Navigating tax developments in Latin America
Ciro Meza Martinez, Martín J. Barreiro, Rolando
Ramírez-Gastón, Clarissa Machado
Miras
July 25, 2022
Alberto Maturana, Ciro Meza, Martin
Barreiro and Rolando Ramírez-Gastón of Baker McKenzie and Clarissa Machado of
Trench Rossi Watanabe provide tax updates from Argentina, Brazil, Chile,
Colombia, Peru, Mexico and Venezuela.
In response to the
increased economic, social and political issues caused by the COVID-19
pandemic, Latin American jurisdictions have experienced innumerous changes to
their tax framework in 2020 and 2021, which include increased tax audits and
tax burdens, in contrast to the strategic tax incentives granted. But the
changes did not stop there.
Some jurisdictions continue to experience broad tax
reforms and others continue to discuss proposals of different tax changes in
what tends to be a long-term process for the sustainable development of the
region. This article provides an overview of relevant tax updates in Argentina,
Brazil, Chile, Colombia, Peru, Mexico and Venezuela.
Corporate
income taxes and other related matters
CIT rate
increase and dividends taxation in Argentina and Colombia
Colombia and Argentina have recently increased
their corporate income tax (CIT) rates and imposed taxation on dividends
distributions.
In Colombia, after recurrent social protests, the
government presented a tax reform bill, which was approved by Congress in
September 2021. As a consequence, as of fiscal year 2022, the general CIT rate
is 35% for national companies and similar entities, permanent establishments
and foreign companies or non-resident legal entities required to file the
annual income tax return.
Colombia also imposes a tax on distribution of
dividends.
Dividends paid to non-resident entities or
individuals paid out of profits taxed at the corporate level are subject to
dividend tax at a 10% rate (unless a double tax treaty applies). Dividends
distributed to non-resident entities or individuals paid out of untaxed profits
at the corporate level are subject to the general income tax rate (35%). The
net dividend will be subject to an additional 10% withholding tax.
Dividends distributed to local entities paid out of
profits taxed at the corporate level are subject to dividends tax at a 7.5%
rate. If profits were not taxed at the company level, the dividends will be
subject to the general CIT rate (35%) and, then, to an additional 7.5%
withholding tax. This withholding tax is not applicable when a control
situation or business group is registered.
Dividends paid to resident individuals paid out
from profits taxed at the company level are taxed at progressive rates ranging
from 0% to 10%.
Argentina’s income tax law was changed in June 2021
and new CIT rates were introduced for companies. The rates vary according to
the companies’ accumulated net profit, as follows:
- Up to AR$ 5
million: 25%
- Between AR$ 5 million and AR$ 50 million: 30%
- More than AR$
50 million: 35%
Dividends and profits in cash or in kind
distributed by companies in Argentina are taxed at a rate of 7%. Permanent
establishments are also subject to the 25% to 35% tax rates and the additional
tax rate of 7% at the time of remitting the dividends/profits to their home
office.
‘Envisioned’
CIT reform in Brazil
The Brazilian National Congress and the government
are discussing various proposals of broad tax reforms in Brazil. Bill of Law
2337/2021 is focused on CITs.
Among other changes, the proposal creates
withholding income tax (probably at a 15% rate) on payment of dividends. In
addition, it reduces the tax rates of the CIT (from 25 % to 18%) and the social
contribution on net profits (from 9% to 8%). At the time of writing (July 2022)
the final approval has not been announced.
Considering different political issues and the
presidential elections in 2022, it is unlikely that this proposal will be
discussed further and approved this year.
Non-taxation
of state tax benefits in Brazil
Based on the legislation in force in Brazil, state
tax incentives related to the ICMS should not be subject to taxation by CIT nor
PIS and COFINS because they are deemed subvention for investments and/or in
view of the offense to the federative pact. Some favourable decisions have been
issued on this matter, but there are still controversies under discussion,
considering different interpretations of the necessary requirements for the
application of this tax treatment.
Capital gains
tax increase in Chile
Chile is among the jurisdictions in Latin America
that made several changes to their tax legislation as of 2020. As a result of
these changes, capital gains on the sale of widely traded shares acquired and
sold in the Chilean stock market will be subject to a 10% income tax as of 1
July 2022, provided certain requisites are satisfied. Prior to this legal
change, these capital gains were tax exempt.
Income tax
treatment of silent partnerships in Peru
A controversial tax amendment was recently made in
Peru relating to the silent-partnership agreement, one of the most common
associative contracts in the country. According to this amendment, income
distributed to the silent partner will be considered dividend and for the
non-resident silent partners, the dividend will be considered Peruvian-sourced
income, subject to income tax in Peru of 5%.
The Peruvian Tax Court went
against common business practice on the silent-partnership agreement.
The Peruvian Tax Court had not adopted a final
position regarding the theme until April 2021, when it published Resolution
02398-11-2021 (of mandatory application). The Court’s position went against
common business practice. Now, the new rules formalize the Peruvian Tax Court’s
position.
Deductibility
of expenses in Peru and Mexico
In Peru, new rules were enacted to mitigate
corruption and informality.
The first one improves the rules in relation to
using the Peruvian banking system. The most relevant change was the reduction
of the threshold to be observed for taxpayers to route payments through the
Peruvian banking system. The reduction was from PEN3,500 ($1,000) to PEN2,000
($500).
Additionally, when the payment is made to a third
party, as agreed by the payment recipient, the Peruvian tax authority should be
notified before the payment. Failing to comply with this formal obligation,
would make the payment not deductible for tax purposes. It has been expressly
established in the Peruvian Income Tax Law that bribery payments are not income
tax-deductible.
Other important changes related to deductibility of
expenses occurred in Mexico. As of the 2022 tax reform, deductions for the
impairment of assets will be subject to filing a notice. In addition,
deductions for the practical impossibility of collecting receivables will be
subject to the definitive resolution of the competent authority (e.g. courts).
Expansion of
anti-avoidance rules in Mexico
Mexico introduced a general anti avoidance Rule
(GAAR) for the first time in 2020, when the concept of ‘business reason’ was
included in the Federal Tax Code. The corresponding provision establishes that
in general a given transaction has a business reason when the tax benefit is
lower than the financial benefit expected in the transaction.
In this context, more recently, the Mexican tax
reform for 2022 determined that major corporate restructuring procedures that
would conceptually be income tax-free, including mergers and spin-offs, require
evidencing the existence of a business reason. Otherwise, the tax authority
will be able to determine sale and other taxable effects. In addition,
interests derived from intercompany loans that lack a business reason would be
deemed as dividends (back-to-back rules).
Thin capitalisation rules have also experienced
recent changes in Mexico. The rules used to contain an exception for financial
entities. However, from 2022, multi-purpose financial entities (SOFOM) will not
be subject to this exception if they operate mainly among related parties.
Tax authorities have considered that SOFOM entities
are subject to wider restrictions to apply the preferential 4.9% withholding
income tax on interests paid abroad, especially when the lender is a related
party.
VAT and other
indirect tax matters
Increase of
VAT in Mexico and Chile
As of 2022, the use or enjoyment of tangible goods
in Mexico, regardless of where the material delivery of the goods is made or
where the corresponding lease agreement is executed, will trigger VAT, not only
for its importation into Mexico but also for the corresponding use taking into
consideration the rental fee as the taxable base.
In Chile, from June 1 2020 a VAT of 19% is being
levied on digital services delivered by foreign resident service suppliers,
when performed or used in Chilean territory.
Recent law changes in Chile
strengthened alternative dispute resolution mechanisms.
In addition, as a result of the continued tax
reforms in Chile remunerations paid for all services will generally be subject
to 19% VAT as of 2023, except for certain explicitly exempted services such as
health services and professional services provided by individuals and certain
professional firms.
Prior to this rule, all professional, technical and
consulting services were exempt from VAT. Accordingly, entities will need to
review their legal structure, to define how they will continue to provide
services.
Tax
incentives in Colombia, Argentina and Venezuela
In 2021 the Colombian government enacted Law 2,099
recognising new unconventional sources of renewable energy, such as green
hydrogen, blue hydrogen and geothermal energy. This recognition allows the
energies to access industry tax incentives, which are mainly related to income
tax, VAT and customs duties.
Also in 2021 Argentina extended the tax and customs
benefits set forth by Law No. 19,640 until December 31 2038 for the Province of
Tierra del Fuego, Antarctica and the South Atlantic Islands (‘regime’).
In general, the tax incentives refer to the Tierra
del Fuego free zone and include exemptions from federal taxes and customs
benefits. An additional reimbursement has been established for incremental
exports to third countries of goods originating in the Province of Tierra Del
Fuego, Antarctica and Islas Del Atlántico Sur equivalent to 5% of the FOB
value.
In addition, the Argentinian National Executive
Branch approved the new regulatory framework for biofuels in August 2021 (Law
No. 27,640) which will be valid from August 5 2021 until at least December 31
2030.
Biofuels will be exempted from the liquid fuel tax
and the carbon dioxide tax, in all of their stages of production, distribution
and commercialisation. The exemptions will operate until the end of the regime
as long as the main raw materials used in the respective production processes
are of national origin.
In Venezuela, as of December 2020 the National
Executive issued various decrees establishing exemptions from the payment of
VAT, customs duties and customs service fees for various categories of imported
goods and economic sectors. In May 2022 the effects of the benefits were
extended until 31 December 2022 by Decree No. 4,683.
‘Envisioned’
indirect tax reform in Brazil
There are currently three major projects regarding
indirect tax reforms being discussed in two different legislative houses in
Brazil. PEC 100/2019 and PEC 45/2019 refer to the changes and extinction of
several indirect taxes (e.g. IPI, PIS, COFINS, ICMS, ISS) and the creation of a
tax on goods and services (IBS”), of a contribution on good and services (CBS)
and of the selective tax (IS).
A fourth broad tax reform proposal is PEC 07/2020
which is being discussed in the Chamber of Deputies. In summary, the intention
of PEC 07/2020 is to radically change the national tax system and make it
equivalent to the US tax system. The proposal removes various taxes in force
such as ICMS, IPI, PIS, Cofins, ISS, IPVA, ITCMD, ITR, IPTU, CSLL and social
contributions and replaces them by taxes that would be levied on the three main
taxable bases: consumption, property and income.
Considering that these proposals in general involve
municipal, state and federal taxes (in addition to political issues and the
presidential elections this year) it is probable that no approval will take
place in 2022.
Tax
litigation and audits
Colombia,
Chile, Brazil and Mexico
In January 2022, the Colombian Congress approved a
reform to the code that regulates the judicial phase of tax litigation. One of
the main changes was the amount of claims for the designation of jurisdiction.
Now most of the controversies will be analysed by local judges and not by the
higher courts with more experience in tax matters. Congress also approved a
bill, which originated during the COVID-19 pandemic implementing virtual
procedures in the judicial sphere, such as in hearings and filings of briefs
and motions.
In Chile, at the administrative stage, a new law
introduced an administrative action to be filed before the IRS’s National
Director. This action aims to modify a resolution issued in the administrative
reconsideration process, when it is against the law and/or the administrative
instructions (e.g. the IRS’ rulings). The law also reinforced the list of
taxpayers’ rights and introduced a new action to protect them.
At the court stage, the law introduced a new action
against the Tax Court decision (formal cassation). In addition, it declared
that the burden of proof falls on both the taxpayer and the IRS.
Likewise, recent law changes in Chile strengthened
new alternative dispute resolution mechanisms, such as the conciliation
settlement (to be proposed and approved by the Tax Court in a conciliation
hearing) and the direct settlement approved by the IRS’ National Director.
In Brazil, the casting vote on the Brazilian
Administrative Court of Tax Appeals (CARF) was extinguished by Law No.
13.988/20 which establishes that, in cases of tied trials, the dispute must be
resolved favourably to taxpayers. The new regulation directly impacts the judgment
of cases involving complex tax legislation (including transfer pricing (TP)
matters and goodwill amortisation).
Furthermore, in Mexico, from the 2022 tax reform, a
taxpayer’s self-correction of omitted contributions can be relieved through
off-setting positive tax balances, subject to certain formal requirements and
to the filing of a request before the tax audit is concluded.
In addition, seizing assets for the collection of
due tax credits can be performed through the taxpayer’s electronic tax inbox and
failing to demonstrate the capability (assets, infrastructure, personnel, etc.)
to develop the activities supported in tax vouchers allows one to presume
simulated activities (simulated activities could lead to criminal
consequences).
Highlights of
other relevant updates from 2022
In Chile, the newly elected government – took
office in March 2022 – announced an upcoming structural tax reform as part of a
“new, long-term fiscal deal”. But perhaps the biggest of all possible changes
in the tax scenario is the new constitution proposal – prepared by a
Constitutional Convention – that Chileans will vote for or against in a
referendum set for September 4 2022.
However, other relevant changes were implemented in
tax legislation as of 2022 and as of 2023. For instance, as of 2022, the
amounts received by life insurance beneficiaries are subject to gift and
inheritance tax, at a progressive rate between 0% and 25%.
As of 2023, the tax benefits on certain real estate
property acquired before 2010 will no longer be valid and the real estate tax
rate applicable to property worth more than approximately $600,000 in total
will be increased (the marginal tax rate applicable above the $600,000
threshold will increase from 0.275% to 0.425%).
In case of Brazil, as part of its accession to the
OECD, the tax on financial transactions (‘IOF-exchange’) rates are scheduled to
be reduced in the coming years. There was an immediate reduction to zero of the
rate of the IOF-exchange applicable to short-term foreign loan operations, as
well as a gradual reduction for other transactions specified in Decree No.
10,997/22.
From a TP standpoint, in April 2022 the OECD and
the Brazilian Federal Revenue (RFB) gave a presentation on the development of
the project to potentially align the Brazilian TP rules with the OECD
standards.
The OECD and RFB presented the series of rules that
will guide the new Brazilian TP system, which include:
- General principle-based guidance based on the
arm’s-length principle in line with OECD standards;
- Introduction of the OECD-recognised TP
methods;
- A comparability analysis becoming a
cornerstone of the new system;
- Continued reliance on spontaneous
self-administered adjustments;
- Definition of the concept of intangibles for
TP purposes;
- Recognition of the importance of intra-group
services through specific provisions;
- Introduction of comprehensive guidance on CCAs
– considerations for both: development CCAs and services CCAs;
- Guidance to address the TP considerations
resulting from business restructuring;
- Guidance on applying the arm’s-length
principle to deal with the challenges arising from various types of
financial transactions; and
- TP documentation that follows international
best practices.
As next steps, the OECD and RFB will collect
feedback from the market players (e.g. companies and others) that are directly
affected by the envisioned changes. A public event with this purpose was
organized by RFB and the Inter-American Development Bank (IDB) on June 29 2022.
After the public audiences, draft legislation will be presented to the National
Congress, which will deliberate on the matter. The RFB and the OECD ‘forecast’
is that the bill will be ready for deliberation between 2022 and 2023.
In Argentina, the ‘Integrated System for monitoring
foreign payments of services – SIMPES’, was created on January 7 2022, by means
of which it is necessary to apply for the previous authorisation of the Federal
Tax Administration to make payments to foreign providers of services via wire
transfers.
Finally, Venezuela approved a reform to the Large
Financial Transactions Tax Law (LFTT Law) that entered into force on March 28
2022. The reform introduces important changes regarding taxable transactions,
applicable tax rates, exemptions and exonerations.
Simultaneously, the National Executive issued
Presidential Decree No. 4,647, which exonerates certain transactions from the
payment of the large financial transactions tax (LFTT). These transactions
include: (i) debits connected to the assignment of Venezuelan securities; (ii)
the settlement of the principal or interest thereof; and (iii) securities
traded through the Stock Exchange in currencies other than legal tender or
through cryptoassets or cryptocurrencies other than those issued by the
Bolivarian Republic of Venezuela (‘Exoneration Decree’).
Further to the reform, the National Integrated
Service of Customs and Tax Administration (SENIAT) designated special taxpayers
as collecting agents of the LFTT. The guidelines entered into force on March 28
2022.
On April 20 2022, the SENIAT readjusted the tax
unit (TU) value from VES 0.02 to VES 0.40, an increase of 2,000%. The TU
adjustment will only be applicable for assessing national taxes administered
and collected by the SENIAT. For taxes paid annually, such as income tax and
high-net-worth tax, the applicable TU will be the one in force at the end of
the fiscal year. For taxes that are paid in periods other than annually, such
as VAT, the applicable TU will be the one in force at the beginning of the
fiscal year.
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