Tuesday, July 28, 2009

Corporate Tax Issues to be Considered by Multinationals When Investing in Peru

Excerpt from Practical Latin American Tax Strategies by John A. Salerno and Julian Vasquez (PricewaterhouseCoopers LLP)

As with most South American countries, Peru currently maintains a worldwide system of income taxation with respect to business income that is earned in corporate solution -- e.g., via a Peruvian subsidiary of a multinational company. However, Peruvian branches or other permanent establishments (“PE’s”) of foreign companies or investors are taxed only on their Peruvian source income.(i.e., a territorial approach).

Peruvian source income derived by Peruvian branches, and worldwide income derived by Peruvian companies/subsidiaries, are generally subject to Peruvian corporate income tax. Such business income, which is subject to the so-called “Third Category” income tax (hereinafter referred to as the “Third Category Tax” or “CIT”), is taxed at a 30% rate on a net basis (i.e., gross income less allowable deductions). The distribution of net after-tax income is subject to a 4.1% dividend withholding tax, thereby subjecting the income to a 32.87% effective tax rate in the hands of foreign investors.

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Tuesday, July 7, 2009

U.S. Government Continues to Increase Focus on Transfer Pricing with Increased Controversy Expected

Excerpt from Practical US/International Tax Strategies by Bob Ackerman, David J. Canale, Karen Kirwan, Carlos Mallo, Mike Patton, Leigh Anne Pasak and Peyton Robinson (Ernst & Young LLP)

Transfer pricing will undoubtedly become a more significant focus of attention for the Internal Revenue Service (IRS) in their examinations of multinational corporations (MNCs). In a statement regarding international tax reform on May 4, 2009, President Obama announced that the IRS will “hire nearly 800 more IRS agents” to increase international tax enforcement efforts.

Concurrent with his remarks, the White House issued a press release commenting on the President’s proposal, indicating that the budget would provide the IRS with funds “to hire new agents, economists, lawyers, and specialists, increasing the IRS’s ability to crack down on offshore tax avoidance, often done through transfer pricing and financial products.” Despite the Administration’s recent announcements reflecting greater scrutiny of international tax issues, nevertheless, there may still be a public perception that the President’s plan will not cover transfer pricing. On May 5, 2009, the New York Times published an article citing different sources indicating that transfer pricing was the “one tax loophole open” in the plan. This perception—wholly without merit—may incite Congress to demand that the Treasury Department and the IRS enforce compliance with transfer pricing even more aggressively.

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Saturday, July 4, 2009

Chili: VAT on Services Considered Export Transactions

Excerpt from Practical Latin American Tax Strategies by Miguel A. Zamora (Cruzat , Ortúzar & Mackenna Ltda.)

Services qualified as export by the Chilean Custom Service are exempt from VAT and are also entitled to recover from the Treasury the VAT borne in rendering those services.

Former regulations by Customs stated that a case by case qualification was necessary until in 2007 the Customs authority issued Resolution No. 2511 of 2007 under which it issued a list of services qualified as export transactions. According to this regulation, the same requirements are applicable but with a listed service any taxpayer performing it may enjoy the tax benefits associated with such qualification. Services not included in the list may be included by special request but unlike what took place before, its inclusion would benefit all taxpayers performing the same service. This regulation left to the tax authority the ability to audit the use of this benefit.

In 2008, the tax authority issued a Rev. Ruling stating that Resolucion 2511 requested that the services were VAT taxable in order to enjoy the VAT recovery benefit. This Rev. Ruling indirectly creates a new requirement in Customs regulation and may generate the odd situation in which a taxpayer performs a listed service but may not be in a position to recover the VAT borne to perform such export activity.

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