Driving change. Achieving results. Proactively adapting to new tax realities. 2016 Latin America Tax Summit, Rio de Janeiro 29 February to 2 March
Gaining Competitive Advantage Through the Use of FTZs and Advanced Customs Approaches in Latin America
Speakers Douglas Zuvich Tax Partner KPMG in USA Marco Banuelos Tax Partner KPMG in Dominican Republic Cesar Buenrostro Managing Director KPMG in Mexico Carlos Ottoni Director KPMG in Brasil 3
Agenda Trade in LATAM Today Export Promotion Programs Case Studies Final thoughts and Q & A 4
Trade in LATAM Today In 2015 Latin America and the Caribbean exports decreased by 14% Export decline began at the end of 2014 and worsened throughout 2015 Sharp drop in commodity prices and weakened demand from major trading partners -14.0% Exports Imports - 10.3% United States China 2015 Prices Soybean, sugar, and coffee Oil, metals and minerals Exports to Major Partners -7% -14% European Union 20% - 25% 50% -18% Source: Inter-American Development Bank s Latin America and Caribbean Trade Trend Estimates 2016 5
Export Promotion Programs Export promotion policies are not new to the region however there is renewed impetus to use them for increased exports and diversification of export sectors Fiscal Incentives are often aimed at reducing or eliminating import duties for raw materials used in the manufacture of exported goods and the streamlining of logistics processes Fiscal Incentives Special Credit Packages Direct Support to Exporting Firms 6
Export Promotion Programs Cont. Particular programs and regulations vary by country but some common aspects apply Programs used for exports in the region include: Free Trade Zones IMMEX RECOF Drawback Customs Bonded Warehouses Export Processing Zones 1. Taxes for import of raw materials are eliminated or reduced 2. Products are manufactured at designated areas or via prior approval 3. Finished products are exported 7
Free Trade Zones A Free Trade Zone (FTZ) is an area within which goods may be landed, handled, manufactured, reconfigured, and re-exported without having to pay customs duties. Only when the goods are moved out of the FTZ and into the customs territory of the country in which the zone is located do the goods become subject to customs duties. Important FTZs in Latin America Colón Free Trade Zone (Panama) Free Economic Zone of Manaus (Brazil) 8
Free Trade Zones Cont. Duty Deferral Import duties for imports shipped to an FTZ are deferred until the time those products leave the FTZ and enter countries commerce. Duty Exemption Import duties are exempted for imports entering an FTZ and later exported without ever entering countries commerce or destroyed within the FTZ. Duty Reduction (Inverted Tariff) Importers who import raw materials and conduct manufacturing operations in an FTZ may elect to pay duties for imported raw material based on the duty rate of the manufactured item (when the duty rate for the item is lower than the raw material duty rate) at the time the manufactured product leaves the zone and enters countries commerce. 9
Recof RECOF - Brazil Created in 1997 Special Regime of Industrial Warehouse under Automated System Control Allows importing and purchasing on the local market of goods with tax suspension, which after undergoing industrialization operations, may be destined either for export or the domestic market May be used concurrently with drawback. Offers a one-year tax suspension, which can be extended to one year more This regime can be applied for several segments of industry 10
Recof Cont. 2015 National Export Plan Expansion of Recof RECOF-SPED is a new initiative (January 27, 2016) which requires a digital book keeping system which reduces the cost of system maintenance Minumum sales and export requirements have also been reduced Goal to increase companies utilizing Recof from the current 20 to 1,000. 11
IMMEX IMMEX - Mexico Created in 2006 as a result of the merger of the Maquiladora and PITEX (Temporary Import Programs to Produce Export Articles) programs. Differences between IMMEX companies and Maquiladoras All maquiladoras are IMMEX companies but not all IMMEX companies operate as maquiladoras Typically involves a Mexican manufacturer that is wholly-owned by a foreign parent, which allows the Mexican company to import inputs needed for duty free production activities, conducting manufacturing on site in Mexico, and then exporting the goods abroad without paying import duties. Applicants must commit to minimum annual sales abroad, (500,000 USD) or a minimum amount of exports (10%) as a percentage of total invoices. 12
IMMEX Cont. 2014 Tax Amendment increased IMMEX benefits Additional deduction for income tax purposes equivalent to 47% of the exempted employee payments Companies applying this benefit must keep specific accounting records distinguishing maquiladora revenues from other type of activities Maquiladoras can not carry out sales in Mexico Temporary imports are subject to Value Added Tax (VAT) but the VAT Certification provides a credit equivalent to the amount of the import VAT. (no VAT payment). 13
IMMEX Cont. 2014 Tax Amendment increased IMMEX benefits (cont.) When sales from a foreign entity to a n IMMEX company takes place and the goods are imported under IMMEX, VAT applies for the sales operation, nevertheless,, the withholding and payment of this VAT by IMMEX companies will be credited on the same month, thus triggering a zero cash effect, as long as the goods sold are part of a supply chain for goods deemed for export. 14
Duty Drawback The refund of import duties on imported merchandise that are then reexported or destroyed. Program created to reduce production costs of manufactured products that are subsequently exported. May be used for operations that involve manufacturing, assembly, alteration, transformation, processing, or reprocessing. 15
General challenges May require application and review process for entering the program Inventory control requirements Minimum import and export requirements Compliance with VAT Certification obligations Dealing with tax authorities 16
The role of technology Implementing and maintaining FTZ s and Special Programs can be burdensome. Technology plays a key role in increasing efficiency and reduce risk by: Helping maintain compliance with the various complex rules Increasing visibility and supply chain efficiency Better integration with company data, brokers and carriers. 17
Case Studies 18
Case Study 1 Using FTZs Company A produces and sells food and drinks products in Latin America with manufacturing plants in Europe, US, Mexico, Puerto Rico, and the Dominican Republic. Company A is looking to expand its Dominican Republic facility and relocate from Puerto Rico to the Dominican Republic. In the Dominican Republic where it currently produces, certain foods are not subject to VAT and thus any input VAT paid on raw materials, packaging etc. cannot be claimed as a credit. 19
Case Study 1 w/o a FTZ Raw Materials No VAT Raw Materials 18% VAT Company A Finished Good No VAT
Case Study 1 w/ a FTZ Raw Materials No VAT Raw Materials No VAT Company A (FTZ) Finished Good No VAT
Case Study 2 Restriction of sales (maquiladoras) Former Scheme Temporary import 1 4 Sales Sales in Mexico 6 3 Export of goods No longer possible, due to the new maquila definition Industrial process 2 5 Change of regime Physical delivery 22
Case Study 2 Restriction of sales (maquiladoras) Applied Scheme Temporary import 1 6 Sale of goods to be sold in Mexico 0% VAT Virtual export + Temporary import 3 7 5 Change of import regime Export of goods Industrial process 2 Physical delivery 4 Services process invoiced to the Foreign parent Company Physical delivery Sales in Mexico 8 23
Case Study 3 VAT optimization (sales in MX) Former Scheme Temporary import 1 Exports Sale of goods 4b Trading Company 3 withholds 16% Virtual export (V5) + VAT Permanent import 5 4a Sales in Mexico Industrial process 2 Physical delivery Physical delivery 24
Case Study 3 VAT optimization (sales in MX) Applied Scheme Temporary import 1 6 Virtual export + Temporary import 3 Sale of goods to be sold in Mexico 0% VAT 8 5 Export of goods Sales in Mexico Industrial process 2 Physical delivery 4 Services process invoiced to the Foreign parent Company Physical delivery 7 Change of regime 25
Case Study 4 RECOF Company A (an industry in automotive segment) imports goods in order to manufacture its products that are going to be sold in internal and external markets; Company A also imports goods to attend the aftermarket; Due Brazilian's s taxes rules, several taxes are applied over the import process executed by Company A. In some cases, those taxes can increase in almost 100% the goods value; The taxes added to the imported goods are exported, embedded with the Company A s product, causing negative impact in its competitiveness; Company A imports more than US$ 1,5 billion and exports almost US$ 1,7 billion; 26
Case Study 4 RECOF (cont.) After applying Recof, Company A will get all taxes suspended in import process; Company A will also have additional saving in terms of cash flow, mainly, because Recof allows it to import goods with suspended and only nationalizing when selling ;them to internal market; All suspended taxes will exempted when products are exported; Using Recof, Company A will optimize around 5% of costs regarding imported goods. 27
Final thoughts and Q & A 28
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