In view of the globalisation process and considering the expanding integration of national economies and the advent of the digital economy, opportunities have arisen for multinational enterprises (MNEs) to minimise their tax burden by structuring their business in jurisdictions where they are more favourably taxed.
Therefore, nations have recognised the need to review existing tax rules to effectively prevent double taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it. These practices, deemed as aggressive tax planning, are addressed as base erosion and profit shifting (BEPS).
The G20 entrusted the OECD to develop an action plan to address BEPS issues (Action Plan). On July 19 2013, the OECD published the Action Plan that provides countries with domestic and international instruments that will better align the right to tax with economic activity. In general, the Action Plan (i) identifies actions needed to address BEPS; (ii) sets deadlines to implement these actions; and (iii) identifies the resources needed and the methodology to implement these actions.
Although this work on BEPS has not yet been concluded, new laws have already passed in several countries around the world inspired by the Action Plan's objectives, including in countries which are not members of the OECD. In Latin America, tax authorities in several countries have already publicly stated that new laws and procedures will be enforced in the near future in a manner which is consistent with the OECD's work. To date, significant developments can be seen in Mexico and Brazil, where impacting legislation has been enacted, clearly inspired by the BEPS agenda.
New BEPS-inspired legislation in Mexico includes a focus on the enhancement of transparency of information for tax purposes, a concern that is common among the tax authorities of almost all major world economies. Such changes in Mexico are similar to those recently put in place in Brazil.
Developments in Mexico
In 2015, in line with BEPS developments, the Mexican Tax Administration Service (SAT) derogated the Criterion 97/2013/SAT that allowed entities residing in preferential tax regimes to pay taxes on a net income basis upon the transfer of Mexican shares, provided that the corresponding income was not derived by a Mexican resident through such legal entity. At that time, this Criterion appeared to have left the door open for foreign legal entities or vehicles located in low tax jurisdictions, with no Mexican owners, to still benefit from the optional net taxation treatment applicable upon the transfer of Mexican shares.
The derogation of this Criterion beginning in FY15 was in line with the Mexican authorities' BEPS-related position to punish transactions carried out with taxpayers incorporated in preferential tax regimes. As such, by derogating this Criterion, these taxpayers were denied the possibility to apply the optional net taxation treatment upon the transfer of Mexican shares, regardless of whether the beneficial owner holding the foreign vehicle (directly or indirectly) was a Mexican resident.
Mexican tax authorities have also enacted legislation consistent with Action 6 of the BEPS Action Plan, the main objective of which is to prevent the granting of treaty benefits under inappropriate circumstances, mainly to avoid the generation of double non-taxation.
In this regard, as of 2014 Mexico requires a 'sworn declaration' to be issued by non-resident related parties certifying that a double juridical taxation exists on a given item of Mexican source income received from its Mexican counterpart, in order to be entitled to treaty benefits on said income. It should be noted that an administrative tax rule was issued on December 30 2013 (amended on December 18 2014 to include an additional hypothesis) by the SAT to relieve the non-resident in some specific cases from having to issue the sworn declaration, such as in the case where the taxpayer is a resident of a country with a territorial tax system with respect to income tax.
With the issuance of this rule, the BEPS-inspired requirement set forth in cases of related-party transactions became less severe and broadened the opportunity for foreign related parties to apply treaty benefits without the need to certify that double juridical taxation exists in a given transaction.
The most recent measure taken by the Mexican tax authorities was in January 2014, when Form 76 ('Information about relevant transactions') was issued, inspired by Action 13 of the Action Plan. That action aims at providing guidance on transfer pricing documentation and country-by-country reporting (CbCR). Form 76 is also consistent with BEPS Action 5 mentioned above, as well as with Action 12, which has the objective of developing recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the experience of the increasing number of countries that have such rules.
In this context, since 2014, Mexican taxpayers have been required to file an informative tax return depicting multiple types of activities or transactions they have undertaken that need to be disclosed to the tax authorities. The idea behind this is for the tax authorities to have more readily available information about what taxpayers are doing – information that will be used by the tax authorities to find out if aggressive planning schemes are behind those transactions reported by the taxpayers. The filing of Form 76 is due within 30 days of the date the transaction was carried out. Notwithstanding the 30-day period established in the Tax Code, different due dates are provided in regulations issued by the tax authorities, in such a way that the taxpayers are likely to have a term longer than the 30-day period to file the form.
In terms of what has to be reported, derivative financial transactions, transactions that trigger transfer pricing adjustments, direct or indirect changes of ownership in Mexican corporations and the tax residence of the shareholders, corporate restructuring and corporate reorganisations, changes of tax residence, transfers of intangibles or financial assets, transfers of goods whereby the seller reserves rights over the good transferred, transfers of assets triggered by mergers or spin-offs, transactions carried out with residents of countries with territorial systems of taxation in which a double tax treaty has been applied, financial transactions where the payment of the interest is pushed out for more than one year, payments of interest payable after one year or more, transfers of tax losses upon spin-offs, reductions of tax losses upon a merger, and capital reimbursements or dividend payments with resources coming from loans are among the qualifying activities.
Interestingly, Brazil is following a similar path of requiring the disclosure of information regarding transactions which presumably have a tax planning inclination, and the Brazilian tax authorities claim that such new legislation follows the example of comparable countries like Mexico. However, initial experiences with the Brazilian incarnation of this transparency measure indicate that it is a much more stringent and severe regime than that which exists in Mexico.
Developments in Brazil
Similar to Form 76 in Mexico, the President of Brazil enacted Provisional Measure No. 685/2015 (MP 685/2015) in July 2015. This measure establishes the obligation for taxpayers to report to the Federal Revenue Department (RFB) information regarding any acts or transactions performed in the previous calendar year which may have eliminated, reduced or deferred corporate taxation (DPLAT). The provision of this information has a deadline of September 30 of each year.
Although Brazil is not a member of the OECD, the country participates in the discussions held by the OECD as an observer and tends to follow the international trends on taxation. In this context, the explanations disclosed by the Brazilian presidency on the motivation of the new legislation expressly stated that the obligation at hand is inspired by the BEPS Action Plan.
MP 685/2015 provides that information regarding the following situations shall be reported:
- Acts and transactions performed without relevant non-tax reasons (that is, without relevant business purpose);
- Acts and transactions that adopt unusual structures, indirect legal transactions or that contain provisions that may distort the effects of typical contracts; or
- Specific acts or legal transactions to be described by the RFB in normative rulings.
In case the RFB has a disagreement about the tax impacts attributed to the situations reported through DPLAT, the taxpayer will be required to collect the corresponding additional taxes plus interest for late payment. The tax authorities in Brazil have formally expressed their views that this new legislation is beneficial to the taxpayer, to the extent that it creates an environment not previously existing in Brazil where the taxpayers and the tax authorities can exchange information on certain transactions and factual scenarios and in case the tax authorities disagree with the tax position taken by the taxpayer, the latter has a chance to not be subject to the aggravated penalty applicable in case of tax evasion and fraud.
However, according to the current language of the MP, if the DPLAT is not submitted or is declared ineffective (for example in a case where it contains false information, which can be a subjective analysis), the tax authorities will presume the taxpayer has committed tax evasion or fraud and, thus, the taxes due will be increased by interest for late payment and a fine of 150%.
In a divergence from Mexico, in Brazil the taxpayer must interpret the vague expressions used in the legislation (such as "relevant non-tax reasons", "unusual structure" , and "indirect legal transactions") in order to conclude whether a given act or transaction should be reported. The transactions to be disclosed by the RFB in normative rulings will be mandatorily reported, however such list will not be exhaustive – that is, other transactions may be subject to DPLAT if they are deemed to lack business reasons or to be unusual.
The deadline for the conversion of the MP into law is November 22 2015. The Provisional Measure may or may not be converted into law. In addition, the MP can still be amended. Members of the Brazilian Parliament have already proposed more than 200 amendments to the text, and several organisations representing taxpayers are engaging in discussions with respect to the issue, in such a way that there are chances of the current language of the MP being amended.
In view of all the above, it appears that an increasing concern is developing in Latin America with respect to transparency of information for tax purposes, especially regarding aggressive tax planning.
It is hard to predict the practical implications derived from the recent legislation enacted in Mexico and in Brazil. However, taxpayers are likely to start facing more in-depth tax audits focusing more closely on the substance of the matter than its form. Tax authorities of these countries will probably now seek more comprehensive justification as to the business reasons behind the transactions carried out by taxpayers.
It is uncertain what the level of scrutiny will be and what level of detail tax authorities will apply upon conducting tax audits within the context of BEPS. We consider that today, more than ever, it is critical to prepare detailed documentation and keep it readily available for the tax authorities to review, including, in many circumstances, supporting documentation produced in foreign countries. Tax audits which in Latin America are still very much home country-focused tend to extrapolate the own-country facts and documentation to reach facts and documents cross-border. Across Latin America it is clear to see that exchange of information between countries, including between countries which have not executed double tax treaties (but which have exchange of information agreements in place) is becoming more frequent as transparency increases more generally.
Ultimately, similar regulations to the ones enacted in Mexico and in Brazil are likely to be implemented in other Latin American countries because transparency for tax purposes is definitely an international trend and the OECD is working hard to enhance it towards OECD members and non-members. Furthermore, two of the largest economies in the region have already taken the first step, in such a way that other countries are likely to follow the lead.
Trench, Rossi e Watanabe Advogados, in cooperation with Baker & McKenzie
Rua Arq. Olavo Redig de Campos, 105 – 31st floor
Simone Dias Musa is a tax partner in the São Paulo office of Trench, Rossi & Watanabe. She concentrates on corporate income tax matters, tax planning for inbound investments, taxation of reorganisations, mergers and acquisitions. She also provides skillful advice on international tax planning, including outbound investments of Brazilian multinationals, use of tax treaties, transfer pricing and financing transactions.
Frequently recognised for her practical advice, technical knowledge and creativity, she has received numerous awards for her professional achievements.
Baker & McKenzie Abogados
Tel: +52 (55) 5279-2924
Jorge Narváez-Hasfura is a tax partner in the Mexico City office of Baker & McKenzie. He focuses on the legal aspects of corporate income tax, transfer pricing, international tax planning and corporate reorganisations. He is proficient in tax rulings, tax treaties, personal income tax matters, estate planning, tax and customs litigation, as well as value-added tax. He also advises clients on issues involving special taxes on products and services, single rate tax and customs duties.
He has authored numerous publications on subjects related to his field and is also a frequent speaker at key seminars and conferences, including those organised by the International Fiscal Association.
Trench, Rossi e Watanabe Advogados, in cooperation with Baker & McKenzie
Rua Arq. Olavo Redig de Campos, 105 – 31st floor
Daniel Zugman is a tax associate in the São Paulo office of Trench, Rossi & Watanabe. His practice concentrates on direct taxes, including tax planning, corporate reorganisations and cross-border investments.
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