The Concise Tax Guide Overview on Taxes in Latin America

Transcription

1 The Concise Tax Guide Overview on Taxes in Latin America 2012

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3 Table of Contents Argentina... 1 Brazil... 9 Chile Colombia Mexico Venezuela... 41

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5 Argentina: Overview on Taxes Argentina Basic Taxation System Levels First level of taxation Second level of taxation Third level of taxation Principles enforced Transfer Pricing Rules Tax Treaty Network Tax-free Reorganizations Federal National, Provincial, Municipal National Taxes: Income Tax, Value-Added Tax, Tax on Debits and Credits on bank accounts and other financial transactions, Tax on Minimum Presumed Income, Personal Assets Tax, Excise Tax, and Tax on Liquid Fuels Provincial Taxes: Gross Receipts Tax, Stamp Tax, Real Estate Tax, and Tax on Estates and on the Gratuitous Transfer of Assets (the last tax only levied by the province of Buenos Aires) Municipal Taxes: Depending on each Municipality. In general, fees for Municipal Services Substance over form Arms -length transactions Economic reality Follows OECD Different models: OECD, United Nations, others Available, subject to certain requisites First Level Taxes on Profits Income Tax Source of Income Rules Individuals living in Argentina, Corporations, Limited Liability Companies ( LLC ), Branches and Permanent Establishments of foreign entities located in Argentina ( PEFE ) Global Source Foreign Beneficiaries Argentine Source Corporations, LLCs, Branches and other PEFEs Tax Rate Dividend, Revenues distributed by LLC, Branches or PEFEs 35%. Not subject to taxation, unless the dividends or revenues distributed exceed the taxable income of the paying entity. In such case, the Baker & McKenzie 1

6 amount paid exceeding such taxable income will be subject to a 35% withholding tax. Individuals Tax rate Progressive rate from 9% to 35% Foreign Beneficiaries Payments made to foreign beneficiaries are subject to the following income tax withholding applicable on the gross amounts paid, except as noted with an asterisk. Amounts paid to foreign shipping companies for noncontainerized transportation services Amounts paid to foreign shipping companies for containerized transportation services 3.5% 7% Amounts paid to foreign reinsurance companies 3.5% Contracts that comply with the requirements of the technology transfer law. 1) Amounts paid for technical assistance, engineering or consulting services not available in Argentina in the judgment of the Argentine Transfer of Technology Authority ( INPI ) 21% 2) Amounts paid for assignment of rights or licenses for use of patents or others not contemplated in 1) above. 28% Interest on foreign 2 Baker & McKenzie

7 Argentina: Overview on Taxes credits. a) The borrower is an Argentine financial entity. b) The borrower is an Argentine individual or legal entity and the lender is a banking or financial entity, subject to supervision by a specific banking supervising authority, which is not incorporated in a low-tax jurisdiction or is incorporated in a country which has executed a treaty to exchange information with Argentina. In addition, banking secrecy, exchange secrecy or the like should not be opposed to a request for information by the respective tax authorities. c) The borrower is an Argentine legal entity (excluding banking and financial entities) or individuals and the lender does not fulfill the requirements mentioned in b) above % 15.05% 35% Salaries, fees, other 24.5% Baker & McKenzie 3

8 compensations of expatriates transitory in Argentina for no more than six months in the taxable year. Lease of personal property by foreign lessor. Rent paid on Argentine real estate property.(*) Transfer for consideration of assets located or economically used in Argentina, belonging to entities registered or located abroad.(*) Any other payment of Argentine-source income made to a foreign beneficiary not contemplated above. 14% 21% % Depreciation Fixed assets may be depreciated on a straight-line basis. Buildings: 2% per annum. Other assets: expected useful life. Capital gains 1. The sale of shares in an Argentine corporation by a foreign corporate seller is not taxable if the seller is not registered in a low-tax jurisdiction. It is debatable whether the sale of shares in an Argentine corporation by a foreign corporate seller is taxable if the seller is registered in a low-tax jurisdiction. Even if it is taxable, the Income Tax Law has not established a mechanism to pay the corresponding tax if the buyer is not an Argentine party. The sale of shares in an Argentine corporation by a foreign individual seller is not taxable. 2. The sale of quotas of an Argentine LLC by a foreign corporate seller is taxable but the Income Tax Law has not established a mechanism to pay the corresponding tax if the buyer is not an Argentine party. * Taxpayers may opt to pay taxes based on actual net income, in which case, a 35% income tax withholding shall apply on such actual net income and not on the gross amount paid. 4 Baker & McKenzie

9 Argentina: Overview on Taxes The sale of quotas of an Argentine LLC by a foreign corporate seller is taxable if the buyer is an Argentine party. It is debatable whether the sale of quotas of an Argentine LLC is taxable when the seller is a foreign individual. 3. The sale of shares in an Argentine corporation or quotas of an Argentine LLC by an Argentine corporate seller is taxable. The sale of shares in an Argentine corporation or quotas of an Argentine LLC by an Argentine individual seller that is not habitually engaged in this kind of trade is not taxable. The sale of shares in an Argentine non-listed corporation or quotas of an Argentine LLC by an Argentine individual seller that is habitually engaged in this kind of trade is taxable. It is debatable whether the sale of shares in an Argentine listed corporation is taxable when the seller is habitually engaged in this kind of trade. Consolidation of balance sheets for tax purposes Not available for corporations and LLCs Carry Forward and Carry Back Carry Forward: 5 years Carry Back: Not available Taxes on assets Personal Assets Tax Taxation rules Individuals and estates with domicile in Argentina Taxable assets located in Argentina and abroad Individuals and estates with no domicile in Argentina Certain taxable assets located in Argentina Domicile criteria for tax purposes Tax rates Expatriates are considered with domicile in Argentina inter-alia, if they have resided in Argentina for more than five years General 0.5%/ 0.75% / 1% / 1.25% For certain specific cases 2.5% In case of corporate vehicles organized in Argentina, nonresident equity holders (individuals, estates and legal entities) and resident equity holders (individuals and estates) are subject to a 0.5% Personal Assets Tax on the proportional net worth value of their equity. This tax should be determined and paid by the Argentine corporate vehicle. Similar rules apply for an Argentine nonfinancial trust. Baker & McKenzie 5

10 Tax on Minimum Presumed Income Taxation rules Tax basis Legal entities, enterprises, certain individuals, certain trusts, certain common investment funds and PEFEs in all cases incorporated or located in Argentina. General Assets located in Argentina and abroad. Reduced Banking, financial entities and Insurance Companies incorporated in Argentina will only compute 20% of their assets as taxable basis. Certain consignees of agricultural products will only compute 40% of their assets as taxable basis. Tax exemptions Tax credit The cost of assets subject to depreciation (excluding automobiles) in the fiscal year of their acquisition and in the following one. The cost of construction of civil works and their improvements, in the fiscal year of their construction and in the following one. Income tax paid in a given fiscal year will be credited against the tax liability arising from this tax for the same fiscal year. If there is no income tax to pay, the tax payment arising from this tax may be carried forward against the income tax liability corresponding to the following 10 fiscal years. Taxes on consumption Tax rate 1% Value-Added Tax ( VAT ) (i) Excise Tax (ii) Tax on Liquid Fuels Taxation rules Tax rate Taxation rules Offset rules Tax rates Tax debit and credit levied on the sale of goods located within the country or placed within the country; the rendering of most services, leases or works within the country; the rendering of most services or works outside Argentina, when such services are economically used in Argentina; and imports of goods. 21% on the net price of goods, services or works. In certain cases, the tax rate is reduced from 21% to 10.5% and in others it is increased to 27%. Levied on the first transfer of certain taxable goods. Also applies on the import of such taxable goods. Tax paid at the time of the import can be offset with the tax payable upon the subsequent first transfer of such goods in Argentina. Depending on the goods. 6 Baker & McKenzie

11 Argentina: Overview on Taxes Tax on debits and credits on bank accounts and other Taxation rules This tax applies to (i) all credits and debits made in any bank account, (ii) certain transactions carried out through financial entities, and (iii) flow of funds under certain conditions. transactions Tax rates The general tax rate is 0.6% for credits and 0.6% for debits. In some cases the tax rate is 1.2%. There are special tax rates for certain transactions. Second Level Gross Receipts Tax Stamp Tax Real Estate Tax Tax on Estates and on the Gratuitous Transfer of Assets (levied only by the province of Buenos Aires) Third Level Municipal Fees Taxation rules Tax rates Taxation rules Tax rates Taxation rules Tax rates Taxation rules Tax rates Taxation rules Tax rates Tax debit and credit levied on the sale of goods located within the country or placed within the country; the rendering of most services, leases or works within the country; the rendering of most services or works outside Argentina, when such services are economically used in Argentina; and imports of goods. Depending on each activity and jurisdiction, ranging, in general, between 1 % and 6%. Applies on the value of taxable documents implementing the creation, amendment and/or extinction of rights and/or obligations. Depending on each document and jurisdiction, ranging in general, between 1 % and 4%. Applies to the fiscal value of the real estate Depending on each jurisdiction Applies on any wealth increase obtained as a consequence of any gratuitous transfer, comprising or affecting goods/properties located in the province of Buenos Aires and/or for the benefits of individuals or corporations domiciled therein. Depending on the degree of the family relationship and the amount transferred, ranging from 4% to %. Applies on the provision of Municipal services and activities conducted by tax payers. Depending on each activity and jurisdiction. Baker & McKenzie 7

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13 Brazil: Overview on Taxes Brazil 1 Basic Taxation System Entities responsible for the enforceability of Tax Law Decentralized on three levels: The Federal Government, States and Municipalities have different levels of jurisdiction. Federal, State and Municipal Governments Main Taxes Federal Taxes Import Duty - II; Export Tax - IE; Individual and Corporate Income Tax IRPF and IRPJ; Federal Excise Tax - IPI; Financial Transactions Tax - IOF; Rural Land Tax - ITR; Social Contribution on Net Income - CSLL; Social Contribution on Gross Revenues - PIS and COFINS; Social Contribution on Imports PIS-Import and COFINS-Import; Social Security Contribution; Contribution for Interventions in the Economic Domain CIDE State Taxes Tax on Transfer of Assets by Donation or Causa-Mortis - ITCMD; State Value-Added Tax - ICMS; Vehicle Tax IPVA Municipal Taxes Municipal Real Estate Property Tax - IPTU; Real Estate Transfer Tax - ITBI; Services Tax ISS; Municipal fees for public services in general. Federal Taxes Foreign Trade Taxes Import Duty (II) Taxation rules Tax rate Tax is levied at customs clearance on imported goods and applied on the CIF value. Depending on the products tariff classification, under the Harmonized System of Classification of Goods as adopted under Brazilian legislation; 2 as a rule, an ad valorem rate shall apply. Export Tax (IE) Taxation rules Tax is levied on the exportation of certain goods and generally applied on FOB value to a limited list of products (e.g., tobacco products, leather). 1 This is intended for general information purposes only and may not be used in lieu of specific legal advice. This summarizes the most significant taxes that affect businesses in Brazil. 2 The International Convention on Harmonized System of Goods Designation and Codification was introduced into the Brazilian Legal System through Decree No. 97,409/88. As of 1 January 2007, Resolution of the Foreign Trade Chamber ( CAMEX ) No. 43/06 amended the tariff classification applicable to certain products. Baker & McKenzie 9

14 Tax rate Depends on the tax classification code under the Harmonized System of Classification of Goods. Currently, the export tax applies to a very limited category of products as the government adopts a policy of fomenting exportation from Brazil. The maximum rate may be increased up to 150%. 3 Federal Excise Tax (IPI) IPI Taxation rules Offset rules Tax rate Tax is levied at each production stage of manufactured products and on the importation of manufactured products. Tax is generally applied on the transaction value and does not apply to products to be exported. Tax paid upon the acquisition or importation of raw materials and intermediary products, parts, components and packing materials can be offset on subsequent transactions. The net effect is a tax on the value-added at each stage of production. Tax rates vary according to the essentiality of the product. Luxury goods have a higher rate (e.g., for perfumes, the current maximum rate is 42%). Products are classified in accordance with the Harmonized System of Classification of Goods. Tax on Financial Transactions IOF (Financial Transaction Tax) General rules This tax applies to specific transactions related to credit, exchange, insurance, securities, and transactions with gold when considered by law as a financial asset or exchange instrument (gold destined to the Financial Market). This tax is utilized as an instrument of financial policy. Tax on Credit Transactions (IOF-Credit) IOF-Credit Taxation rules Tax rate The tax is levied on credit transactions performed by financial institutions and on cash loans between non-financial companies, or a non-financial company and individuals. The tax rates vary according to the credit transaction. The tax rate for loan transactions per day is % for loans granted to legal entities and to individuals. Moreover, the legislation introduced an additional rate of 0.38% levied over the principal amount of the loan regardless of the term for repayment. 3 Law No. 9,716/98 authorizes the Executive Branch to increase or reduce the rate of the export tax. Nonetheless, the increase cannot exceed five times the 30% rate established in the mentioned legislation (i.e., 150%). 10 Baker & McKenzie

15 Brazil: Overview on Taxes Tax on Exchange Transactions (IOF-Exchange) IOF-Exchange Taxation rules The tax can be levied on the exchange transaction value. This can be imposed on exchange transactions effected to remit payments abroad for services, including technical assistance fees and royalties for the use of trademarks and patents. Tax rate The rate can be settled by the government up to 25%. Nonetheless, the tax rate of the IOF levied on exchange transactions is reduced to 0.38% in most cases, but few exceptions may apply (as provided by Decree No. 7,412 of Dec. 30, 2010), for example: (i) payment of dividends and interest on equity to foreign investors is subject to a 0% rate; (ii) the investment made by nonresidents in the Brazilian financial and capital markets is subject to a general rate of 6% (some specific transactions performed after Dec. 1 st, 2011 are subject to a zero rate); (iii) exchange transactions made by credit card companies in order to cover expenses made by their clients abroad are subject to the IOF at a tax rate of 6.38%; (iv) foreign loans contracted with a term for repayment of up to 720 days are subject to a 6% rate. Tax on Insurance Transactions (IOF-Insurance) Some exemptions also apply, as in relation to the import of goods into Brazil. IOF-Insurance Taxation rules Tax rate Insurance transactions subject to this tax include life insurance, personal and labor accident insurance, properties insurance and other non-specified insurances. Tax is levied on the premium amount. Tax rates vary according to the type of insurance, and they cannot be higher than 25%. Life insurance transactions are subject to a 0.38% rate. The IOF Regulation lists several types of insurance transactions that are subject to a zero rate, such as the export credit transactions and international transport of goods. Other non-specified insurance premiums are subject to a 7.38% rate. Tax on Securities Transactions (IOF-Securities) IOF-Securities Taxation rules Tax is levied on transactions with securities (acquisition, assignment, renegotiations or payment for the liquidation of the securities). 4 However, tax is effectively due on a few securities transactions because there are tax exemptions or the rate is reduced to zero. 4 The Financial Transactions Tax charged in connection with credit operations shall exclude the taxation due to securities operations (and vice versa) when both are related to the same transaction. Baker & McKenzie 11

16 Tax rate The maximum tax rate applicable is 1.5% per day on the amount of the transaction with securities. Tax on Transactions with Gold Financial Asset or Exchange Instrument IOF (Financial Transaction Tax) Taxes on Income Taxation rules Tax rate The tax is levied on the first transaction performed by a financial institution. 1% on the value of the gold transaction. Source of Income Rules Individual Resident individuals or corporations, and any other kind of entity or de facto entity, foreign subsidiaries of Brazilian corporations, branches and other permanent offices of foreign entities Foreign beneficiaries Generally due on worldwide income. 5 Any income and capital gains received from a Brazilian source. Taxation rules are different for residents and nonresidents. 6 Income Tax Individual Income Tax (IRPF) Residents Taxation rules The tax is based on income received during the calendar year. Withholding taxes apply to certain income received during the year, i.e., salaries, rentals, etc. An annual tax return is due by April of each year. Tax rate Progressive rates from zero to 27.5%, which vary depending on the specific bracket of the individual s net overall taxable income. Income Tax nonresidents Taxation rules This is levied on income received by a nonresident from a resident source, such as capital gains and work remuneration, service fees, payments for interest, copyrights, royalties, rentals, etc. It is noteworthy to mention that a new legislation 5 There are two different taxes that apply to adjusted net income of entities: the Corporate Income Tax and the Social Contribution on Net Income. Both are calculated on worldwide income. 6 In general, a Brazilian national is automatically a resident while domiciled in Brazil or, if not, upon his or her election to be treated as a resident for tax purposes. A non-brazilian national, on the other hand, is considered a resident depending on the type of visa held. Foreign individuals under temporary visas and without employment relations will be deemed residents for tax purposes after spending 183 days in Brazil, within any 12-month period from the time of entry. However, foreigners who enter into Brazil with authorization to work are treated as residents for tax purposes from the time of entry, even if under temporary visa. The same is applicable to foreigners holding permanent visas that are also treated as residents for tax purposes upon arrival. 12 Baker & McKenzie

17 Brazil: Overview on Taxes has introduced the possibility of taxing the capital gain derived from the disposition of assets located in Brazil even if it was carried out between two nonresident parties. The tax should be withheld when the income is paid, credited, and used on behalf of or effectively remitted to a nonresident, whichever occurs first. The tax is generally based on gross payments (i.e., without any deductions) and is due when the funds are credited, made available, used on behalf of, or effectively remitted to the nonresident, whichever occurs first. Tax rate When specific tax reductions 7 or tax treaties do not apply, the withholding income tax varies from zero to 27.5% for Brazilian-source income (e.g., salaries, wages, services, etc.) while capital gains are subject to the 15% withholding income tax rate. Dividends earned after 1 January 1996 are not subject to the withholding income tax when distributed. Upon distribution, profits and dividends prior to 1996 are subject to the withholding income tax at the rates effective in the year the profits had been generated. As of 1 January 1999, most payments made to a nonresident beneficiary domiciled in low tax jurisdictions (countries listed on Normative Ruling No. 1,037/2010 issued by the Federal Revenue Services) are subject to a 25% withholding tax. Corporate Income Tax 8 Corporate Income Tax (IRPJ) (Brazilian branch offices, agencies or representative offices of companies domiciled abroad) Taxation rules Tax rates Surtax Payment methods The tax is due on an adjusted book income. 9 The adjustments are generally related to timing and permanent differences, such as eliminating equity adjustments for investments in affiliates, profits and dividends from investments valued by the cost method, adjustments for current and previous years nondeductible provisions, etc. Basic rate: 15% on taxable income Surtax of 10% on the annual income in excess of R$240,000 Since 1996, taxpayers may opt to calculate the IRPJ on a quarterly or annual basis. If it is calculated quarterly, the payment must be made by the last day of the following month of the quarter and will be considered definite. Therefore, the payment in April, for the tax calculated on the first quarter, indicates an irreversible option valid for the whole calendar year. If the IRPJ is calculated annually, taxpayers must perform monthly anticipations, and the option for the annual method is made through payment until the end of February. The option is exercised through an advance payment to be repeated every month thereafter. Advance payments are calculated either on an estimated basis (percentage of gross revenues 7 There are a few transactions subject to zero withholding tax, e.g., certain freight and rental of foreign vessels and airplanes, interests and expenses related to certain export financing mechanisms. 8 See Social Contribution on net Income. Corporate Income Tax and Social Contribution Tax are currently charged on profits at a combined rate of 34%. 9 Entities with annual revenue below certain limits (currently approximately US $26 million R$ 48 million) may opt to pay these taxes based on a presumed amount of profit. Baker & McKenzie 13

18 of previous month) or on the actual accumulated profits. For most companies, the monthly estimated income corresponds to 8% of the total monthly gross revenues. When the annual method of calculation is adopted at the end of the tax year, entities must either pay or request reimbursement for the difference between the amount paid monthly and the amount calculated on the annual income. Offset rules Tax losses generated in a given tax period can offset the income tax due in subsequent periods. Tax losses carried forward can offset up to 30% of taxable income of a given tax period (i.e., for each R$1.00 of taxable income, R$0.70 must be subject to taxation, regardless of the existing amount of NOLs). Those carried forward losses do not expire. Social Contribution on Net Income Social Contribution on Net Income (CSLL) Taxation rules Tax rates Deduction and offset rules Payment methods The tax is levied on the adjusted book income before taxes. For instance, adjustments related to timing and permanent differences by eliminating equity adjustments for investments in affiliates, profits and dividends from investments valued by the cost method, and adjustments on current and previous years nondeductible provisions, etc. This tax is a true corporate income tax surcharge at 9% since it is levied separately from the corporate income tax as it is paid to the Social Security System, and not to the Federal Administration. From 1 May 2008, financial institutions 10 and private insurance companies will be subject to the incidence of the CSLL at an increased tax rate of 15%, as provided by Law No. 11,727/08. The CSLL used to be deductible from its own tax basis and for corporate income tax purposes. However, it is no longer deductible as of Tax losses may be carried forward indefinitely, but can offset only up to 30% of the tax liabilities in subsequent tax periods. Similar to the IRPJ, taxpayers may opt to calculate the CSLL on a quarterly or annual basis (provided that the CSLL should be paid together with the IRPJ on the same basis). Foreign Tax Relief A foreign tax credit system is available to companies domiciled in Brazil for foreign taxes paid on income earned abroad. The amount of the credit is the lower limit of the total amount of Brazilian Corporate Income Tax and Social Contribution Tax paid on the same income and the actual foreign tax paid. 10 Legal entities defined as financial institutions subject to CSLL at a rate of 15% are listed on Complementary Law No. 105/ Baker & McKenzie

19 Brazil: Overview on Taxes Contribution to Development of Technology Contribution to Development of Technology (CIDE) Tax rules Tax rate This is a contribution 11 due by Brazilian companies which acquire administrative services, licenses for the use of rights, acquire technological knowledge (know-how), or are parties to agreements which imply the transfer of technology, executed with nonresidents. The contribution is owed only when the other contracting party is a nonresident. Currently, the CIDE is also levied on technical and administrative services (and similar) that do not involve transfer of technology. 10% of the amount paid, credited, delivered, used or remitted to the nonresident beneficiary. Provisional Tax on Banking Transfers Provisional Tax on Banking Transfers (CPMF) Taxation rules Tax rate Since 1 January 2008, CPMF is no longer in force. N/A Social Contributions on Gross Revenues and on Importation of Goods and Services (PIS/COFINS and PIS/COFINS-Import) COFINS Taxation rules The tax is levied on gross revenues of most entities. It is due monthly on virtually all revenues, though there are a few exceptions (e.g., sales of fixed assets, export revenues). As of February 2004, the non-cumulative system was introduced which entitled the taxpayer to register corresponding credits on certain transactions such as: (i) acquisition of goods for resale; and (ii) acquisition of raw materials, machinery, and equipment to be used in the manufacturing process or in the rendering of services, among others Tax rate 7.6% on gross revenues. PIS Taxation rules The tax is levied on gross revenues of most entities and is due monthly on virtually all revenues, save for a few exceptions (e.g., sales of fixed assets, export revenues). As of December 2002, the non-cumulative system was introduced which entitled the taxpayer to register corresponding credits on certain transactions such as: (i) acquisition of goods for resale; and (ii) acquisition of raw materials, machinery, and equipment to be used in the manufacturing process or in the rendering of services, among others. 11 This contribution is effective as of 1 January As of 1 February 2004, the COFINS rate was increased from 3% to 7.6% and the non-cumulative system was implemented to avoid the accumulation of this contribution through the supply chain. 13 The new system and the 7.6% do not apply to (i) taxpayers that are already subject to the one-time COFINS levy, such as the pharmaceutical and automotive industries; (ii) immune legal entities; (iii) legal entities subject to the income tax based on the presumed or arbitrated profit; and (iv) financial institutions, health plan operators, private pension entities and security companies, among others. To the legal entities subject to the income tax based on the presumed or arbitrated profit, the rate, for instance, is 3%. Baker & McKenzie 15

20 14 15 Tax rate 1.65% on gross revenues. PIS/COFINS Import Rural Land Tax Rural Land Tax (ITR) State Taxes Taxation rules Tax rates Taxation rules Tax rates Since May 2004, PIS/COFINS have been levied on imported products and services. The contributions are due upon the entry of foreign goods into Brazil, and in the payment, crediting, delivery, use or remittance of amounts to foreign residents or domiciled abroad as payment for services supplied. According to the noncumulative system, the importer may register PIS/COFINS credits as long as they are provided under the applicable legislation. Such taxes will be calculated on the CIF value, plus ICMS and PIS/COFINS Import themselves. Generally 1.65% for PIS-Import and 7.6% for COFINS-Import. The tax is levied on real estate properties in rural zones. Progressive rates from 0.03% to 20% on the value of the land. Progressive rates are based on the size and economic use of the land. Tax on Transfer of Assets by Donation or Causa-Mortis - ITCMD 16 Taxation rules Tax rate 17 Tax is levied on the transfer of movable assets and real estate by donation or descent ( causa-mortis ). Rates and tax benefits may vary from state to state. Currently, in the States of São Paulo and Rio de Janeiro, the ITCMD levies a 4% rate on the appraised value of the movable asset, real estate or transmitted rights. Vehicle Tax IPVA Taxation rules The tax is levied on the property of vehicles. 14 As of 1 December 2002, the PIS tax rate was increased from 0.65% to 1.65% and the non-cumulative system was implemented in order to avoid the accumulation of this contribution through the supply chain. 15 The new system and the 1.65% do not apply to (i) taxpayers that are already subject to the one-time PIS levy, such as pharmaceutical and automotive industries; (ii) immune legal entities; (iii) legal entities subject to the income tax based on the presumed or arbitrated profit, and (iv) financial institutions, health plan operators, private pension entities and security companies, among others. To the legal entities subject to the income tax based on the presumed or arbitrated profit, the rate, for instance, is 0.65%. 16 According to the Brazilian Federal Constitution, States have jurisdiction to establish that the Tax on Transfer of Personal Properties ( ITCMD ) can be levied on the transfer of movable assets and real estate by donation or descent ( causamortis ). 17 Rates and tax benefits may vary from State to State. 16 Baker & McKenzie

21 Brazil: Overview on Taxes Tax rates 18 Depends on the type and legal classification of the vehicles. The tax basis is the vehicle value. Tax on Consumption of Goods and Services State Value- Added Tax (ICMS) Taxation rules Offset rules Tax rate Tax is levied on the importation of goods into Brazil, on any sale or transfer of goods within Brazil, and on certain communication and transportation services, even if the importation or transfer of goods or rendering of services is initiated abroad. It does not apply to transactions with products or services destined to exportation. Tax paid on import, sale or transfer of goods or rendering of services shall be offset at the subsequent transfer of goods or rendering of services. Rates vary depending on the kind of goods or services, and on the State where the transaction takes place. In most Brazilian states, the ICMS rate is 17%. In São Paulo, the current ordinary rate applicable is 18% for transactions with products or services, 12% for transportation services, and 25% for communications services. Municipal Taxes Municipal Services Tax Services Tax (ISS) Taxation rules Tax rate 19 Tax is levied on the rendering of services specifically listed, and services are not subject to the State value-added tax. Tax is also levied on the importation of services. May vary from 2% to 5%, depending on the kind of service, and the Municipality in which the party rendering the services is located. Municipal Tax on Urban Real Estate Property 20 Municipal Tax on Real Estate Property (IPTU) Taxation rules Tax rate 21 Annual tax levied on the appraised value of the urban real estate. In São Paulo, the IPTU is levied progressively based on the fair market amount of the real estate property. Tax on Transfers of Real Estate Properties ITBI Taxation rules Tax is levied on the onerous transfer of real estate properties and interest rights. This does not apply to real estate transfers pursuant to corporate mergers and certain contributions. 18 Rates and tax benefits may vary from state to state. 19 Rates and tax benefits may vary from municipality to municipality. 20 Rates and tax benefits may vary from municipality to municipality. 21 The rate of Municipal Real Estate Property Tax may be progressive, according to the Brazilian Federal Constitution. Baker & McKenzie 17

22 Tax rate Tax rate may vary according to the actual value of the transaction or the appraised value of the property. In the Municipality of São Paulo, as a general rule, a fixed rate of 2% applies. Tax authorities also are allowed to update the appraised value of the real estate through market researches. 18 Baker & McKenzie

23 Chile: Overview on Taxes Chile Basic National Taxation System, Excepting Municipal Taxes National Taxes Municipal Tax Income Taxes, Value-Added Tax, Stamp Tax, Estate and Donation Tax, Real Estate Tax, Mining Royalty Tax. Municipal Taxes National Taxes Income Taxes. Integrated System: General. The Chilean Income Tax Law (CITL) combines two principles. Individuals and juridical entities resident or domiciled in Chile are subject to taxation on their worldwide income regardless of whether the income comes from a Chilean or foreign source. On the other hand, individuals and juridical entities, neither resident nor domiciled in Chile, are subject to taxation in Chile only on Chilean-source income. However, foreign resident individuals pay taxes solely on their Chileansource income during the first three years after entering the country. The Regional Director of the Internal Revenue Service (IRS) may extend said term on an exceptional basis. The Chilean income taxation is progressive and integrated. Chile contains an imputation system. To promote savings and investment, business income taxation is divided into two levels: First, at the business entity or corporate level and in the year in which the income is generated, a 18,5% yearly tax rate is assessed on the entity s net taxable income determined on an accrual basis in accordance with the Income Tax Law and full accounting records (except for limited cases in which taxation is based on presumed income, and accordingly, no accounting records are needed to evidence the taxable base) 22. The 18,5% Corporate Tax is creditable against the amount due based on second level taxation. Second, taxation at the second level takes place only when business profits are distributed to the ultimate business owners (resident individuals who are partners or shareholders of the business entity, are subject to Surtax, whereas nonresident individuals or foreign juridical entities that are partners or shareholders are subject to Withholding Tax). The effective rate payable on profits remitted abroad to a nonresident partner or shareholder, as the case may be, is normally 35% (of which 18,5% is payable at the time profits accrued at the corporate level with the balance [35%, less 18,5% credit] due on the payment, remittance or profits overseas). According to this structure, in addition to the 18,5% Corporate Tax, there are no other income taxes applicable to undistributed business profits as well as to business profit distributions made by a business entity to another business entity which does not qualify as the ultimate business owner, thus avoiding an internal double taxation. Further, under some circumstances, the ultimate business owner may be entitled to a tax deferral on profit remittances that are reinvested in another business entity within 20 days. Consistent with this structure, non-deductible expenses and amounts that are deemed a covert profit distribution to the ultimate business owners are penalized with second-level taxation or subjected to a special 35% tax in the case of Chilean corporations. In addition, mining operations are subject to Mining Royalty payments, as of 1 January Pursuant to Article 64 bis of the CITL as amended by Act No.20,026 of 2005 and by Act No of Pursuant to Law N 20,455 of 2010, the First Category Tax rate of 17% was increased to 20% for year 2011; 18,5% for year 2012 and should return to the normal 17% rate as from January Baker & McKenzie 19

24 First Category or Corporate Tax: Levied on income generated by real estate, securities and business activities in general (industry, trade, etc.) and on income of any origin, nature or denomination not expressly levied under other categories or otherwise tax-exempt. Activities performed primarily through physical or intellectual effort rather than through capital are excluded from this Corporate Tax and subject to the Second Category Tax. In other words, the First Category Income Tax affects business income arising mainly from capital, whereas the Second Category Income Tax affects income arising mainly from personal services rendered by a resident or domiciled individual, such as an employee, technician, independent worker, Board Director or advisor. The applicable rate of the First Category Tax is 18,5%24. As mentioned above, Chile has a fully integrated tax system allowing this corporate tax to be credited against the Surtax, a personal income tax payable by resident investors when business profits are withdrawn or to be credited against the Withholding Tax, in the case of foreign investors when profits are remitted overseas. First Category Taxpayers need to be enrolled before the IRS, to keep full accounting records, to substantiate the operations with duly stamped invoices and to comply with their tax obligations. Principles Enforced The strict test for deducting expenses the use of stamped documents to sustain operations pertaining to arm s-length transactions. Transfer Pricing Rules Follows the OECD model. Tax Treaty Network Follows the OECD model but in some matters, it follows the UN model. Treaty with Argentina based on Decision 40 of the Andean Pact. 24 Tax-Free Reorganizations Available, subject to certain requisites. Payroll Tax or Second Category Tax: Levied on resident employees wages with a progressive rate ranging from 0% to 40% to be withheld by the employer. Personal Income Tax or Surtax: Levied exclusively on Chilean residents aggregate yearly income from Chilean and/or foreign sources. Levied with a progressive rate ranging from 0% to 40% identical to that of the Second 24 Chile has Double Tax Treaties (DTTs) currently in force with Argentina, Belgium, Brazil, Canada, Colombia, Croatia, Denmark, Ecuador, France, Ireland, Malaysia, Mexico, New Zealand, Norway, Paraguay, Peru, Poland, Portugal, South Korea, Spain, Sweden, Switzerland, Thailand and United Kingdom,. Chile has also signed TTs with Australia, Russia, and the United States, which have not been submitted to Congress approval. Finally, Chile is currently negotiating DTTs with Austria, China, Cuba, Czech Republic, Finland, Hungary, India, Italy, Kuwait, the Netherlands, South Africa, Switzerland, Uruguay and Venezuela. 20 Baker & McKenzie

25 Chile: Overview on Taxes Category Tax. As a result of the Integrated Chilean Tax System, in case Corporate Tax is paid on the income distributions subject to this tax, the 18,5% paid on such profit at the corporate level is credited against the Surtax. Withholding Tax: General. Withholding Tax of 35% is payable by nonresident individuals and entities, on Chileansource business income withdrawn from Chile, paid from Chile, made available for or remitted abroad. This tax is withheld by the payer entity. The 18,5% Corporate Tax effectively paid is credited against the Withholding Tax due. As a result, the effective rate payable on foreign investment profits remitted abroad is normally 35%, with 18,5% payable at the time profits are earned (at the corporate level) and the balance due upon payment overseas. Particular. Withholding Tax (normally at the rate of 35%) is assessed on most payments made abroad. The most relevant rates are the following: 35% with respect to profit or dividend withdrawals from companies and other permanent establishments existing in Chile. In case Corporate Tax is paid on the above income, this amount is credited to the Withholding Tax payable. However, the rate is 42% for foreign investors who previously opted for the tax invariability alternative under Decree Law % on the gross amounts paid for the use of trademarks, formulas, know-how and similar items, without any deduction. A reduced 15% rate applies to patents; utility models; industrial drawings and designs; layout-design (topographies) of integrated circuits; new vegetal varieties; and computer programs or software. However, if the payment is to a related party or to beneficiaries either domiciled or residing in a tax haven, the applicable rate is 30%. 35% of interest payments made abroad. The rate goes down to 4% in the case of credits extended abroad by international banks or financial corporation balances on the price for imported goods, bonds or debentures. However, when the debtor of foreign credits is a financial corporation incorporated in Chile who uses these funds to extend credits abroad, no tax is applied to the interest payments made to the foreign lender. Recently some thin capitalization rules were enacted for the purpose of restricting the application of the 4% rate in cases of excess related indebtedness. 35% of service fees paid abroad. There are some exceptions. 1.75% of lease payments made by lessees under certain capital asset leases of imported goods. 15% on engineering and technical work as well as professional and technical services rendered in Chile or abroad. However, if the payment is to a related party or to beneficiaries either domiciled or residing in a tax haven, the applicable rate is 20%. 20% on compensation paid to foreign individuals performing scientific, cultural or sportive activities in Chile. Section 21 (1) Nondeductible Expenses: (2) Tax Penalty: A sole tax of 35% is paid by stock corporations on non-deductible expenses. Disbursements made by other entities that are deemed a non-deductible expense at the corporate level are added to the tax base of the corporate tax and deemed a covert profit distribution affecting the partner s Surtax or Withholding Tax, as the case may be. Baker & McKenzie 21

26 Value-Added Tax: Value-added tax (VAT), currently at a 19% 25 rate, applies on the sale of movable goods made on a customary basis, certain types of real estate and some services, regardless of whether it performed on a customary basis or not, including industrial, commercial and construction services as well as most local leasing and licensing arrangements. The tax extends to the import of goods. Importing capital goods that form part of an investment under the Foreign Investment Statute are exempt if they are included in a list contained in a Supreme Decree of the Ministry of Economy. The export (of goods and some services) is entitled to the zero rate mechanism when exports are exempt, but remains entitled to recover amounts paid with respect to acquisitions and services deemed as exports. VAT paid on the purchase of goods and services used to produce goods and services which are subject to VAT (inputs) may be credited against VAT due on subsequent sales or services subject to VAT (outputs). VAT credit can be carried forward indefinitely until completely absorbed by future debits. Excess VAT credit accumulated over a period of six consecutive months or more may be reimbursed by the Treasury, provided such excess pertains to the acquisition of fixed assets. Stamp Tax: Levied on documents evidencing a cash credit transaction (i.e., that in which one party delivers cash and the other becomes obliged to deliver it back on another occasion), bills of exchange, promissory notes, import credit documents and others. After a tax cut enacted during 2010, the general rate now is 0.05% per month or a fraction thereof between the date of the document and the expiry date. The aggregate rate may not exceed 0.6%. Negotiable instruments payable on demand are subject to a sole rate of 0.25%. Estate and Donation Tax: Levied on decedents estates and donations. Levied at a progressive rate ranging from 1% to 25%. A 20% tax surcharge is applied when the beneficiary and the decedent or donor are not immediately related by blood. If they are distant relatives or are not related at all, the tax surcharge is 40%. Real Estate Tax: Levied on farming and non-farming real estate, at an annual rate of 20 per 1,000, payable in four quarterly installments. The rate is applied on the fiscal valuation determined by the Chilean IRS. 26 This rate is subject to certain changes, depending on the location of the real estate and some exemptions exist. Chilean Platform Company Act No. 19,840: Act No. 19,840 created a special tax regime under which foreign investors incorporating a Chilean corporation (the Vehicle) may use Chile as a platform to invest in the region. The Vehicle is deemed a nonresident, non-domiciled entity. The foreign source income, accrued by the Vehicle non-profit distributions, is not subject to Chilean Taxation. The Vehicle is deemed a nonresident entity and subject to Chilean taxes only on Chilean source income. Therefore, profits generated abroad and distributions of foreign source income to the foreign shareholders are not subject to any Chilean tax 25 Please note that Act No. 20,120 has made the VAT rate increase permanent. 26 In 2006, a valuation process took place. 22 Baker & McKenzie

27 Chile: Overview on Taxes other than the Municipal Tax. The Vehicle must keep full accounting records in the foreign currency of its capital, and obtain registration with the Chilean IRS, which in turn requires broad and periodic disclosure of information. The investments must be made in companies incorporated and formally existing abroad in a country that is not listed as a low-tax jurisdiction. The Vehicle s bank accounts are not entitled to the banking secret. The Vehicle is subject to the Municipal Tax. Mining Royalty Tax The Mining Royalty Tax (called Impuesto Específico a la Actividad Minera ) is levied on the annual operational income derived from a metal mining activity obtained by a mining operator. This tax applies as a function of the size and profitability of the mining operator. The law of 2010 introduced a new Mining Royalty. Old Mining Royalty: Mining operators with annual sales below the equivalent of 12,000 metric tons of fine copper are not required to pay this tax. Mining operators whose annual sales have an equivalent value between 12,000 and 50,000 metric tons of fine copper pay the tax at progressive rates from 0.5% and 4.5%. Mining operators with annual sales exceeding the equivalent value of 50,000 metric tons of fine copper (large mining operators) will be subject to a progressive mining tax rate between 5% and 14% of the taxable operational income. The specific applicable rate in these cases will be determined by reference to a profitability test called mining operational margin. Large mining operators with a mining operational margin of 85% or more will be subject to a 14% mining royalty tax rate; operators with a mining operational margin of 35% or less will be subject to a 5% mining royalty tax rate; and those with a margin of between 35% and 85% will be subject to a mining royalty tax rate between 5 and 14%. The value of a metric ton of fine copper is calculated according to the average value at the London Metal Exchange. The Old Mining Royalty Tax regime applies since 01/Jan/2006 and will continue to apply to mining operators under the following situations: (a) mining operators in production stage with existing DL 600 contracts, albeit with a 3-year transitional period under a special regime; (b) mining operators in pre-operational stage with existing DL 600 contracts with a mining royalty stability election; and (c) mining operators in pre-operational stage with a DL 600 application filed up until 31/Aug/2010. New Mining Royalty: it is substantially based on the old regime (rate and taxable basis are similar). For example, the old Mining Royalty Tax regime contemplated rules allowing the accelerated writeoff of certain exploration expenditures, which the new Mining Royalty Tax regime has not amended. Therefore, exploration costs incurred after the deposit discovery are treated as start-up or development costs, i.e. deductible in full or deferred over a period not exceeding 6 years, at the election of the taxpayer. The period is counted from the year in which the costs are incurred or that of commencement of production. The new Mining Royalty Tax regime establishes that in the case of large mining operators (i.e. Mining Operators whose annual sales exceed the equivalent of the value of 50,000 metric tons of fine copper), their applicable rate will be a progressive rate between 5% and 14% of the taxable mining operational income. The applicable rate in these cases will be set as a function of a profitability test called mining operational margin. In particular, large mining operators with a mining operational margin of 85% or more will be subject to a 14% mining royalty tax rate; large mining operators with a mining operational margin of 35% or less will be subject to a 5% mining royalty tax rate; and large mining operators with a mining operational margin of between 35% and 85% will be subject to a mining royalty tax rate between 5 and 14%. Mining operators with annual sales below the equivalent of 12,000 metric tons of fine copper are exempt. Baker & McKenzie 23

28 The new Mining Royalty Tax regime applies in general- to all mining operators since 01/Jan/2011 (general effective date). However, mining projects covered by a DL 600 application filed before 31 Aug 2010 will be grandfathered: they will be subject to the old Mining Royalty Tax regime, outlined above, for a 15-year stability term counted from the date of start-up of operations. The new Mining Royalty Tax regime is a permanent change and is not a transitory nor temporary measure. The operational income of the mining activity is calculated following certain rules established by law (add-backs or deductions from the company s corporate Taxable Income, as provided by law). A mining operator refers to all individuals or legal entities that extract mineral substances and sell them in any state of production. Municipal Tax Municipal Permits: Levied on the exercise of any profession, trade, industry, commerce or other lucrative secondary or tertiary activity, in addition to primary activities involving a manufacturing process. The value of the permit for 12 months ranges from 0.25% to 0.5% of each taxpayer s tax equity or tax net worth, with a minimum of 1 UTM and a maximum of 8,000 UTM. The effective rate is set by each municipality (1 UTM = US$80 approximately) See Articles 23 and 24 of Decree No. 2385, published in the Official Gazette on 11 November Baker & McKenzie

29 Colombia: Overview on Taxes Colombia Basic Taxation System Levels First level of taxation Second level of taxation Third level of taxation National National, Provincial, Municipal National Taxes: Income Tax, VAT, Stamp Tax Financial Transactions Tax Provincial Taxes: Various excise taxes (e.g., alcohol and tobacco excise taxes) and vehicle tax Municipal Taxes: Depending on the municipality. Industry and commerce taxes, Real Estate Tax First Level Taxes on Profits Income Tax Source of Income Rules Colombian resident individuals and Colombian corporations Worldwide income Branches of foreign entities located in Colombia, foreign nonresident investors, and individuals Colombian source income Corporate entities, including branches of foreign entities located in Colombia Tax rate The general corporate income tax rate is 33% of ordinary net income, or 33% of presumptive income (an alternate minimum taxable income) whenever it exceeds regular net income in any given year. Presumptive income is the equivalent of 3% of net worth as of 31 December of the prior year-end. For dividends paid to foreign shareholders and profit distributed by local branches to foreign home offices 33% withholding income tax if dividends were not taxed at a corporate level. 0% dividend tax. Baker & McKenzie 25

30 Individuals Tax rate Nonresident individuals: 33% withholding income tax. Local residents: progressive rates from: 19% to 33% Foreign nonresident beneficiaries Payments made to foreign nonresident beneficiaries are subject to withholding taxes. Royalties paid to foreign nonresident licensors (other than royalties paid under software licenses and film licenses). 33% Fees paid for consulting, technical assistance or technical services rendered in the country or abroad by non-domiciled providers. 10% Compensation paid for other type of services rendered within the country. 33% Compensation paid to foreign nonresident licensors for software licenses. 26.4% Compensation paid to foreign nonresident licensors for film licenses (or film distribution). 19.8% Interest on foreign loans or international financial lease payments obtained from financial institutions to finance activities of interest for the social and economic development of Colombia. 0% if the loan was granted prior to 2011 Interest on foreign loans in general 14% Interest on short term loans (less than a 33% 26 Baker & McKenzie

31 Colombia: Overview on Taxes year) Interest on international financial lease payments. Interest on loans obtained by Colombian financial institutions. Interest on certain loans related to foreign trade. 14% 0% 0% Chattel rentals. 33% Any other payment to a foreign beneficiary not contemplated above. 14% Dividends Dividends distributed by local corporate entities that are paid out from previously taxed profits would not be subject to taxation in hands of the shareholders. Transfer pricing In connection with transfer pricing, the Tax Code adopts the OECD model. This will basically obligate taxpayers doing business activities with related parties established abroad to determine their income based on a profit margin comparable with the one obtained in deals with unrelated parties. In addition, the taxpayers will be obligated to keep for five years all records of operations or transactions involving related parties, and report annually to the tax authorities all operations and transactions performed with related parties. In principle, the methods set forth in the law for the determination of the profit margin are (i) the Comparable Uncontrolled Price Method (CUP), (ii) the Resale Price Method, (iii) the Cost Plus Method, (iv) the Profit Split Method, (v) the Residual Profit Split Method, and (vi) the Transactional Net Margin Method. There are currently some limitations in the law pertaining to the deductibility of expenses incurred with related parties (i.e., interests paid to related parties, losses or capital losses in the sale of assets to related parties, etc.). In principle, these limitations will not apply to the taxpayers that comply with the transfer pricing requirements referred to above. According to transfer pricing regulations, the taxpayers may enter into Advance Pricing Agreements ( APA ) with the Tax Authorities. The law states that it will be presumed that business operations entered into between Colombian residents or domiciled parties, on the one hand, and residents or domiciled parties of low-tax jurisdictions, on the other, will be deemed to be made between related parties, and will thus be subject to the transfer pricing regulations and restrictions described above. Baker & McKenzie 27

32 Low-tax jurisdictions The Tax Code includes provisions on payments to low-tax jurisdictions. Such payments would not be deductible unless they have been subject to income tax withholdings. This would not apply to payments made in connection with financing operations registered before the Central Bank. The list of low-tax jurisdictions will be determined by the National Government. Assets tax Net worth tax Taxation rules Tax rate For the year 2011, net worth tax was accrued on taxpayers with a net worth as of 1 January 2011, higher than COP3,000,000,000 (approximately US$1,580,000). It is important to highlight that the net worth tax for the year 2011 had differential treatment regarding the applicable rate, explained as follows: If the taxable base exceeded the amount of COP$3,000,000,000 but did not exceed COP$5,000,000,000, the applicable rate should be 2.4%. If the taxable base exceeded COP$5,000,000,000, the applicable rate should be 4.8%. The tax is payable in eight (8) installments. It will be two (2) per year, as of 2011 and until Taxes on consumption Value-Added Tax ( VAT ) Taxation rules Tax rate Special rules Tax levied on the sale or importation of tangible movable goods and the performance of services within Colombian territory. Certain goods and services are not taxed. As a rule, the general tax rate is 16% on the total value of the transaction, but there are certain goods and services subject to differential rates (i.e., 10% rate for medicines, 20% rate for mobile telephone service). Since it is a tax levied on the value-added, the VAT paid by the seller of goods or the service provider is creditable against VAT charged to customers. Exported products and services are tax exempt. Exporters can claim the refund of the VAT paid in the production of the exported goods or services. In the case of products and services that are not exempt but excluded, the seller of such type of products may not claim the refund of VAT paid and such will entail a higher operation cost. Tax on trade documents (transfer taxes) Stamp tax Taxation rules Stamp tax is levied on written documents, executed in Colombia or abroad, but producing effects in Colombia, in which 28 Baker & McKenzie

33 Colombia: Overview on Taxes obligations are created, modified, assigned, etc. However, as from FY 2010 the applicable tax rate is 0%. Tax rates 0% as from the year Taxes on financial transactions Financial Transactions Tax ( GMF ) Taxation rules Tax rate Withholding/ Deductibility The taxable event is the performance of financial operations by which individuals or legal entities use funds that are deposited in current or savings accounts, as well as the issuance of certified checks, except for inter alia certain transactions performed between accounts of the same holder. Exceptions apply. The tax is levied at a rate of 0.4%, and accrues at the time the financial operation takes place. This burden will be gradually phased out. The rate will reduce to 0.2% for FY 2014 and 2015, 0.1% for FY 2016 and 2017 and to 0% from As from January 1, 2018, this tax will be repealed. The financial transactions tax must be withheld by the financial entities through which the operations are performed. The financial entities must file the relevant returns and pay the collected amounts to the tax authorities. Additionally, they shall be liable for any failure in the compliance with these obligations, and shall be subject to the applicable fines and interest. Currently, the deduction for the financial transactions tax is of 25%. As from FY 2013 the deduction would be of 50%. Second Level Various excise taxes Third Level Industry and commerce tax Taxation rules Tax rates Taxation rules Various rules apply. These depend on the activity. Payable by those who carry out within the jurisdiction of each municipality industrial, commercial, or service activities. The tax base will be the gross income received from the performance of taxed activities. Tax rates These vary on each municipality and range between 0,4 and 1%. An exception thereto is Bogotá (1.38%). Real estate tax Taxation rules These apply to the value of the real estate (as appraised by the owner or the official entity, depending on each municipality). Tax rates These depend on the municipality, and usually do not exceed 3.3% of the value of real estate. Baker & McKenzie 29

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35 Mexico: Overview on Taxes Mexico Basic Taxation System Levels First level of taxation Second level of taxation Third level of taxation Federal Federal, State, Municipal Federal Taxes: Income Tax; Value-added Tax; Single Rate Tax on Business Income; Special Excise Tax on Production and Services; Tax on New Automobiles; Cash Deposits Tax; Foreign Trade Taxes (on exportation and on importation). State Taxes (Depending on each State): In general, Payroll Tax; Acquisition of Used Automobiles Tax; Lottery Tax. Certain states also levy individuals who render independent personal services, rent or sell real property or carry on business activities. On January 1, 2012, each State will have the authority to tax the Ownership and Use of Automobiles. Municipal Taxes (Depending on each Municipality) In general, Property Tax; Real Estate Transfer Tax; Billboard Tax. First Level of Taxation: Principal Federal Taxes (Income Tax, Valueadded Tax, and Single Rate Tax on Business Income) Income Tax Subjects to Income Tax Mexican residents, either individuals or corporations, on a worldwide basis regardless of the source of income. Nonresidents with a permanent establishment in Mexico, in respect of the income attributable to such permanent establishment. Nonresidents without a permanent establishment in Mexico when the source of income is in Mexico. Mexican Corporations Taxable income As of January 1, 2010, corporate taxpayers (including permanent establishments in Mexico of foreign entities) are subject to income tax at a flat rate of 30% on net taxable income. As a result of the 2010 tax reform, the tax rate has been increased from 28% to 30%. This new tax rate will apply to tax years 2011 and After 2012, the corporate tax rate will be reduced by one percentage point each year and, therefore, it is provided that for tax year 2014, Mexico will apply a tax rate of 28%. Net taxable income comprises gross income less allowable deductions and less net operating loss carryovers and employee profit sharing paid. Net operating losses may be carried over for 10 years. Items constituting gross income Most receipts constitute gross income to a corporation. Gross income includes all types of income from whatever source derived. Income can be generated in cash, in Baker & McKenzie 31

36 kind, in services, in credit (i.e., accrued) or of any other type. Specifically, gross income includes an annual inflationary gain (which represents the depreciation in value of the taxpayer s liabilities caused by inflation, after subtracting the inflationary loss on some of the taxpayer s receivables). Only certain limited types of income are excluded from taxation, namely, capital increases, absorption by the shareholders of the losses of the company, premiums on the placement of shares issued by the company, valuation of shares with the participation method, and income resulting from revaluation of capital or assets. Deductions Allowable deductions basically include all business expenses and asset depreciation that are strictly indispensable to the taxpayer s business. In 2005, Mexico switched from expensing inventory purchased to a system of cost of goods sold. Mexico also introduced thin capitalization rules in 2005, which disallowed deduction of interest on debt exceeding a 3:1 debt-to-equity ratio. A good number of specific items are defined as being nondeductible including, for instance, goodwill. Preferential Tax Regimes (Tax Havens) Mexican taxpayers must recognize as taxable income their ratable share of the income from foreign sources which have not been effectively subject to income taxes outside of Mexico at a rate at least equal to 75% of Mexico s corporate or individual tax rate, as the case may be. The old system of specifically blacklisted countries was abolished in Also subject to these rules is income derived from foreign tax transparent or pass through entities or legal figures, even in those cases where actual taxation is higher than the 75% threshold. Income subject to the preferential tax regime ( PTR ) provisions includes income generated either directly or indirectly, proportionally to their participation, through corporations and any other type of entity created or incorporated in terms of foreign legislation with a legal personality of its own, as well as corporations incorporated under Mexican legislation residents abroad (i.e., foreign entities ), or through trusts, partnerships, investment funds and any other similar legal figure of foreign law without a legal personality of its own (i.e., Legal Figures ). Income derived from a foreign entity considered a tax resident of another country shall be computed by taking into account the taxable result of such entity in terms of its domestic tax legislation. The taxable result would be subject to the PTR provisions and taxable to the taxpayer in the calendar year during which the tax year of the foreign entity closes. Income derived from foreign legal figures not paying taxes as residents of a given country will be determined for each type of income considered separately and will be taxable to the taxpayer in the same calendar year in which it is derived. Income is to be recognized on a current basis, according to the rules for recognition of income applicable to corporations or individuals under Mexican tax law, even if not actually distributed or paid out by the foreign entity or vehicle. If the taxpayer makes available the accounting records of the investments and files in February of each year, an information return is filed before the treasury officials. The taxpayer may claim the deductions and net operating losses of such investments. Otherwise, such income is to be recognized on a gross basis. During the month of February, taxpayers generating income subject to the PTR rules are required to file information returns. Returns must also be filed with respect to any type of income generated directly or indirectly from specifically listed tax heavens. Similarly, information returns must be filed with respect to income generated through transparent entities or vehicles. In these two latter events, filing the information 32 Baker & McKenzie

37 Mexico: Overview on Taxes returns does not mean that such income is subject to the PTR rules; however, failure to file the information returns and keep accounting records available to the tax authorities aside for other penalties, will cause taxpayers to pay tax on all PTR income on a gross basis. Failure to timely report PTR income constitutes a crime separate and distinct from the common crime of tax fraud that would arise from omitting tax payments on interest, currency exchange and any other types of gains or yields derived from such investments. Exceptions to PTR rules Income derived through foreign entities and legal figures (as defined above) performing business activities, unless their passive income represents more than 20% of their total income, are subject to the PTR. Income is not subject to the PTR rules and no reporting obligation exists when such income derives from investments in foreign entities or legal figures in which the taxpayer s daily average participation does not permit it to have effective control. The concept of effective control is defined as the authority that a taxpayer has to determine the moment of distribution of profits and/or yield, either directly or through a third person. The MITL however, sets forth a rebuttable presumption that the resident of Mexico has such control. Income derived from foreign entities that are tax residents of any given country (in cases where their gain is taxed at a rate equal or higher than 75% of the 28% Mexican income tax) is subject to the PTR provided that: (i) all their income is taxable, except for dividends received from entities resident in the same country; and (ii) all their deductions relate to expenses actually incurred, regardless of whether the timing for accrual is different from that set forth by Mexican tax legislation. Royalty income derived from foreign entities or legal figures upon the use of a patent or industrial secret, are likewise subject to the PTR, provided that : (i) the intangible is created and developed in the jurisdiction where the entity or legal figure owning the right resides or is located; (ii) no deduction is taken in Mexico when the royalties are paid; (iii) the royalty payment is made pursuant to arm slength standards; and (iv) the accounting records of the relevant foreign entities or legal figures are kept available to the Mexican tax authorities. Income derived from the transfer or shares within the same group of companies as a consequence of an international corporate restructure, spin-off or merger, provided that: (i) a notice is filed with the tax authorities prior to the restructure describing the shareholding position of the group and the steps to be undertaken in the restructure; (ii) the restructure is performed based upon business and economic reasons as opposed to tax reasons; (iii) within 30 days upon concluding the restructure, a notice is filed with the tax authorities evidencing that all the steps towards the restructure have been undertaken; and (iv) the shares transferred or issued upon the restructure remain within the group for a period of two years. Taxpayers are required to maintain an account for each foreign entity or legal figure in which they participate. This account shall be added with the taxable result of each year for which taxes have already been paid. The tax paid shall be subtracted from the taxable result. This account shall be decreased with the dividends and income already distributed to the taxpayer. In cases where the balance of this account is lower than the income, dividends and yield distributed to the taxpayer, Baker & McKenzie 33

38 Mexican taxation would be triggered upon the differential. In cases of liquidation or capital redemptions of the type of entities referred to above, taxable income shall be determined as set forth by the Mexican domestic tax legislation. Taxpayers would be entitled to credit the income tax paid abroad by the foreign entities or legal figures in which they participate, in the same proportion of their average participation, against their Mexican income tax liability related to PTR income, provided that in all cases, they are able to evidence that foreign taxes were paid. Tax Simulation As of January 1, 2008, in the context of Mexico s PTR rules, Mexican tax authorities have been entitled to determine that related party transactions are a simulation, i.e., these are an attempt to avoid taxation by creating a legal structure which has no real purpose other than tax avoidance. In cases of simulation, the tax effects applicable to the simulated act will be those that would otherwise have applied. The Mexican tax authorities in declaring that a transaction is a simulation must identify the act so simulated and the one actually intended by the parties, the tax benefit obtained through the simulated act and the basis upon which the existence of the simulated act was determined. This is the first time that the Mexican Treasury has pursued direct enforcement powers of this type with regard to simulation. The new powers apply only to transactions covered by the PTR section of the MITL, and if it proves to be effective, it is likely that they will be extended to all other federal tax laws. Bearing this in mind, we foresee substantial activity by the tax authorities in regard to this issue. Transfer Pricing In line with international principles, the MITL provides that transactions between or among related entities must, for tax purposes, take place under the same conditions that would have been agreed upon by independent parties entering into comparable and same transactions under the same or similar circumstances. These transfer pricing provisions are primarily aimed at preventing the shifting of income between related parties in order to obtain tax advantages. In the international market, the transfer pricing provisions are intended to protect Mexico s share of tax revenues arising from international transactions. In this respect, the arm s-length standard allows the tax authorities to allocate income when transactions are not carried out as these are between unrelated parties. The main purpose of the transfer pricing rules is to determine the real taxable income of a related taxpayer by placing such related taxpayer in equal or similar tax circumstances with an unrelated taxpayer. No finding of a tax avoidance purpose on the part of the related parties is required in order to justify the reallocation of income under the transfer pricing rules. Parties are considered related where one participates, directly or indirectly, in the administration, control or capital of the other or where one person or a group of persons participates, directly or indirectly, in the administration, control or capital of two or more entities. Following the OECD guidelines, the law sets forth six transfer pricing methods to be used in determining the arm s-length nature of related transactions: (i) the 34 Baker & McKenzie

39 Mexico: Overview on Taxes comparable uncontrolled price method ( metodo de precio comparable no controlado ); (ii) the resale price method ( metodo de precio de reventa ); (iii) the cost-plus method ( metodo de costo adicionado ); (iv) the profit-split method ( metodo de particion de utilidades ); (v) the residual profit-split method ( metodo residual de particion de utilidades ); and (vi) the transactional net margin method ( metodo de margenes transaccionales de utilidad de operacion ) referred to in the United States as the comparable profits method. In 2006, Mexico introduced a hierarchy among the methods, requiring that the comparable profits method be used first, and only where this method is not appropriate can the other methods be resorted to. Mexico also introduced the best method rule. Mexican taxpayers who have transactions with related parties residing outside Mexico are required to prepare and keep contemporaneous documentation to support the arm s length nature of such transactions. While no such obligation exists with respect to transactions between related parties within Mexico, the obligation to the effect that prices must conform to the arm s-length principle applies to these taxpayers as well. Under the provisions applicable to all taxpayers, fines up to 100% of the additional tax liability resulting from a transfer pricing adjustment, plus interest and inflation adjustments to the date of payment, may be imposed. These penalties are reduced by one half if the taxpayer has satisfied the contemporaneous documentation requirements. The MITL contemplates the possibility of applying correlative adjustments where a transfer pricing adjustment is made by a country with which Mexico has executed a double taxation agreement. It should be noted that transactions between a Mexican taxpayer and any party resident in a tax haven are presumed to be related-party transactions that do not conform to the arm s-length standard. Dividends After-tax dividends or profit distributions of shareholders are not taxed. Mexican entities are required to keep a net after tax profit account ( cuenta de utilidad fiscal neta or CUFIN ) 28. When distribution is not made from the CUFIN, the Mexican company making the profit distribution (and not the recipient) is subject to a 30% tax on the grossed-up profit distribution (corporate level). This tax is creditable against the company s year-end income tax for the same year and for the following two years. Capital Reductions, Liquidation In principle, when a shareholder receives a mere reimbursement of his investment, no Mexican tax should be triggered. A capital reduction or a liquidation of a Mexican entity, however, may be considered a dividend, with the tax effects discussed above, when the amount per 28 Section 124 of the MITL provides that this account includes the company s net after-tax profits of each fiscal year, plus dividends received by the company from other companies and residents in Mexico or from low-tax jurisdictions less the amount of dividends distributed in cash or in kind from that account. The net after-tax profit of each fiscal year is the amount that results by subtracting from the company s taxable income for the year (i) the employees mandatory profit sharing, (nondeductible); (ii) reinvested tax profit, (iii) its income tax paid, and (iv) the sum of nondeductible items. (The balance of this account is adjusted annually for inflation.) Baker & McKenzie 35

40 share received by the shareholders exceeds the amount of the capital contribution per share, indexed for inflation. In order to make this calculation, Mexican entities are required to keep a Capital Contribution Account ( cuenta de capital de aportación ). The capital reduction or liquidation may also be treated as a dividend distribution when the corporation has retained earnings in excess of the capital contributions account and no balance exists in the net after-tax profits account. When a balance in the net after-tax profits account exists, no tax would be payable. The only financial effect would be the depletion of such balances for the return of capital rather than for future distribution of profits. Tax Returns Corporations are required to make estimated tax payments on the 17th of each month as part of the tax that should be paid on their annual revenues. In general, the basis for computing estimated tax payments is the estimated annual tax profit of the company which is obtained by applying to the gross income of the current year the preceding year s profit factor, less any loss carryover of prior years to be applied. An authorization for reductions in the amount of estimated tax payments for the second half of the year may be requested when the taxpayer reasonably believes that regular estimated tax payments will result in an overpayment. In addition, corporations must file annual tax returns within the three months following the date on which their fiscal year ends. The fiscal year must coincide with the calendar year, except for short years in events such as commencement of operations, mergers or liquidations. In addition, certain information returns must also be filed, typically by February 15. Record-keeping requirements Mexican corporate taxpayers are required to maintain corporate and accounting records of their operations in accordance with Mexican generally accepted accounting principles. Mexican corporations meeting certain income, asset or number of employee thresholds should have their operations audited by local certified public accountants. Tax Consolidation Mexico s tax reform for 2010 changed the tax consolidation regime, specifically when the deferred taxes would be payable. Until December 2009, the tax deferred under the consolidation regime is payable, among other cases: (i) upon the transfer of shares of a controlled company to parties outside the group; (ii) upon the variation of the shareholding participation of the holding company in the controlled company; (iii) upon the disincorporation of one or more controlled companies or deconsolidation of the group; or (iv) once the 10-year recapture period elapses without offsetting the losses incurred. The idea behind the consolidation tax regime is to recognize the need of companies belonging to the same group to combine their tax results to facilitate their financial operations; however, the purpose of the amendments to the tax consolidation regime was to repeal the concept that the deferral cannot be construed as to allow taxpayers to defer the tax triggered indefinitely. Taking the foregoing into account, as of January 1, 2010, there is a five-year limit 36 Baker & McKenzie

41 Mexico: Overview on Taxes during which the tax triggered can be deferred. Thus, the 10-year tax consolidation regime applicable to losses is reduced to five years. With regard to other concepts such as dividends derived from accounting profits, losses derived from the sale of shares of controlled entities not deducted by the company incurring in such losses, as well as the differences between the individual and consolidated net after-tax profit accounts, the deferral of which is not limited to a determined time period but to the causes mentioned above it is also limited to five years. This new period applies prospectively and also to the tax already deferred. To comply with this new obligation, the tax already deferred will be paid as of the sixth year in which it was originated 25% in the first fiscal year, 25% in the second, 20% in the third, 15% in the fourth, and 15% in the fifth. Although failure to pay this tax by the holding company will not result in deconsolidation, the holding company would have to pay the entire amount of the tax deferred, together with indexation, surcharges and penalties. Mexican Resident Individuals Nonresidents Dependent Personal Services Consideration derived from the rendering of personal subordinated services (i.e., salaries, and all those remunerations derived from a labor relationship, including mandatory employee profit sharing and severance payments) is taxable income for the employees. The general rule under the MIT is that employees are taxed on cash basis rather than on an accrual basis. Fees paid to members of the board of directors, statutory auditors, or other company officers, are considered salary payments and therefore subject to tax pursuant to the tax regime applicable to salaries. Retirement payments, indemnities, seniority premiums and other severance payments are exempted up to certain limits. Employee benefits are deductible to the employer and either totally or partially exempted for the employees provided they qualify as social welfare benefits. The most common types of employee benefits are (i) life and major medical insurance, (ii) reimbursement of medical and funeral expenses, (iii) annual medical checkups, (iv) savings funds, (v) pension funds, (vi) food supplies, (vii) sporting and cultural activities, (viii) scholarships for the employees and or for their children, (ix) disability subsidies (x) infant day care centers, and other benefits of a similar nature. A number of statutory requirements must be met in order for the referred payments to qualify as social welfare benefits, including those granted to all employees. Certain statutory limitations also apply. Employers are required to withhold personal income tax from their employees salaries and remit the amount withheld to the Mexican tax authorities on a monthly basis. However, no withholding applies to minimum-wage employees. The current marginal rates applicable for withholding purposes fluctuate from 3% to 30%. In computing the withholding tax, limited subsidies and credits are available. In certain events, employers must compute and pay, on behalf of their employees, their year-end tax. Finally, employers must file an information tax return by February 15 of every year, indicating therein all their employees names, taxpayer registry numbers, past year s wages and tax withholdings. Taxation of nonresidents. Baker & McKenzie 37

42 Single Rate on Business Income Nonresidents are subject to taxation in Mexico with respect to income attributable to any permanent establishment they may have in Mexico, or with respect to any Mexican-source income. Mexican-source income is listed by way of limitation in the MITL as follows: (i) dependant personal services; (ii) pension and retirement funds; (iii) independent personal services; (iv) lease (use and enjoyment) of real property; (v) time sharing services; (vi) lease (use and enjoyment) of movable goods; (vii) sale of real state; (viii) sale of shares and other securities; (ix) financial derivatives and debt/equity swaps; (x) dividends; (xi) income received from a non-taxpayer; (xii) interest; (xiii) financial leases; (xiv) royalties and technical assistance; (xv) construction and maintenance of works; (xvi) prizes and awards; (xvii) artists, athletes and shows; (xviii) agency services by entities located in tax havens; (xix) debt forgiveness, payments by third parties, buy-in payments, lost profits, liquidated damages and sale of goodwill. Certain preferential tax treatments are established under the international tax conventions that Mexico has executed. As an example, in accordance with the US- Mexico Double Taxation Agreement, the transfer of shares issued by a Mexican company by a resident of the US may be taxed in Mexico only if the US resident has had a participation of at least 25% in the capital of the Mexican subsidiary at any time during the 12-month period preceding the alienation. Furthermore, if certain requirements are met, the possibility exists for tax-free corporate reorganizations between members of a group that file consolidated tax returns in the US. The new regulations impose certain information requirements with respect to these reorganizations. Under the Mexican tax reform for 2008 (in effect as of January 2008), the Federal Government has imposed the new Single Rate Tax on Business Income or IETU in the government s effort to increase tax collection. Upon the entrance into effect of this new tax, the Asset Tax has been abrogated. This new tax is a truly minimum corporate tax because it will admit very limited credits against the income tax. The single rate minimum tax will admit loss carryforward alternatives. This new tax must be computed on an annual basis with the obligation to file monthly estimated returns; it is levied at the rate of 17.5% and operates on a cash flow basis whereas the income tax operates on accrual basis. The annual results of both the income and the single-rate tax need to be compared. The higher will be paid. Resident individuals, corporations and nonresidents with Mexican permanent establishments are subject to this tax. This tax is payable upon the income derived (some deductions and credits are allowed) from the: i. sale of property; ii. performance of independent services; and iii. temporary use or enjoyment of property as defined in the Value Added Tax Law. However, the temporary use or enjoyment of property giving rise to the payment of royalties with related parties (excluding payments for the temporary use or enjoyment of industrial, commercial or scientific equipment) and interest earned in financial or lending transactions (not applicable when the interest is part of the price) are considered nontaxable transactions. For purposes of this tax, income includes the price or consideration, taxes and fees, other than VAT and Special Excise Tax on Production and Services, normal interest and penalty interest, contractual 38 Baker & McKenzie

43 Mexico: Overview on Taxes penalties, deposits and advances, the recovery of deposits and advances, income from goods or services market or appraised value of goods or services received and in cases where no consideration is paid, the market or appraised value of goods sold or services rendered. Income items that are exempted from this tax are those derived from the transfer of stock and negotiable instruments, the sale of receivables, domestic and foreign currency, the income derived from accidental transactions carried on by individuals, farm income up to 40 times the general minimum salary for individuals (200 for corporations), and in general, income derived by tax-exempt nonprofit entities with exceptions. The deductions allowed are the acquisition of goods, independent services or temporary use or enjoyment of property, taxes other than income tax, single rate tax, cash deposits tax, and social security, non-creditable VAT and Special Excise Tax on Production and Services, returns, discounts, or rebates received on sales (including refunded deposits and payments), indemnities for damages and contract penalties, prizes paid in lotteries, raffles, drawings, games of chance or contests, donations subject to income tax limitations, and bad debts. Disallowed deductions for purposes of this tax are interest, salaries, benefits and social welfare expenses, social security contributions, related-party royalties, depreciation and amortization, tax cost in the sale of fixed assets, land and intangibles (some limitations), and losses in the sale of stock. The following requirements must be met for the expenses to be deductible: i. They should correspond to income subject to single-rate tax, for the supplier of goods or services. ii. Foreign expenses or amounts paid to nonresidents must be deductible in Mexico. iii. The expenses must be strictly indispensable to carry on taxable activities subject to single-rate tax. iv. The expenses must be actually paid when deduction is taken. v. In connection with imported goods all requirements for their legal importation into Mexico must be complied with. vi. Deduction requirements under the Income Tax Law must be complied with. Value-added Tax This tax applies when the following transactions are carried out in Mexico: (i) sale or disposition of goods; (ii) rendering of services; (iii) rental of assets; (iv) importation of goods or services. Please note that certain limited activities are exempted. As of January 1, 2010, the tax rates have been increased by one percentage point. Thus, the general value-added tax rate is 16%. A reduced 11% rate may apply on transactions by residents in the border zones, except for the sale of real property. Export of tangible and intangible goods and listed services are 0%-rated. A few domestic activities are also 0%-rated, such as the sale of agricultural products that do not undergo any industrial process. Value-added tax is triggered on a cash basis, ratably to the price actually received. This tax generally should not impact the costs of the taxpayer, as it is typically entitled to recover the tax paid from the tax charged to its clients. However, oftentimes, complicated mechanisms must be followed to determine the amount of creditable value-added tax. Baker & McKenzie 39

44 Cash Deposits Tax A cash deposits tax has been imposed since July 2008 to tax any cash deposit. As of January 1, 2010, the amount to which the tax will be imposed has been lowered from MXN$25,000 to MXN$15,000 (approximately, US$1, at the exchange rate of MXN$13.00 per US$1.00) each month, at a rate of 3% of the exceeding amount. This tax does not apply to electronic transfers, transfers between bank accounts, negotiable instruments, etc. The amounts paid for this tax are creditable against the annual income tax and the income tax withheld to third parties or could be offset against federal taxes. 40 Baker & McKenzie

45 Venezuela: Overview on Taxes Venezuela National Taxes State Taxes Metropolitan District Taxes Capital District Taxes Municipal Taxes Principles enforced Transfer Pricing Rules Tax Treaty Network Tax-free Reorganizations General rules Income Tax, Value-Added Tax, Luxury Tax, Customs Duties, Estate and Gift Tax, Alcohol and Tobacco Levies, Gaming Taxes, Public Registry Taxes and Fees, Mining and Hydrocarbons Taxes, Special Contribution Imposed on the Average of Assets of Financial Institutions, Telecommunications Taxes, Special Contributions to the National Institute of Cooperative Education, Special Contributions to Pension and Health Systems, Special Contributions to the Employment Payment System, Telecommunications Taxes, Special Contributions under the Organic Drug Law, Special Contributions under the Organic Law on Science, Technology and Innovation, Special Contributions under the Organic Law on Sports and Physical Activities, Stamp Tax in Federal Dependencies, Venezuelan Consulate Offices and certain States and other taxes, levies, fees or special contributions not assigned to states or municipalities Stamp tax, tolls on state highways, fees for the use of state services and assets, and other taxes Fees for the use of municipal services and assets, and other taxes Stamp tax, fees for the use of municipal services and assets, and other taxes Turnover tax on economic activities, industry, trade, services and similar activities; real estate property tax; advertising tax; vehicle tax; and fees for the use of municipal services and assets. Substance-over-form Arms -length transactions Tax transparency or CFC rules for investments in low tax jurisdictions Follow OECD Treaties in force with 31 countries. OECD, U.N. and U.S. Models Available in limited cases, subject to certain requirements Venezuelan taxes are normally self-assessed The statute of limitations for tax liabilities is four years. It may be extended to six years in certain circumstances (e.g., if the taxpayer fails to file the corresponding tax return or in the case of foreign source income) Baker & McKenzie 41

46 National Taxes Income Tax The Income Tax Law was amended in February The amendment ratified the worldwide basis of taxation introduced in Venezuelan taxation with the amendment of October As a result, since January 1, 2001, the taxpayers taxable income has to be determined on three separate bases: (i) net operating income from Venezuela sources; (ii) the adjustments for inflation of the taxpayers nonmonetary Venezuelan assets and liabilities; and (iii) net operating income from foreign sources. The combination of the three will result in the taxpayers net taxable income, to which the relevant tax rates will apply. Venezuela has adopted a simple foreign tax credit which will allow Venezuelan taxpayers subject to worldwide basis to claim a tax credit for taxes paid abroad levied on foreign source income. The tax credit is subject to an overall limitation pursuant to which the foreign tax paid would not be creditable to the extent it exceeds the maximum Venezuelan tax rate applicable thereon (i.e., 34%). There is no indirect foreign tax credit for dividends paid by foreign companies and received by resident individuals or entities. There is also no carry forward or carry back for foreign taxes paid otherwise not creditable in a given fiscal year. The income tax rates are imposed on net taxable income as represented by Tax Units. As of February 15, 2012, a Tax Unit was equal to VEF76,00 (USD at the official exchange rate in force on the same date), subject to subsequent annual adjustments normally made within the two first months of the fiscal year, and based on the National Consumer Price Index variations of the immediately preceding calendar year. On that date it was estimated that the value of the Tax Unit would increase to VEF 90 for fiscal year The income tax rates for individuals range from 6% to 34%. The corporate income tax rate is essentially 34%. Hydrocarbon activities are subject to a 50% rate, while mining royalties are subject to a 60% rate. Insurance premiums paid to non-domiciled companies (which cannot benefit from a double taxation convention) are subject to a 10% tax on 30% of the gross income received from Venezuela, less discounts, returns and cancellation of premiums caused in Venezuela (however, non-domiciled insurance companies are exempt from Venezuelan income tax liability when a reciprocal tax exemption exists for Venezuelan insurance companies). Interests on loans granted by qualified non-domiciled financial institutions are subject to a reduced 4.95% flat rate. Dividends paid by companies incorporated in Venezuela are taxed at a flat rate of 34%, regardless of the nationality, country of incorporation, domicile or residence of the corresponding beneficiaries. In this respect, the dividend tax only applies to the profits that were not subject to income tax liability at the corporate level. This system was created in order to avoid the double economic taxation of dividends. Withholding of Tax Amounts paid to and by a company for services are subject to withholding depending on whether those services are characterized as commercial services or non-commercial professional services. If the services are characterized as noncommercial professional services and are rendered by a domiciled corporation, then 5% of the gross fees must be withheld at the source (backup withholding). If the services are characterized as non-commercial professional services and are rendered by a non-domiciled foreign corporation, then 90% of the gross fees would be deemed to be net taxable income. The tax should be calculated by reference to Tariff No. 2 and totally withheld at the source. Taxes withheld at the source must be paid over to the Treasury by the withholding agent (i.e., payor) within the first three working days following the month when the payment of the income giving rise to the withholding was made. If the withholding agent fails to withhold the tax 42 Baker & McKenzie

47 Venezuela: Overview on Taxes at the appropriate time, it will be subject to a penalty, along with the risk that the company might lose its right to the deduction of the expense. Adjustment for Inflation Taxpayers must adjust the value of their assets and liabilities periodically to account for inflation. The initial adjustment to non-inflation monetary assets and liabilities, which results in an adjusted balance sheet, is made for income tax purposes only. The balance sheet for financial reporting purposes continues to be prepared on the basis of generally accepted Venezuelan accounting principles. The initial adjustment, which is a one-time operation only, does not affect income tax liability in respect of the fiscal year in which the initial adjustment is made. The purpose of the initial adjustment, which is made on the last day of a specific fiscal year, is to start the next fiscal year with an adjusted balance sheet reflecting current values of non-monetary assets and liabilities which are brought up-to-date based on inflation or devaluation, depending upon the asset or liability category involved. The adjusted asset and liability values and the corresponding adjusted net worth resulting from the process of initial adjustment become the platform for making the successive annual adjustments which have an impact on annual net taxable income. The only assets and liabilities subject to adjustment are those which may be characterized as non-monetary. The term non-monetary refers to assets and liabilities which, because they are not expressed in or represent nominal Bolivar values only, are susceptible to variations in value based on inflation or devaluation, and on liquidation will likely produce an amount which is different from the historical cost as reflected on the taxpayer s books. Assets or liabilities whose current market value at any time may vary from their historical cost are nonmonetary. The basis for adjustment of all adjustable non-monetary assets (other than receivables and cash) is the Consumer Price Index (CPI) published by the Venezuelan Central Bank from the date of acquisition of the asset or January 1, 1950, whichever is later, to the date of adjustment. In the case of non-depreciable assets, whether current or fixed, the calculation is a simple process of multiplying the historical cost of the asset by the aggregate inflation rate (i.e., the aggregate CPI variation), and adding the product to the historic cost by debiting the respective asset accounts and crediting the Net Worth Revaluation Surplus. In the case of a depreciable fixed asset, the process is somewhat more complicated because the product of the multiplication process must be debited to the respective asset account and credited in part to depreciation to cover the expired portion of the useful life of the asset. Only the balance is then credited to the Net Worth Revaluation Surplus. Adjustments to non-monetary assets are credited to the Net Worth Revaluation Surplus and adjustments to non-monetary liabilities are debited. The net amount of the Net Worth Revaluation Surplus derived from the initial adjustment is converted into a component element of the taxpayer s net worth as of the date of the initial adjustment. It then becomes the opening adjusted net worth for purposes of the first annual adjustment. The compulsory annual adjustments made subsequent to the initial adjustment have a direct impact on the taxpayer s annual net taxable income. The annual adjustments to balance sheet items as required by law are debited or credited to a temporary reconciliation account called the Inflation Readjustment Account. The final result of this account, depending on whether it is positive or negative, is treated either as an addition to or an allowable deduction from the net taxable Baker & McKenzie 43

48 income obtained from the taxpayer s normal business activities. Because the Inflation Readjustment Account is closed out annually into the Net Worth Revaluation Surplus, in addition to the impact it has on the current year s income tax liability, the final result of that account also affects year-end net worth an important factor in computing the annual adjustment for the subsequent fiscal year. The annual adjustments, like the initial adjustment, are made for income tax purposes only. Any increase in income or net worth as a result of those adjustments does not increase the source out of which dividends may be paid. The converse is equally true. Investment Tax Credit Deductions Declaration and Payment Transfer Pricing Taxpayers engaged in industrial, agri-industrial, agricultural, construction, electricity, telecommunication, science and technology, and any other industrial activity (except oil activities) are entitled to an investment tax credit equal to 10% of the amount of the qualified investment. To qualify, the investment must be made in assets which improve or develop productivity. Holders of income derived from rendering tourism services, duly registered with the National Tourism Registry, shall receive a discount of 75% of the amount of new investment used for the construction of hotels, lodgings and inns, for the expansion, improvement or refurbishing of existing buildings or services, to render any tourism service or for the education and training of their workers. In the case of agricultural, livestock, fishing or aquicultural activities, the discount shall be 80% of the value of new investments made in the area of influence of the production unit with a purpose of mutual profit, both for the unit itself and for the community in which the unit is located. For the purposes of the fiscal acknowledgment of communal investments, such investments must be previously qualified and later verified, by the competent entity of the national executive branch. The same discount shall be granted to tourism activities for communal investments, when such investments are made by small and medium industries in the sector. An additional investment tax credit of 10% of the cost thereof is granted to investments in fixed assets, programs and activities destined to the conservation, defense and improvement of the environment. Certain investments in the naval and maritime industry qualify for a 75% investment tax credit. Business taxpayers may generally deduct normal and necessary Venezuelan source expenses and losses incurred in obtaining Venezuelan-source income. Net operating losses may be carried forward for three years. Losses arising from inflation adjustments may be carried forward for one year. Foreign losses may only offset foreign source income. Taxpayers have a term of three months from the end of their fiscal year to declare and pay income taxes. After filing the first income tax return, each company must file, within the second half of the ninth month following the end of its fiscal year, an estimated tax return. The amount of the net income reflected in the estimated tax return may not be less than 80% of the total net income of the preceding fiscal year. The amount of the tax paid with the estimated return is an advance payment of the tax payable for the corresponding fiscal year. Taxpayers contracting with related parties must determine income, costs and deductions on the basis of arms length transactions in comparable operations by using the methodology set forth in the Income Tax Law. If the applicable methodology is not contemplated in the law, the OEDC transfer pricing guidelines will apply, providing they are consistent with the law. 44 Baker & McKenzie

49 Venezuela: Overview on Taxes Thin Capitalization Net Operating Losses Exemptions and Exonerations The amendment to the Income Tax Law of 2007 included for the first time in Venezuela thin capitalization rules in order to set a limit on the deduction of interest paid to related parties. In this respect, interest paid to related parties on loans that exceed the 1:1 debt-to-equity ratio are not deductible expenses for income tax purposes. Net operating losses are subject to a three-year carryforward rule, while inflation adjustment losses are subject to a one-year carryforward rule. Foreign-source net operating losses cannot be used to offset Venezuelan-source income. Both interest and capital gains on sovereign debt bonds issued by the Venezuelan Government are exonerated from income tax liability. Interest and, in some cases, on certain private debt bonds issued by Petróleos de Venezuela, S.A. (Petrobonos or Bonos PDVSA), the state-owned oil company, are exonerated from income tax liability. Presidential Decree No of 2011 granted the income tax exoneration to taxpayers who obtain net income from Venezuelan source income arising from the primary exploitation of agricultural, forestry, cattle breeding, poultry breeding, fishing, aquiculture, and fish breeding activities obtained by individuals, legal entities and unincorporated entities, residing in Venezuela. Presidential Decree No of 2011 established an income tax exoneration of as an incentive to further the construction of dignified houses, according to the Decree having the Rank, Value and Force of Organic Law of Emergency for Lands and Houses and the Great Mission Vivienda Venezuela Value-Added Tax The purchase and import of goods and services are subject to a value-added tax (VAT). Currently, the applicable rate is 12% of the gross price (certain luxury items are subject to an additional 10% rate, while certain items are subject to a reduced 8% rate). The VAT applies to sales and leases of personal tangible property, but not to the sale or lease of real estate. Individuals and corporations that import goods or services on a regular basis, manufacturers, producers, assemblers, as well as persons engaged in commercial activities and persons that render independent services on a regular basis, are considered taxpayers under the VAT. VAT taxpayers must register in a Tax Information Registry ( RIF ). The actual tax to be paid by each taxpayer is equal to the difference between the taxpayer s fiscal debits (the VAT charged to its clients) and its fiscal credits (the VAT paid by it to providers of goods and services) and is determined on a monthly basis. The resulting amount must be paid over to the National Treasury within the first 15 days of the following month. VAT Withholding: Administrative Order No. SNAT/2005/0056 issued by SENIAT on January 27, 2005 and published in Official Gazette No of February 28, 2005 ( Administrative Order ) designated special taxpayers as VAT-withholding agents. Under the Administrative Order, special taxpayers are required to withhold 75% of the applicable VAT on each payment or constructive payment made to ordinary VAT taxpayers, whether or not they are also special taxpayers. In principle, the amount to be withheld shall be equivalent to 75% of the tax rate applicable to the transaction. The amount to be withheld must be calculated according to the following formula: Baker & McKenzie 45

50 Mret = Pfac x Ai x R Where: Mret: Amount to be withheld Pfac: Price invoiced for taxed goods and service Ai: Applicable tax rate R: Withholding percentage The amount to be withheld is 100% (that is, the entire applicable rate) when the invoice fails to itemize the tax, comply with established requirements and/or formalities or when the supplier is not registered with the RIF. The withheld VAT must be paid by special taxpayers to the Tax Administration. VAT withholding may cause several cash flow problems to VAT taxpayers. Customs Duties Import duties have to be paid for all products imported into Venezuela. The duties are calculated on the CIF value of the products. The tariffs generally vary from 5 to 20% depending on the customs classification of the products. There is also a 1% service fee on the CIF value of the product for the use of the ports. Local Taxes Municipal Gross Receipts Tax All persons performing industrial, commercial or similar activities for profit must obtain a municipal license from, and pay a municipal tax to, the municipal jurisdiction (i.e., municipality) in or from which they perform such activities. The amount of the tax is calculated on the basis of a fixed percentage of the taxpayer s gross receipts from the prior tax year. Fixed periodic amounts are established for a few activities. The amount of the tax varies considerably according to the municipal jurisdiction where the taxable activity is performed. (There are more than 330 municipal jurisdictions in Venezuela.) Generally, the tax is determined annually and paid quarterly within the first month of each quarter. For calculation purposes, taxpayers must submit an annual return stating the gross receipts from each of its activities. Failure to submit the return and pay the tax on time, or any other infringement of the corresponding ordinance, normally results in fines, suspension or cancellation of the municipal license and temporary or permanent closure of the premises. Municipal Property Tax A tax on urban real estate (commonly called Municipal Property Tax) must be paid by the owner of real property. This tax is calculated by applying the percentage (established in the ordinance governing the location where the real estate is located) to its municipally appraised value, including the value of the land, buildings and industrial or commercial facilities. The amount of this tax varies considerably according to the municipal jurisdiction where the property is located and even within the same municipal jurisdiction, according to the type, use and purpose of the property. This tax is determined annually and paid quarterly within the first month of each quarter. Generally, the ordinances provide exemptions and exonerations, establish the obligation to submit returns on a periodic basis to determine the tax payable, and provide sanctions for any infringements. 46 Baker & McKenzie

51 Venezuela: Overview on Taxes Miscellaneous Municipal Taxes Additional municipal taxes include the vehicle circulation tax, public services tax, commercial advertising tax, public performances tax, and legal games and gambling tax. All of these taxes are expenses which may be deducted from a company s taxable income. Baker & McKenzie 47

52 Withholding Rates as Established in the Double Taxation Treaties Entered into by Venezuela Only if beneficiary of payment does not have a permanent establishment (a fixed place of business or an agent invested with the capacity of contracting on its behalf in Venezuela. Otherwise, Withholding Decree No applies (Official Gazette No of May 12, 1997) Country Income Business Dividends Interests paid to Profits 29 foreign banks Other interests Interests paid to the other State Royalties Technical Assistance Technological Services Real estate rentals by remission to local law 30 Austria 0% Barbados 0% Belarus 0% Brazil 0% Belgium 0% 5% if beneficiary owns at least 15% of the capital 15% all other cases 5% if beneficiary owns at least 5% of the capital 10% all other cases 5% if beneficiary owns at least 25% of the capital 10% all other cases 10% if the beneficiary owns at least 10% of the capital 15 % all other cases 5% if beneficiary owns at least 25% of the capital 4.95% 10% 0% 5% 0% 0% 34% 4.95% 15% 0% 10% 10% 10% 34% 4.95% 5% 0% 5% or 10% 0% 0% 34% 4.95% 15% 0% 15% 15% 15% 34% 4.95% 10% 0% 5% 0% 0% 34% 29 Including commissions and professional service fees. 30 The back-up withholding will be creditable against the final tax of 34% on net income. 48 Baker & McKenzie

53 Venezuela: Overview on Taxes Income Business Dividends Interests paid to Other Interests Royalties Technical Technological Real estate Country Profits 29 foreign banks interests paid to the other State Assistance Services rentals by remission to local law 30 15% all other cases Canada 0% China 0% 10% if beneficiary owns at least 25% of the capital 15% all other cases 5% if the beneficiary owns at least 10% of the capital. 10% all other cases 4.95% 10% 0% 5% or 10% 0% 0% 34% 4.95% 10% 0% 10% 0% 0% 34% Czech Republic 0% 5% if beneficiary owns at least 15% of the capital 10% in all other cases 4.95% 10% 0% 12% 10.2% 12% 34% Cuba 0% Denmark 0% France 0% Germany 0% 10% if the beneficiary owns at least 25% of the Capital 15% in all other cases 5% if beneficiary owns at least 25% of the capital 15% in all other cases 0% if beneficiary owns at least 10% of the capital 5% all other cases 5% if beneficiary owns at least 4.95% 10% 0% 5% 15% 15% 34% 4.95% 5% 0% 10% or 5% 5% 0% 34% 4.95% 5% 0% 5% 0% 0% 34% 4.95% 5% 0% 5% 0% 0% 34% Baker & McKenzie 49

54 Income Business Dividends Interests paid to Other Interests Royalties Technical Technological Real estate Country Profits 29 foreign banks interests paid to the other State Assistance Services rentals by remission to local law 30 15% of the capital 15% all other cases Indonesia 0% Iran 0% 10% if beneficiary owns at least 10% of the capital 15% all other cases 5% if the beneficiary owns at least 15% of the capital 10% in all other cases 4.95% 10% 0% 20% or 10% 10% 17% 34% 4.95% 5% 0% 5% 0% 0% 34% Italy 0% 10% 4.95% 10% 0% 7% or 10% 0% 0% 34% Korea 0% Kuwait 0% Malaysia 0% Norway 0% 5% if beneficiary owns at least 10% of the capital 10% all other cases 5% if the beneficiary owns at least 15% of the capital 10% in all other cases 5% if beneficiary owns at least 10% of the capital 10% all other cases 5% if beneficiary owns at least 10% of the capital 5% 10% 0% 5% or 10% 0% 0% 34% 4.95% 5% 0% 20% 0% 0% 34% 15% 15% 0% 10% 10% 0% 34% 4.95% 15% 0% 12% or 9% 9% 0% 34% 50 Baker & McKenzie

55 Venezuela: Overview on Taxes Income Business Dividends Interests paid to Other Interests Royalties Technical Technological Real estate Country Profits 29 foreign banks interests paid to the other State Assistance Services rentals by remission to local law 30 10% all other cases Portugal 0% 10% 4.95% 10% 0% 12% or 10% 10% 0% 34% Qatar 0% Russia 0% Spain 0% Sweden 0% Switzerland 0% 5% if beneficiary owns at least 10% of the capital 10% all other cases 10% if beneficiary owns at least 10% of the capital 15% all other cases 0% if beneficiary owns at least 25% of the capital 10% all other cases 5% if beneficiary owns at least 25% of the capital 10% all other cases 0% if beneficiary owns at least 25% of the capital 10% all other cases 5% 5% 0% 5% 0% 0% 34% 5% 10% 0% 15% 10% 0% 34% 4.95% 10% 0% 5% 0% 0% 34% 4.95% 10% 0% 7% or 10% 0% 0% 34% 4.95% 5% 0% 5% 0% 0% 34% The Netherlands 0% 0% if the beneficiary owns at least 25% of the capital 10% all other cases 4.95% 5% 0% 5%, 7% or 10% 0% 0% 34% Baker & McKenzie 51

56 Country Income Business Dividends Interests paid to Profits 29 foreign banks Other interests Interests paid to the other State Royalties Technical Assistance Technological Services Real estate rentals by remission to local law 30 Trinidad & Tobago 0% 5% if the beneficiary owns at least 25% of the capital 10% all other cases 4.95% 15% 0% 10% 0% 0% 34% United Arab Emirates 0% 5% if the beneficiary owns at least 10% of the capital 10% all other cases 4.95% 10% 0% 10% 10% 0% 34% United States 0% 5% if beneficiary owns at least 10% of the capital 15% all other cases 4.95% (including insurance companies) 10% 0% 5% or 10% 0% 0% 34% United Kingdom 0% Vietnam 0% 0% if beneficiary owns at least 10% of the capital 10% all other cases 5% if the beneficiary owns at least 10% of the capital 10% all other cases 4.95% 5% 0% 7% or 5% 0% 0% 34% 4.95% 10% 0% 10% 10% 0% 34% 52 Baker & McKenzie

57 Contacts Ronald Evans Caracas, Venezuela Torre Edicampo, P.H. Avenida Francisco de Miranda, Cruce con Avenida Del Parque Tel: Fax: Martín Barreiro Buenos Aires, Argentina Leandro N. Alem 1110 Floor 13 Tel: Fax: Simone Dias Musa São Paulo, Brazil Av. Dr. Chucri Zaidan, andar Tel: Fax: Hector Reyes Mexico City, Mexico Edificio Plaza Inverlat Blvd. M. Avila Camacho No. 1-12o Col. Lomas de Chapultepec Tel: Fax: Alberto Maturana Santiago, Chile Nueve Tajamar 481 Torre Norte, Piso 21, Las Condes Tel: Fax: [email protected] Jaime Vargas Bogotá, Colombia Av. 82 No , 6Th Floor Tel: Ext Fax: [email protected] Baker & McKenzie 53

58 Baker & McKenzie has been global since inception. Being global is part of our DNA. Our difference is the way we think, work and behave we combine an instinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. Serving our clients with more than 3,800 lawyers in 42 countries, we have a deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Baker & McKenzie Global Services LLC / One Prudential Plaza, Suite 2500 / 130 E. Randolph Street / Chicago, IL 60601, USA /