Module IV: Corporate Tax Planning Update:

Transcription

1 Module IV: Corporate Tax Planning Update: Colombia and Venezuela 11th Annual Latin American Tax Conference Miami, Florida March 2010 Jaime Vargas, Sergio Corredor and Jorge Jraige

2 Agenda COLOMBIA General Tax Overview Option 1: Repatriation of Taxed Dividends Option 2: Step-up of asset cost in a share transaction VENEZUELA General Overview Option 1: Repatriation of funds Option 2: Inbound Transactions Option 3: Thin Capitalization 2

3 COLOMBIA General Tax Overview 3

4 General Structure National Level Income Tax: 33% Capital Gains Tax: 33% Tax on Equity: 1.2% Value Added Tax: 16%, 0%, other special rates Tax on Financial Transactions: 0.4% Stamp Tax: 0% Departmental Level Municipal Level Excise Taxes (alcohol, beer, cigarettes) (different rates) Excise Tax on Gasoline: fixed amount per gallon Registration Tax: 0.3% - 1% Tax on Vehicles: 0.2% Industry and Commerce Tax: 0.3% - 1.3% Tax on billboards and other exterior advertisement Real Estate Tax: Several rates

5 Income Tax - Generalities Nonresidents taxed on their Colombian source income Services rendered inside Colombian territory Exploitation of tangible or intangible assets inside Colombia Transferring of assets inside Colombia Residents taxed on worldwide income Basic FTC mechanism Branches taxed only on Colombian source income

6 Income Tax - Generalities Other main characteristics Transfer pricing regulations No permanent establishment regulations Tax haven regulations Treaty in force with Spain and Andean Pact. Treaty with Chile accepted by the Constitutional Court. Treaties signed with Mexico, Switzerland and Canada, pending of approval. Treaties being negotiated with Belgium, Czech Republic, Germany, South Korea, Netherlands, India, and the United States of America. S.A.s per se Corporations

7 Income Tax Rates - Residents Current Income and remittance taxes - resident companies and individuals Detail Tax Base Rate Colombian companies Income Net Taxable Income 33% Foreign companies investing in Colombian companies Income Dividends remitted outside Colombia 0%- 33% Branches of foreign companies Income Net Taxable Income 33% Branches of foreign companies Remittance Profits remitted outside Colombia 0% - 33%

8 Income Tax Rates Non Residents Current Income Taxes - Nonresident Companies Detail Tax Base Rate Technological Services, Consulting services Income 100% of the payment 10% Use of intangibles (brands, know-how, etc.) Income 100% of the payment 33% Software Income 80% of the payment 33% Interests Income 100% 0% or 33%%

9 Income Tax Deduction of payments abroad Treatment of payments to foreign parties Deductibility generally limited to 15% of net taxable income of taxpayer before deducting payments abroad. Some exceptions Payments subject to withholding taxes Payments for the acquisition of tangibles Interest payments, financial lease payments Costs & expenses that have to be capitalized in accordance with accounting rules Treatment of payments to foreign related parties Overhead payments Licensing of intangibles Other services

10 Income Tax Financing Interest payments abroad in relation to the following loans are not subject to income tax withholdings: Short term loans originated in the import of merchandise or in bank overdrafts Loans obtained for the financing or pre-financing of exports Loans obtained abroad by financial entities incorporated in Colombia Loans obtained in relation to foreign trade operations through financial entities incorporated in Colombia.

11 Income Tax Financing Lease payments made to foreign entities with no domicile in Colombia in relation to lease agreements made for financing the acquisition of machinery and equipment related to export activities or to activities that are considered of interest for the social and economical development of Colombia in accordance with the CONPES (National Council of Social and Economical Politics) Loans obtained by entities whose activities are considered of interest for the social and economical development of Colombia in accordance with the CONPES. With a few exceptions, foreign financing must be obtained from foreign financial institutions registered before the Central Bank, and channeled through the regulated exchange market. No thin capitalization rules; no back-to-back rules.

12 Income Tax - Incentives Free Trade Zones Industrial users of goods and services are subject to a 15% income tax rate. Acquisition of fixed real productive assets An additional deduction of 40% of the acquisition price of the asset is applicable in the year in which the asset is purchased. Some Income Tax Exemptions: 15 years of income tax exemption on income obtained from the sale of electric energy obtained from wind power, agricultural wastes or biomass. 30 years of income tax exemption on income obtained from hotels built or remodeled or between 2003 and In the case of remodeling, limited to the proportion that the remodeling represents in the total tax cost of the hotel. From 2003 to 2022, ecotourism services are exempt of income tax.

13 Colombian Taxation System - Value Added Tax Value Added Tax Accrued On Services rendered inside Colombia Sale of movable tangible assets inside Colombia Imports Some exceptions to territorial scope Audit, consulting and advisory services Licensing of intangibles Satellite connection and access services Telephone services switching outgoing for incoming calls General Rate 16%

14 Option 1: Repatriation of Taxed Dividends 14

15 Purpose of the transaction Objective: repatriate dividends that were not taxed at the corporate level without triggering the tax at the shareholders level. Additional Benefit: Lowering the equity tax basis

16 Transformation of Company into a Branch Abroad Colombia HoldCo SubHold ColCo Description: ColCo has undistributed dividends of USD 10 mm. Those dividends were not taxed at ColCo s level; if distributed to its shareholders, a withholding tax would apply at a 33% rate. Proposed Structure 1. Subholding absorbs ColCo in an international merger. As a consequence of the merger, ColCo becomes a Colombian branch. 2.ColCo distributes to SubHold the retained profits that were not taxed in its hands. 3. No withholding or income tax will apply on the repatriation HoldCo Paid-out profits would be reduced from 2011 equity tax basis.

17 Option 2 Step-up of asset cost in a share transaction 17

18 Purpose of the transaction Objective: Eliminate tax impact in Colombia on the sale of a company while stepping-up the cost of assets for the purchaser and pushing down debt into Colombia.

19 Sale of Colombian Company Abroad HoldCo Newco Bank Loan or Back to Back Loan Description: ColCo has undistributed dividends of USD 10 mm. Those dividends were not taxed at ColCo s level; if distributed to its shareholders, a withholding tax would apply at a 33% rate. Proposed Structure Colombia ColCo Purchaser 1. Holdco creates Newco. 2. Newco and Colco merge; Colco becomes Newco s Colombian branch. 3. Purchaser acquires a foreign loan. Purchaser uses the loan to acquire Newco s shares. The sale of Newco s shares is not taxable in Colombia; interest paid on the loan is not taxable in Colombia. 4, Purchaser liquidates Newco and in consequence its Colombian branch. 5. Purchaser receives the assets of the branch for their fair market value, which would be equal to the price paid for Newco s shares, and consequently steps-up the cost of the assets.

20 VENEZUELA General Overview 20

21 Tax Planning in Venezuela Tax collection needs Expropriation environment Exchange control in force Tax Evasion v. Tax Avoidance 21

22 Tax Planning in Venezuela Substance-over-form analysis Organic Tax Code Income Tax Law VAT Law Recent SupremeCourt s case law Decision of July 16, 2002, case: Organización Sarela, C.A. v. National Treasury Decision of August 14, 2007, case: Publitotal 994 Servicios de Publicidad v National Treasury Decision of August 6, 2008, case: S.A. y Policlínica La Arboleda, C.A. v. National Treasury Decision of October 27, 2009, case: Agencia Operadora la Ceiba, S.A. v. National Treasury 22

23 Option 1: Repatriation of funds

24 Purpose of the Transaction Business purpose: Acquisition of foreign currency for: Payment of debts Dividends Cross-border financing transactions Ancillary Tax Benefits: Creation of tax-free profits Avoidance of non-deductible losses 24

25 Common Swap Transaction 2 TREASURY BILLS DPNs FOREIGN BROKER Results: VENCO VEF DPNs Venco s Adjusted Basis on DPNs VEF 6.5 Income derived by Venco from the Swap Transaction US$1 or VEF 4.30 Loss derived from the Swap Transaction (VEF 2.20) 1 Local Broker The loss is not deductible for income tax purposes. 25

26 Results: Outbound Transaction (Option 1) VENCO 2 1 FOREIGN BROKER Venco s Adjusted Basis on Bonds VEF 6.5 Income derived by Venco from the Swap Transaction US$1 or VEF 4.30 Loss derived from the Swap Transaction (VEF 2.20) The loss is deductible TREASURY BILLS Private Bonds VEF Private Bonds Local Broker 26

27 Loan of Securities (Option 2) - Opening Market 3 Swap of DPNs TREASURY BILLS IRP VENCO 1 VEF 2 Loan of DPNs Local Broker Purchase of DPNs 27

28 Loan of Securities (Option 2) Closing Market 1 Treasury Bills DPNs IRP 2 DPNs + VEF VENCO 3 DPNs VEF Local Broker 28

29 Pros and Cons of the Loan Transaction Advantages Financial statements will reflect an account receivable in VEF Protection against VEF devaluation No loss on VENCO s books and, therefore, no decrease in E&P (for dividend purposes) No adverse tax consequences for VENCO in Venezuela Application of statutory exemption; and Avoidance of losses not deductible for income tax purposes Disadvantages In the unlikely event of VEF Revaluation IRP would require more USD to pay the Security Loan 29

30 Option 2: Inbound Transactions 30

31 Option 2: Inbound Transactions 31

32 Purpose of the Transaction Business Purpose: Funding of local operations and change of position from US$ to VEF Ancillary tax benefits: Creation of tax free gains (inbound transaction) 32

33 Inbound Transaction 1 TICCs USD FOREIGN BROKER VENCO TICCS 2 Local Broker VEF Results: Venco s Adjusted Basis on TICCs US$1 or VEF 4.30 Income derived by Venco from the sale of the TICCs VEF 2.20 The gain is exempt

34 Option 3: Thin Capitalization [change title in View/Header and Footer] 34

35 Purpose of the Transaction Business Purpose: Acquisition of working capital Ancillary tax benefits: Creation of a taxable deduction from theadjustment for inflation system higher than the limitation imposed on interest Potential exchange losses 35

36 Loan Transaction (Fact Pattern) Loan January 2010 ($120) Parent Co Year 1 U.S. Interest (5%) Venezuela VEN Co Net worth average 100 Debts with 3 rd parties 40 Debts with Parent Co 120 Inflation rate 27%

37 Application of Thin Cap rules Step 1: The thin cap limitation applies if: Debts (owed to both related and not related parties) exceed from taxpayers net worth In the case study, Debts (160) exceed Venco s net worth (100). Therefore, the regime applies. Step 2: Subtraction of Annual 3rd Parties Debts Average from the Annual Net Worth Average ( Result ): If the Result is positive, interest are partially or fully deductible. If the Result is negative, no interest expense is deductible. In the example the Annual Net Worth Average (100) exceeds by 60 the Annual 3rd Parties Debts Average (40). Therefore, the Result (60) is positive. 37

38 Application of Thin Cap rules Step 3: Amount of deductible interest If the quotient obtained from dividing the Result by the Annual Related Parties Debt Average is = 1, interest are fully deductible. If that quotient is < 1, the interest are partially deductible. In the case study, where the Result is 60, the quotient is < 1 (i.e., 0.5 or 60/120). Therefore, the interest deduction is determined as follows: Interest paid * quotient = 6 (120 * 5%) x 0.5 Interest deduction = 3 38

39 Application of Thin Cap rules Step 4: Debts considered as net worth for tax purposes Portion of Debts with related parties exceeding the net worth Debts not complying with arm s length conditions In the case study, the portion of the debt treated as net worth is 20 (i.e., ). It must be treated as an interim net worth increase. Step 5: Overall result derived from the thin cap provision Interest deduction 3.0 AFI Net worth deduction 5.4 (20 * 27% or inflation %) Overall deduction 8.4 Deduction before Thin Cap6.0 Benefit for the fiscal year

40 Unwind of the Transaction Parent Co Year 2 U.S. Venezuela VEN Co Repayment of Loan in December 2011 ($120) Net worth average 110* Debts with 3 rd parties 40 Debts with Parent Co 0 Inflation rate 24%

41 Application of Thin Cap rules VenCo will be entitled to a deduction arising from the adjustment of its net worth at the beginning of the fiscal year for the inflation for that fiscal year (i.e., 24% in the example) The payment of the debt owed to ParentCo should be treated as an interim net worth decrease giving thus rise to taxable income. The income, however, will be determined by applying the inflation corresponding to December 2011 (e.g., 2%) to the Debt amount. The overall result, therefore, will be a deduction of 7.88, determined as follows:. Deduction 20 * 24% (4.80) Interest deduction 6 * 0.58* (3.48) Income 20 * 2% 0.40 Overall

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