to most industries. Effective corporate income tax rate is reduced from 34% to 25%. Possibility to offset accumulated tax losses from foreign subsidiaries. 26

27 Chilean CFC rules Introduced by Law and will become applicable starting 1 January 2016 Passive income earned or received by CFC is subject to current Chilean income tax Control Chile Chilean Tax payer individually or with members of same group holds directly or indirectly 50% or more of: Foreign Subsidiary Foreign Subsidiary Capital Profits Voting Presumption of control for entity in a low tax jurisdiction Low tax jurisdiction definition Multi-factor test 27

28 Chilean CFC rules (cont.) Foreign Subsidiary Chile Foreign Subsidiary Eight categories of passive income Dividends not passive if paid by directly or indirectly held CFC whose main business activity is not earning passive income Exception for banks and financial institutions Certain operations with Chilean Taxpayers Presumption that all income is passive if 80% or more of total income is passive CFC rules not applicable if passive income is 10% or less of total income Presumption that all income of a CFC in a low tax jurisdiction is passive Minimum presumed passive income of a CFC in a low tax jurisdiction Losses of a CFC cannot be deducted Foreign tax credit rules and credit for certain Chilean taxes paid Risk of double taxation because of limitations to foreign tax credit 28

29 CFC rules the an dimension Relevant tax considerations from an an perspective include: Mexico Brazil Chile - Some an countries also have CFC rules although the trend has been to remove or have more limited application of these rules - Interposition of holding company in an jurisdiction and/or mixing of activities/shareholdings may sometimes avoid application of CFC rules Foreign Subsidiary Foreign Subsidiary 29

30 Thank you The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

31 any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 31

32 2014 Latin America Tax Summit