Latin American Reorganization: Be Aware of Tax Issues

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

Multinationals considering the reorganization of their group legal entity or operational structures in Latin America need to be cognizant of the potential income tax implications related to the sale or transfer of shares or other equity interests in their affiliates.

While most companies are keenly aware of the tax implications relating to the sale of a direct or indirect subsidiary to a third party, many do not realize that an intra-group transfer of shares in connection with, for example, the formation of a regional holding company structure or post-deal integration planning, may also trigger tax in certain Latin American countries. Absent tax treaty protection the tax cost of the transfer of shares can be quite high.

In some cases the relevant taxable “transfer” is not so evident, and may occur, for example, as a result of the liquidation of a nonresident shareholder of a Latin American company. Domestic law or tax treaty-based strategies often exist to minimize or eliminate the local country income tax burden on capital gains. Thus, particularly in the case of transactions with related parties, slight modifications of a transactional structure may, in certain cases, yield a more favorable tax results.

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Brazilian Exporters Surprised by Change of Position on Inflation Correction

Excerpt from Practical Latin American Tax Strategies
published by WorldTrade Executive

Brazilian exporting firms have been surprised by the sudden reversal of a longstanding policy correcting tax credits for inflation.

For years, exporters have been able to use credits from their “presumed” excise tax (IPI) to compensate for payments of Brazil’s PIS-Cofins corporate social security taxes. This compensation was created as a fiscal incentive for exporters. Rather than exempt exporters from PIS/Cofins, which would have required legislation, the government adopted an administrative approach, granting a credit for what companies would have paid in excise taxes, the reason why it is referred to as the “presumed IPI.”

In practice, exporters have commonly allowed these credits to accumulate over several years before claiming them. Since these credits often date back six or seven years, the tax department has permitted companies to adjust their credits for inflation, using the country’s base interest rate.

But starting last December, the tax department has rejected this practice. In a series of decisions in February and March of this year, the department’s Superior Chamber of Fiscal Appeals, the last administrative recourse for companies, has supported this new policy, turning down the appeals of exporting firms.

More: How does this affect compensation for exporters?>

Transfer Pricing in Latin America

In a recent discussion, PricewaterhouseCoopers' John Salerno joined the editors of Practical Latin American Tax Strategies to talk with ADM's Robert Frable and Sony's Marc Lewis about their tax operations in Latin America, their new procedures for dealing with FIN 48 and transfer pricing procedures. Following is and excerpt from the interview with Marc Lewis, the second in a series of excerpts from that exclusive interview:

Strategies: You had mentioned earlier some of the benefits of taking a regional approach to managing the Latin American tax burden. Is there anything specifically that you have been doing within your company to regionalize the approach to tax planning?

Lewis: Transfer pricing is probably a good way to illustrate a regional approach. It is important for a company to be consistent about its transfer pricing both regionally and globally, and I think it is important for many reasons. A regional approach is a good approach for transfer pricing because it forces you to look at things on a 50,000 foot level in the Americas, for instance. There are requirements now in pretty much every country, and you ask yourself, if I’ve got limited resources in my department, how am I going to tackle this kind of project.

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Managing Tax Risk in Latin America

In a recent discussion, PricewaterhouseCoopers' John Salerno joined the editors of Tax Strategies to talk with ADM's Robert Frable and Sony's Marc Lewis about their tax operations in Latin America, their new procedures for dealing with FIN 48, and transfer pricing procedures. This excerpt from that interview takes a look at their strategies surrounding FIN 48:

Strategies: What has your overall experience been in managing the implementation of FIN 48 in the region?

Lewis: It is hard to say that the Latin American region presents something that is unique within FIN 48 implementation versus some of the other regions but I think one thing to consider is how much reliance a taxpayer can place on the availability of Competent Authority or APA relief. To a certain extent, it is dependent upon how active the Competent Authority is between different countries and how active the APA programs are between different countries. Latin America, Mexico and probably some others have pretty robust activities. However, in other countries, it is just building up, so I do not think you are at the same level as you see in some of the countries in Europe, Japan and other places where you can rely upon a Competent Authority or APAs in the assessment of uncertain tax positions.

Frable: FIN 48 was an interesting experience with this being the implementation year. I think everybody was surprised at how much time they ended up spending on the implementation. It took away from your day-today responsibilities. I think it is going to get better; tax departments, controllers and even outside auditors had to work through a learning curve.

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Managing Transfer Pricing Risk in Brazil

Brazil, the ninth largest economy in the world, has developed a unique set of transfer pricing rules that differ from the Organization for Economic Cooperation and Development (OECD) based approach adopted by most countries around the world. As result of this uniqueness, multinational corporations (MNCs) face a number of transfer pricing difficulties which may range from an increased burden on compliance activities to double taxation. Further, Brazilhas signed several Tax Information Exchange Agreements with foreign tax authorities (including one recently with the U.S.) that increase the exposure of MNCs to transfer pricing issues.

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