Latin AmericaTax Executives Workshop 9 May 2012 Mexico City, Mexico
Agenda • Novedades fiscales en Estados Unidos, Europa, Centro América, Brasil, Colombia y otros países • Actualización de temas fiscales internacionales • Auditorias y Controversia
EstadosUnidos 9 May 2012 Mexico City, Mexico
Circular 230 disclaimer • Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. • These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.
Agenda • US Legislative update • IRS thin capitalization challenges • US Treaty update • Planning considerations
Annual US federal budget process • Begins when President submits a budget request to Congress for the coming fiscal year (beginning 1 October) • Generally submitted in early February • Details Administration’s tax and spending policy recommendations and priorities • Congress holds hearings on President’s budget and develops its own “budget resolution,” a broad outline of spending limits and revenue targets • If passed, the budget resolution sets the limits and thresholds for spending and tax bills for the coming year • If not passed, the previous year’s resolution remains in effect
Camp proposal – Overview • On 26 October 2011 House Ways and Means Committee Chairman Dave Camp (R-MI) released a “discussion draft” of an international tax proposal that reflects a reduction in the corporate tax rate to 25% and a form of a territorial tax regime • The discussion draft was released as part of the Ways and Means Committee’s comprehensive tax reform effort and these elements are intended to be combined with other corporate and individual tax changes • The discussion draft includes full statutory language and a detailed technical explanation • The specific proposals included in the discussion draft generally are proposed to be effective for taxable years beginning after December 31, 2012
Camp proposal - 95% deduction for certain CFC dividends • The proposal generally would provide a 95% deduction for the foreign source portion of dividends received by a US corporation from its CFC • No credit or deduction would be allowed for taxes (including withholding taxes) attributable to dividends eligible for the 95% deduction • Foreign branches would be treated as CFCs for this purpose, and Treasury would be provided authority to provide similar treatment for partnerships or other flow-through entities • At the election of the taxpayer, similar treatment would be provided for “10/50 companies”
Camp proposal - 95% Deduction for certain CFC dividendsTransition rule deemed inclusion of accumulated foreign earnings • In the last taxable year ending before January 1, 2013, the subpart F income of a “specified 10-percent owned foreign corporation” would be increased by the corporation’s “accumulated deferred foreign income” determined as of the close of such taxable year • The inclusion of this subpart F income would be subject to an 85% deduction, for an effective tax rate of 5.25% • No credit or deduction allowed for foreign taxes paid (or deemed paid) with respect to deductible portion • Taxpayer could elect to pay tax liability in up to eight installments (including interest); certain events can accelerate payment of tax • The accumulated foreign income so included would be subject to the 95% DRD when distributed, which at a 25% tax rate would represent an additional tax of 1.25%
Camp proposal – Thin capitalization rule • Scope: Would apply to any US corporation that is a “US shareholder” with respect to any foreign corporation that is part of the same worldwide affiliated group that includes the US corporation • disallowance would apply if the US corporation fails to meet a relative leverage test and a percentage of adjusted taxable income test • If the domestic corporation fails the relative leverage test and the percentage of adjusted taxable income test, the domestic corporation’s interest deduction is reduced by the lesser of the amount computed under each test • Intra-group debt and equity disregarded • Disallowed interest expense carried forward
Camp proposal – Alternative options to prevent base erosion • Option 1: Excess income from intangible assets • Option 2: Current tax on low-taxed cross border foreign income • Option 3: Subpart F treatment combined with reduced taxation
Camp proposal What does this approach mean for US multinationals? What are the implications for foreign multinationals investing in the US?
Increased IRS focus on thin capitalization • IRS challenges to disallow debt (thin capitalization) are more prevalent • Important to establish appropriate debt level and have contemporaneous documentation regarding suitability of debt levels
Thin capitalization – What can taxpayers do? • Proper documentation and analysis • Ensure appropriate and contemporaneous documentation of their debt/equity position and a full credit capacity analysis that documents their ability to borrow from third parties on similar terms • Document business rationale for borrowing or new capital structure
Treaty updateHungary, Switzerland, Luxembourg Treaty • US Treaties/Protocols with Switzerland, Luxembourg and Hungary pending ratification in US Senate • New US Hungary Treaty will have modern LOB clause and triangular provision (neither are in current US/Hungary Treaty) • Treaty ratification status
Treaty updateUS/Chile Treaty • Signed 4 February 2010 (not entered in force) • Dividend withholding tax rate 5% for dividends paid to company with 10% vote. 15% otherwise. Special rule for pensions. • Interest • 4% for interest paid to bank, insurance company, certain equipment sales and certain special situations • 15% otherwise for 5 years • 10% after 5 years • Special provisions for interest associated with branches and back-to-back arrangements • Royalties • 2%/10% • Special sourcing rule • Limitation on Benefits (“LOB”) provisions • Fiscally transparent entity provision
US/Mexico Treaty • Has modern Limitation on Benefits (LOB) Provisions • Note: Different from other treaties relating to certain details in application • Withholding rates: • Dividends: • 5% for dividends paid to companies with 10% vote; 10% otherwise • 0% where corporate shareholder owns > 80% vote for 12-month holding period and meets certain treaty LOB provisions • 0% for certain pension/retirement plan recipients • Special provisions for Regulated Investment Company and Real Estate Investment Trusts • Interest • 4.9% - loans from banks and for interest from certain securities • 10% - on interest where 4.9% rate requirements are not met and interest is paid by banks or arises from certain credit sales relating to sale of machinery and equipment • 15% - all other • Certain limited exceptions to withholding tax on interest • Royalties – 10%
Leveraged Dividend Mexico Dividend a Note Mexico Dividend ROW US CO Group Finance Company USCo Loan
Hungarian Treaty Implications Expected result under old treaty • Interest payments eligible for 0% interest WHT under the old US – Hungary Treaty Expected results under new treaty • Where EU/NAFTA/EFTA is parent company • Even if new treaty Limitation on Benefits (LOB) provisions are met, the triangular provision is expected to result in 15% US WHT assuming low combined Hungary/branch taxation • Where other parent company is • Likely to have no treaty benefits (US 30% WHT) unless Hungary meets treaty requirements as headquarter company, engaged in active trade or business (ATB) test or otherwise receives Competent Authority discretionary relief. Public EU/NAFTA Hungary loan Third-country branch US Sub interest
Potential US Investment Structures Mexico Interest US Co Third country ATB Co meeting US treaty LOB Loan
Preferred Share Financing Mexico Group Company US Preferred Stock Common Stock Sale / repurchase agreement US 2
Europe 9 May 2012 Mexico City, Mexico
Introduction • Economic outlook in Europe is highly uncertain because of ongoing debt crisis • European countries are implementing severe budget cuts and are looking for ways to increase tax revenue without hurting competitiveness • EU — continued focus on enhancing cooperation on tax policy and tax harmonization
EU Developments – CCCTB Proposal EU 1 EU 2 EU 3 EU 4 • One consolidated tax base • Different tax rates • Sharing mechanism based on allocation key (10% for sales, 45% for labor, 45% for assets) • Common set of anti-abuse provisions • Reduced compliance • Reduced transfer pricing issues • Automatic loss offset • No tax costs on restructuring • Participation exemption & PE exemption on 1/3rd countries income subject to ETR condition (otherwise credit method applies) • Status • On 19 April 2012 the European Parliament approved an amended version of the draft CCCTB Directive of March 16, 2011. European Companies and European Cooperative Societies will have to apply the CCCTB system starting two years after the member states apply the CCCTB. After five years, all other companies (except for small and medium-sized enterprises, SMEs) would have to apply the CCCTB rules (SMEs could voluntarily opt in). If no unanimous decision is obtained for introduction, the enhanced cooperation procedure could apply (at least nine MSs need to vote in favor).
EU Commission Consultation Double Non-Taxation • The European Commission (the Commission) has commenced a fact-finding consultation to identify situations of ‘double non-taxation’. The consultation defines double non-taxation as cases of mismatch between the tax rules of two or more countries that leads to low/no taxation of certain activities, and is concerned with direct taxes. • The press release accompanying the consultation provides that double non-taxation, “deprives Member States of significant revenues and creates unfair competition between businesses in the Single Market”. • The consultation was issued on February 29, 2012 and asks for feedback on examples of transactions which lead to double non-taxation and for suggestions as to how they could be tackled. The consultation period will last until May 30, 2012, after which it is expected a summary of responses will be included within the intended Commission communication on good governance planned for Q4 2012. • The OECD has also recently published a report titled, “Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues”, which deals with double non-taxation. Although the OECD report is not directly linked to the Commission’s consultation, most EU Member States are members of the OECD and 9 of the 27 EU Member States contributed to the preparation of the OECD report. It is interesting to note that the two reports were issued around the same time. • Since direct taxation currently remains the competence of individual Member States and proposals by the Commission on tax matters require unanimous approval of all Member States, how and whether these proposals develop at all remains to be seen. It is very difficult at this stage to determine the extent to which any responses and the proposals may be progressed by the EU. Given the timing of the Commission consultation and OECD report, it appears double non taxation is currently an area of focus for a number of EU member states.
EU Withholding Tax Reclaims • Denkavit claims, Amurata claims, Aberdeen claims—different names for the same opportunity: Claims for the refund of WHT levied on dividends received by a EU shareholder on the grounds of EU law; the different names retrace the history of ECJ decisions. • The European Court of Justice (ECJ) issued several decisions (e.g. Denkavit of December 14, 2006, Amurta of November 8, 2007, Aberdeen Property Fininvest Alpha Oy of June 6, 2009) in cases where a non-resident investor suffered a higher tax burden on dividends received compared to comparable resident investor. • In essence the ECJ held that it is contrary to the free movement of capital under Article 56 EC (now Article 63 of the Lisbon Treaty), if EU member states impose a higher level of WHT on dividends paid to non-residents on their portfolio investments compared to distributions made to comparable resident shareholders, and where WHT credit cannot be utilized. The free movement of capital would also generally benefit to non EU investors. Opportunities of reclaims exist notably for Foreign pension funds and regulated collective investment vehicles. • EU Commission has brought infringement proceedings against almost all EU member states that have imposed dividend WHT and the above ECJ cases suggest that WHT refund claims may be successful (see also French update) Source State Residence State No taxation Shareholder S Shareholder R Dividends Holding Company WHT Dividends
Financing structuresCountry overview • Regular debt push down / leverage remains possible — for example • Czech Republic (subject to 4:1 debt to equity thin cap rules and substance doctrine) • France (subject to thin cap rules (both an arm’s length and thin cap limitation (1.5:1 debt to equity or 25% of net adjusted income before tax) alternatively the group ratio can be used) and business purpose test) • Germany (subject to 30% EBITDA limitation) • Italy (subject to 30% EBITDA limitation and business purpose test) • Poland (subject to 3:1 debt to equity thin cap rules) • Russian Federation (subject to 3:1 debt to equity thin cap rules and maximum deductible interest rate is 14.85% for Ruble and 6.6% for other loans) • UK (subject to thin cap rules (arm’s length test) and WWDC) • N.B. Consider transactions to increase the leverage capacity (by increasing equity /EBITDA)
Financing structuresTax efficient structures HoldCo with I/C receivable allocated to a (deemed) branch Foreign Low taxed entity interest free/hybrid loans Parent Parent Parent Holding Company Low Tax Holding Company I/C loan interest free / hybrid loan Holding Company Branch Subs I/C loan I/C loan Subs Subs
Financing structuresEffective use of interest withholding tax Profile • OpCo A has existing loans payable or needs new financing attracting interest withholding tax that effectively can not be credited at the FinCo level Anticipated benefits • OpCo B should be able to claim a full credit for interest withholding tax if the loan is routed through an appropriate location, for example Italy, UK and, under specific circumstances, Belgium Parent HoldCo • interest interest Finco OpCo B with tax capacity Belgium/Italy/UK OpCo A With debt and WHT that cannot be reduced to 0% loan loan
IP StructuresGeneral considerations • Location of group IP and related management can be critical to allocation of global supply chain profits under transfer pricing principles. • Traditional IP structures have focused on separation of IP ownership in a low-tax jurisdiction (or reverse hybrid) from a principal company subject to tax locally. • IP planning is typically combined with deferral strategies to result in reduced global ETR. • Numerous favorable regimes in European jurisdictions with varying degrees of complexity associated with structuring and ruling process • Special tax regimes are emerging designed to attract jobs through ownership and development of IP and R&D activities, e.g., patent/innovation boxes. • Focus on beneficial ownership and anti-abuse rules is increasing.
IP Structures Principal/patent box structure • Intended tax treatment: • Taxable profits of IPCo may be subject to a low effective tax rate under patent or innovation box regime. • Amortization could also be available in addition to or as an alternative to patent/innovation box. • IPCo may also be able to qualify for R&D tax credits. • OpCo is typically subject to tax on a margin commensurate with functions under OECD transfer pricing principles. • Considerations: • Structure aligns legal and economic ownership of IP with location of key business functions. • Specific supply chain structure depends on business requirements and features of patent/ innovation box regime. • US considerations including taxation of outbound transfer of IP. Parent HoldCo IPCo/ Principal Sales/ sublicenses Local OpCos Contract manufacturing agreement Sales Contract manufacturer Customers
IP Structures UK – migration of IP to foreign branch • Intended tax treatment: • There is no UK taxation on allocation of intangible assets to Foreign Branch. • Foreign Branch can potentially qualify for exemption from UK tax where anti-diversion requirements met. • Foreign Branch may be subsequently incorporated as a subsidiary of UK OpCo with gain on transfer of intangible assets deferred into shares. • Considerations: • Foreign Branch should be responsible for managing the intangible assets although possible for some business functionality to remain in the UK. • Genuine commercial transaction requirement must be met for post-2002 intangible assets. Parent Foreign Principal UK OpCo Allocation ofintangible assets Foreign Branch Intangibles and related business functions
Centro America • Actualización Tributaria en Centroamérica, Panamá y República Dominicana
Tendencias de Política Fiscal y Recaudación en la Región • Aprobación de normas de precios de transferencia • En vigencia: Panamá, El Salvador, República Dominicana, Honduras (2013) y Guatemala (2013) • En proceso: Costa Rica y Nicaragua • Equiparación de tarifas de impuestos de retención por pagos al exterior • Firma de tratados para evitar la doble imposición • Incremento en la cantidad y nivel de agresividad de auditorías fiscales • Enfoque en deducibilidad de gastos por pagos al exterior • Precios de transferencia • Presentación electrónica de declaraciones
Guatemala: Nueva Normativa en Materia Fiscal
Se aprobaron 2 reformas tributarias: Ley Anti-Evasión II (Decreto 4-2012 del Congreso) Publicada el 17 de febrero de 2012. Vigente desde el 25 de febrero de 2012 Ley de Actualización Tributaria (Decreto 10-2012 del Congreso. Publicada el 5 de marzo de 2012. Impuesto Sobre la Renta con vigencia desde el 1 de enero de 2013
Aspectos generales del Decreto 4-2012Ley Anti-Evasión II • Principales cambios: • Simulación Fiscal/Sustancia Sobre forma • Se sanciona la “simulación fiscal”, cuando se encubre el carácter jurídico del negocio que se declara, dándose apariencia de otro de distinta naturaleza o se declare falsamente lo que en realidad no se ha convenido. • Impuesto de Timbre • El pago de dividendos o utilidades está afecta al pago de timbres fiscales, indistintamente de su forma de pago e independientemente de que se emita documento o se realice la operación contable. • Facturas especiales y retenciones por pagos locales • Requisitos adicionales para deducción de gastos
Resumen ejecutivo de la Ley de Actualización TributariaDecreto 10-2012 del Congreso de la República • Régimen sobre las Utilidades de Actividades Lucrativas (25%) • Régimen Opcional Simplificado sobre Ingresos de Actividades Lucrativas (5% hasta US$3,850 mensuales y 7% sobre el excedente) Rentas de actividades lucrativas Rentas de capital, ganancias y pérdidas de capital • 5% sobre renta imponible hasta US$38,500 anuales • US$1,875 base + 7% sobre excedente de US$38,500 Rentas de trabajo Rentas de fuente guatemalteca Residentes • Rentas de capital inmobiliario • Rentas de capital mobiliario • Ganancias y pérdidas de capital • Rentas provenientes de loterías, rifas, sorteos, bingos o eventos similares • 10% en general • 5% para dividendos
Resumen ejecutivo de la Ley de Actualización TributariaDecreto 10-2012 del Congreso de la República Régimen sobre las Utilidades de Actividades Lucrativas (25%) Rentas de actividades lucrativas Con establecimiento permanente Régimen Opcional Simplificado sobre Ingresos de Actividades Lucrativas (5% hasta US$3,850 mil mensuales y 7% sobre el excedente) No Residentes Rentas de fuente guatemalteca • 3% noticias, películas, otras proyecciones. • 5% dividendos, pasajes, fletes, seguros y reaseguros, telefonía, energía eléctrica. • 10% intereses (excepto entidades bancarias con EP) • 15% regalías, sueldos, pagos a deportistas y artistas, honorarios, asesoramiento, comisiones. • 25% otras no especificadas Sin establecimiento permanente Normas de precios de transferencia en transacciones con partes vinculadas
Brazil • Tax Stimulus Package (enacted April 04th 2012) • Digital Inclusion Program • Broad Band Special Tax Regime (REPNBL-Redes) • REPORTO • Automotive Industry Innovation Incentive Program (INOVAR-AUTO) • Temporary Payroll Exemption for IT industries
Brazil • Most significant changes in the Transfer Pricing legislation • Minimum requirement for the application of the Brazilian uncontrolled price method (PIC). • The minimum statutory gross profit margin required when applying the Resale Price Method (PRL), for the import of goods, services or rights, range from 20% to 40% depending on the company’s industry. • FOB price as basis for the PRL calculation. • New transfer pricing method for import/export of commodities traded publicly. • Changes to the deductibility of interest.
Brazil • Frequently amendments in the Financial Tax (IOF) • Loans with maturity date greater than 5 years, subject to IOF at 6% over the principal amount of the loan, otherwise zero • Recent case law • Profits vs. dividends • Goodwill amortization – recent case law on in-house goodwill
Brazil – acquisition structuring US Corp Structure description • US Corp creates a new Brazilian entity (SPV) or uses an existing entity for the acquisition Potential benefits • Potential claim for the tax deduction of goodwill • Discussion of tax/accounting treatment of goodwillvis-à-vis IFRS changes • Potential debt push down on acquisition • Subject to certain limitations, including thin cap rules/ limitations • Merger of SPV into Target to trigger goodwill tax amortization USA Brazil SPV Downstream merger Target Consolidation regime