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

IRS Won't Challenge Credits against US Income Tax for Payments of Mexico's New Flat Tax

by Scott Studebaker (WorldTrade Executive, Inc.)


Mexico’s new flat tax, the IETU, will go into effect on January 1, 2008. The new tax has caused anxiety among U.S. investors over the tax implications. Investors and tax professionals have worried that the new tax might not qualify as an income tax under Article 24 of the U.S.-Mexico tax treaty. This, in turn, would mean that U.S. investors would not be able to receive a credit against their U.S. income taxes for the IETU paid in Mexico—a classic case of double taxation.

But the IRS has stepped in with a welcome, if provisional, clarification. On December 10, the IRS issued Notice 2008-3, in which it said that it, too, had not determined whether the IETU qualified as an income tax under Article 24(1) of the Treaty, and that the agency was going to study the new tax in order to make a determination.


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Many Unresolved Issues Remain Despite New Canada-US Tax Protocol

On September 21 representatives from the U.S. and Canada signed the 5th Protocol to the Canada-U.S. Income Tax Convention. These amendments to the Canada-US. Tax Treaty will have a major impact on the use of hybrid entities. On the one hand the changes will allow greater use of US LLCs by permitting US residents to receive treaty benefits on Canadian source income. However, the rules will adversely affect many hybrid unlimited liability companies used by US firms to invest or carry on business in Canada.

The new changes will also permit Canada to take a more aggressive approach to combat treaty shopping. Determining whether a particular US person is entitled to treaty benefits will be significantly more complex than in the past.

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