Latin American Planning Opportunities under Tax Treaties

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


Latin America has historically not been regarded as a region with an extensive network of income tax treaties. During the 1960s only four income tax treaties were in effect, two of which were with Sweden. With Brazil leading the way, the 1970s and 1980s saw the conclusion of several additional tax treaties, but it was not until recent years that the negotiation and conclusion of tax treaties with Latin American nations began to flourish.

During the 1990s and early 2000s, rapid economic growth and political reform in Latin America’s largest economies fueled a wave of investment by multinational companies based in Europe and the United States. As economies grew and foreign investment restrictions were eased, funds began to flow freely into Latin American markets. The discernible increase in investment spurred the negotiation and conclusion of a number of tax treaties with nations both within and outside the region.

Click here to view a summary of current income tax treaties in force and selected treaties that are either pending, under negotiation or with negotiations pending (free):

France and the United States Sign a Protocol Amending the Income Tax Treaty

Excerpt from Practical US/International Tax Strategies by Gauthier Blanluet, Andrew P. Solomon, Willard B. Taylor, Aditi Banerjee and Nicolas de Boynes (Sullivan & Cromwell LLP)

On January 13, 2009, France and the United States signed a protocol (the “Protocol”) amending the income tax treaty signed by the two countries in 1994, as amended by a 2004 protocol (the “Existing Treaty”).

The Protocol generally eliminates withholding tax on dividends paid to shareholders holding at least 80 percent of the distributing company and generally eliminates the branch profits tax. It also eliminates withholding on royalties for the use of intangible property. The Protocol provides for mandatory arbitration of certain cases that are not resolved by the competent authorities within a specified period of time, clarifies the treatment of certain fiscally transparent and pass-through entities, imposes stricter requirements for certain companies to qualify for the benefits of the treaty, and updates the rules for the exchange of taxpayer information between the tax authorities of each country. These changes will align the Existing Treaty more closely with more recent U.S. tax treaties.

Read More on these Treaty Amendments

Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by Jonathan A. Sambur, Kenneth Klein, Patricia Anne Rexford, John T. Hildy and Rafic H. Barrage (Mayer Brown)


On December 24, 2008, the US Treasury and the IRS released final, temporary and proposed regulations relating to the application of the subpart F foreign base company sales income (FBCSI) rules to contract manufacturing arrangements.

These regulations finalized certain of the proposed regulations relating to this subject that were originally released on February 27, 2008. Also issued were temporary and proposed regulations that modify other of the February 27 proposed regulations. The text of the newly proposed regulations is the same as the corresponding temporary regulations.

Read More on These Regulations (free)

IRS Issues Revised Cost Sharing Regulations

Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by David G. Noren, Paul Dau, Roderick K. Donnelly and John G. Ryan (McDermott Will & Emery)

Taxpayers that have relied on cost sharing arrangements under the 1996 regulations must consider whether and how such reliance will be viable in the future under the new regulations.

On December 31, 2008, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued temporary regulations making fundamental changes to the 1996 rules governing qualified cost sharing arrangements (CSAs). These changes are relevant not only to taxpayers that rely on CSAs, but also to taxpayers that have never implemented a CSA, as Treasury and the IRS have provided for application of the principles of the new regulations to intangible development arrangements in general.

The new regulations are based on regulations proposed in 2005, which have been the subject of considerable discussion and controversy. The new regulations are generally effective as of January 5, 2009, subject to limited transition relief for certain preexisting CSAs. The new regulations also were issued in proposed form and will be the subject of a public hearing scheduled for April 21, 2009.

Read More on How Buy-in Payments Will Be Affected

Recent Developments in Mexican Rulings and Administrative Decisions

Exerpt from September/October 2008 Issue of Practical Mexican Tax Strategies by Terri Grosselin and Santiago Chacon (Ernst & Young)

Recent actions by the Mexican Ministry of Economy and the tax administration indicate a change in policy with respect to companies operating under the popular Maquiladora regime. Although the tax benefits for companies operating in the regime are being carried forward, it appears compliance with the terms of the program will be more strictly monitored.

In 2006, Mexico’s Maquiladora program was combined with other export regimes as part of the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industries (“IMMEX Decree”). The Ministry of Economy is the Mexican agency in charge of granting and monitoring permits to IMMEX companies. So far during 2008, this agency, in close cooperation with the Mexican tax authorities, published a list of a total of 1,342 companies with an IMMEX program that were not compliant with one or more of the requirements to operate under the IMMEX regime for 2006 and 2007. The implication for entities included in this publication, is the possible suspension of certain rights granted under the program with the risk that the IMMEX permit will be cancelled altogether, unless the companies rectify identified deficiencies in a short time frame.

Read More on the impact of non-compliance with IMMEX regulations

IRS Provides Temporary Relief under Subpart F in Response to the Liquidity Crisis

Excerpt from Practical US/International Tax Strategies by Edward Tanenbaum and Diana Wessells (Alston & Bird LLP)

Treasury and the IRS issued Notice 2008-91, which provides temporary and limited relief to a particular aspect of Section 956, in connection with the current liquidity crisis. Under Sections 951 and 956, a U.S. shareholder of a controlled foreign corporation (CFC) is subject to tax on the amount equal to the lesser of (1) the U.S. shareholder’s pro rata share of the average of the amounts of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of the taxable year, less the amount of earnings and profits previously included in the U.S. shareholder’s gross income, or (2) the U.S. shareholder’s pro rata share of the applicable earnings of the CFC. The effect of these provisions is to treat the U.S. shareholders of the CFC as receiving the amount invested in U.S. property as a constructive dividend. Section 956 is consistent with the other provisions of subpart F insofar as it is intended to prevent the tax-free repatriation of earnings.

Read More on Relief Provided by Notice 2008-91 (free)

China’s New Thin Capitalization Rules: Specific Debt/Equity Ratios Established

Excerpt from Practical China Tax and Finance Strategies by Peter Guang Chen (Deloitte Tax LLP, New York City)

Article 46 of China’s new Enterprise Income Tax Law (EITL) provides that a Chinese enterprise’s ability to deduct interest payments on borrowings from related parties is subject to a “prescribed standard.” However, the EITL, which became effective January 1, 2008, did not address what this “prescribed standard” would be. Without a clear answer on an acceptable debt-to-equity ratio in China, many financing and tax planning plans had to be put on hold, particularly for those multinational corporate groups doing cross-border intercompany financing of their subsidiary operations in China.

This important issue was addressed recently in Circular 121 issued jointly by the Ministry of Finance and the State Administration of Taxation.

Read More on Key Issues of Circular 121 (free)

Financial Bailout Package Contains International Tax Provisions

Excerpt from Practical US/International Tax Strategies by Lilo Hester, Ken Wood, Karen Jacobs, Eric Oman, Staci A. Scott and Carlos Probus (Ernst & Young LLP)

Earlier this month, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (Division A), the Energy Improvement and Extension Act of 2008 (Division B), and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (Division C) (H.R.1424), herein collectively referred to as the Act. The Act was passed by the Senate on October 1, 2008, and by the House of Representatives on October 3, 2008. The Act has been widely publicized as the “bailout bill” because it provides the U.S. government with authority to purchase up to $700 billion in “troubled,” illiquid assets owned by various financial institutions.

International tax provisions of the Act include:

• Elimination of the distinction between foreign oil and gas extraction income (FOGEI) and foreign oil related income (FORI) and the combination of FOGEI and FORI into one foreign oil basket, applying the existing FOGEI limitation.

• Extension for an additional tax year (through December 31, 2009) of the controlled foreign corporation (CFC) look-through provision of Section 954(c)(6).

• Extension for an additional tax year (through December 31, 2009) of the exception to treatment as foreign personal holding company income for income derived in the active conduct of a banking, finance, or similar business.

• Extension for an additional tax year (through December 31, 2009) of the exception to treatment of certain insurance income as subpart F income.

Read more on international tax provisions with respect to individuals

IRS Enhances Opportunity for U.S. Multinationals to Access Cash from Controlled Foreign Corporations

Excerpt from Practical US/International Tax Strategies by Douglas S. Stransky, Lewis J. Greenwald, Ameek Ashok Ponda and Eric J. Fuselier (Sullivan & Worcester)

On October 3, 2008, the U.S. Internal Revenue Service (IRS) issued Notice 2008-91, which expands the ability of a controlled foreign corporation (CFC) to make short-term loans to its U.S. parent to fund operations without creating an income inclusion for U.S. federal income tax purposes. This Notice applies for a CFC’s first two taxable years ending after October 3, 2008. Thus, for a CFC with a calendar taxable year, the Notice applies for calendar years 2008 and 2009. On October 16, 2008, the IRS issued a correction to provide that Notice 2008-91 will not apply to the taxable year of a CFC beginning after December 31, 2009.

Current Law
Generally, under Internal Revenue Code (Code) section 956, a loan made from a CFC to its U.S. parent is considered to be an investment in U.S. property because the CFC holds an “obligation” of the U.S. parent. Under this Code section, the average amount of the CFC’s investment in U.S. property held at the end of each quarter of the taxable year is potentially treated as a “deemed dividend” to the U.S. parent and, thus, taxable on the U.S. parent’s federal income tax return.
In some circumstances, however, the U.S. parent can have a loan outstanding from its CFC without triggering any income inclusion. Under Notice 88-108, for example, even if a CFC makes a loan to its U.S. parent that extends over a quarter end, there should be no income inclusion provided that this loan is outstanding less than 30 days.

But if the CFC were to hold any number of obligations that would (without regard to the 30-day exception) constitute U.S. property for aggregate periods totaling 60 or more days during a taxable year, this 30-day exception would not apply.

Notice 2008-91
In Notice 2008-91, the IRS has supplemented Notice 88- 108 so that a loan from a CFC to its U.S. parent would only constitute an obligation that results in an income inclusion if the loan is held for more than 60 days from the time it is incurred. Notice 2008-91 further provides that if a CFC holds obligations that would (without regard to the 60-day exception) constitute U.S. property for aggregate periods totaling 180 or more days during a taxable year, then this 60-day exception would not apply. Thus, Notice 2008-91 effectively extends the periods within which a taxpayer can hold an obligation without triggering the application of Code section 956. A CFC can apply Notice 2008-91 or Notice 88-108, but not both.

Read Related Articles

Proposed Section 108 Regulations May Result in Disparate Treatment of S Corporation Shareholders

Excerpt from Practical US/Domestic Tax Strategies by Jeanne Sullivan (KPMG LLP)

Recently, Treasury published proposed regulations under section 108 on the reduction of tax attributes for S corporations (73 FR 45656-01). The proposed regulations provide guidance on the manner in which an S corporation applies the rules of section 108(b) in a year in which the S corporation has discharge of indebtedness income (COD income) that is excluded from gross income under section 108(a). In particular, the proposed regulations address situations in which S corporation losses and deductions that are treated as net operating losses (NOLs) for purposes of section 108 exceed the amount of the S corporation’s excluded COD income (Excess Deemed NOL). The proposed regulations provide rules whereby the Excess Deemed NOLs are apportioned among the S corporation’s shareholders after tax attribute reduction. As we shall see, the rules may result in potentially disparate treatment of the S corporation shareholders.

Subchapter S generally provides simplified pass-through treatment for corporations that meet its eligibility requirements. To avoid the complexities that can result from the variations in economic rights associated with partnerships, subchapter S requires that each shareholder be allocated a pro rata share of an S corporation’s items of income (including tax-exempt income), loss, deduction and credit as well as a pro rata share of nonseparately computed income and loss (section 1366(a)) and that the S corporation issue only a single class of stock (section 1361(b)(1)(D)). Nevertheless, the S corporation is a separate entity that also retains certain corporate characteristics and the rules of section 108 are applied at the corporate entity level.

Read More: Discharge of Indebtedness and Section 108