Value-Added Tax Across the Latin American Region

Value-Added Tax Across the Latin American Region 11th Annual Latin American Tax Conference The Biltmore Hotel, Coral Gables, FL 10-11 March 2010 Jose Pedro Barnola, Claudio Moretti, Alberto Maturana, Sergio Corredor, Jan Snel, Carmela Hernandez, Alejandro Enriquez Mariscal, Jorge Narvaez-Hasfura, Martin Barreiro

Agenda General pitfalls and opportunities VAT Taxable events Cross border services 2

VAT Pitfalls and Improvements [change title in View/Header and Footer] 3 3

Overview Heavy reliance on VAT throughout the region Generally applicable VAT in BRAZIL, ARGENTINA, CHILE, COLOMBIA, MEXICO, VENEZUELA, PERU and other countries Rates and extent of the tax base vary VAT imposed on seller, passed on to buyer Zero rate on exports of goods and some exports of services Importer is VAT taxpayer in imports 4

Overview Regular VAT credit mechanism generally applies Sellers credit input VAT against their output VAT Self-charged import VAT is immediately credited Brazil Myriad of VAT-type taxes: IPI, PIS/COFINS and ICMS IPI credits/debits mechanisms (inputs and outputs) PIS / COFINS VAT-type legislation is maturing ICMS State VAT-type tax 5

Overview Brazil For taxpayers taxed under the presumed profit method, as well as financial institutions and other specific sectors they still operate as turnover (or cumulative ) taxes with no credit mechanism With rate of 3.65% for each taxpayer One-time tax mechanism for other taxpayers Specific rules for cosmetics, vehicles, pharmaceutical products, oil, etc. 6

VAT Recent developments Brazil Accumulation of credits PIS / COFINS and IPI manageable ICMS exportation, deferrals and incentives Tax-war ICMS Tax substitution regime Expansion of the system to many industries (ICMS) 7

VAT Pitfalls and Improvements Recovery of VAT Credits [change title in View/Header and Footer] 8 8

Recovery of VAT credits Refunds of VAT credits are generally not available Exceptions: ARGENTINA, MEXICO, PERU, COLOMBIA, CHILE in some specific cases, but procedures made the refunds to be effective in very few situations Transfers of VAT credits Monetization / use of credits 9

Argentina Refunds of Input VAT To Argentine Exporters Abrogation of Reimbursement of Input VAT from Acquisition, Construction or Import of Capital Assets New Advanced Refund of VAT Energy Power Generators based on Renewable Sources and other activities 10

Argentina Transfer of VAT Credits of Free Transferability VAT law and procedure allow their transfer from one taxpayer to another Longstanding objection by tax authorities to such transfers based on alleged technicalities The Supreme Court decision Transfer of VAT credit of free transferability does not require prior approval of the tax authority Time consuming process 11

Argentina Transfer of VAT Credits of Free Transferability Tax authority still claims power to approve the use of such VAT credits by assignees General Resolution 1466: Credit must arise from the direct payment of a tax obligation under withholding, perception or payment on account regimes VAT credit transfers are subject to Tax Authority s confirmation of the credit s existence 12

Chile VAT Credits and Refunds: Credit balances may be carried forward no time limits Exporters may, in certain circumstances, get a refund of input VAT incurred in connection with goods/services which constitute part of export activities Local taxpayers may also, in certain circumstances, seek refund of VAT incurred in acquisition of capital assets Reimbursements are carefully reviewed with the purpose of freezing them Offsetting vs other taxes upon total termination of operations Assignable, but Treasury not bound to pay 13

Chile 2007 Customs Ruling and 2008 Rev Ruling 2007 Customs Ruling adopted a more relaxed definition of exportable services that qualify for VAT benefits (Zero-rate and Input VAT refund), including pre-approved services. 2008 Rev. Ruling required the service to be prima facie a VAT taxable event. Audits will now be ex post i.e. audits precipitated by requests for refund of VAT 14

Chile Statute of Limitations for tax refunds Extended to three years in case of undue or excessive payments 15

Colombia VAT Refunds To Colombian Exporters Exporters of goods Entitled to reimbursement of VAT credits derived from VAT paid during the manufacturing process Exporters of zero-rated services Entitled to reimbursement of VAT credits upon complying with specific requirements. 16

Mexico Refund of Creditable VAT Generally Available e.g. Input VAT Paid By Exporters Delays on Refunds Caused from practical considerations Lack of funds by the Mexican Government Pursuing a Refund Important to file for refund and pursue vigorously Before the balance to refund becomes sizable 17

Mexico For Taxpayers Partially VAT-Exempt Activities The creditable portion of input VAT determined considering portion of activities not subject to VAT. Change for 2005 - Determined based on activities carried out in the current month Instead of considering the proportion from the last year Alternative Offset of Creditable VAT As Payment of Other Taxes Enacted in mid 2004 18

Peru VAT refunds: Certificates issued by Tax Adminstration used to pay other taxes payable to the Tax Administration (i.e. Income Tax) If no taxes payable to the tax adminstration, certificates can be used to pay taxes payable to other government agencies Statute of limitations: certificates must be used within 4 years Early recovery of VAT in major projects: for some cases available through domestic law (i.e. mining and hydrocarbons) 19

Venezuela May only be carried out through the issuance of electronic tax reimbursement certificates Refunds of Input VAT To Venezuelan Exporters or Input VAT on the Acquisition, Construction or Import of Capital Assets that will be used in export projects Available in principle But government defers payment of VAT reimbursements Due to its lack of resources 20

Venezuela Input VAT from Acquisition, Construction or Import of Capital Assets Adjustment for inflation of this Input VAT to be credited after manufacturing taxpayer begins commercial production 21

Mexico For Taxpayers Partially VAT-Exempt Activities The creditable portion of input VAT determined considering portion of activities not subject to VAT. Change for 2005 - Determined based on activities carried out in the current month Instead of considering the proportion from the last year Alternative Offset of Creditable VAT As Payment of Other Taxes Enacted in mid 2004 22

Brazil Refund of credits Available for PIS/COFINS and IPI Available for ICMS, but not feasible under the current scenario Transfer of credits Transfer of PIS/COFINS credits to third parties No legal provision on such transfers Transfer of ICMS credits No legal provision when related to transactions between taxpayers located in different states Special rules for credits derived from export transactions May be authorized through agreements executed with the state where the taxpayer is located. Generally is bound by the promise of investments. 23

Brazil Monetization / use of credits Possibility to use IPI, PIS / COFINS credits for payment (offsetting) of other federal taxes (for instance, corporate income tax) ICMS possibile tax planning and tax litigation to speed up the utilization of the accumulated credits. Corporate reorganizations Filing of tax lawsuits aiming the cost incurred with the credits as a deductible item for Corporate Income Tax (IRPJ) purposes 24

VAT Pitfalls and Improvements Withholding of VAT [change title in View/Header and Footer] 25 25

Overview Objectives of imposing withholding on VAT taxes Reduction of tax evasion Anticipation of the tax due Centralization of the tax collection by reducing the number of taxpayers Buyer does not pay some or all of VAT to the supplier Instead buyer withholds it an pays it to the government Generally interferes with normal credit mechanism Supplier doesn t get output VAT from the buyer, from which supplier can recover input VAT that it paid 26

Argentina Required Upon Payment of the Invoice 10.5%, 8.4%, or 16.8% of the amount invoiced (i.e. 50%, 40% or 80% of the VAT charged at 21%) May Result ion Permanent Credit for Supplier Against the Tax Authorities May ask for a refund But it is a very cumbersome procedure 27

Argentina Withholding Can be Avoided with an Exemption Certificate To the Supplier from Argentine Tax Authority Supplier applies for the certificate and complies with specific requirements Certain Suppliers of Goods and Services Are Special Collection Agents for that VAT Appointed by the tax administration Invoice a specific % of the VAT in addition to the 21% May result in permanent VAT Credit for customers of those suppliers against the tax authorities 28

Brazil Tax substitution regime Increasing use of the mechanism for ICMS purposes Before, the application was restricted to strategic industries such as oil, gas, pharmaceuticals and automotive Now, especially as of 2009, the mechanism is applied to a broad range of industries PIS / COFINS one-phase mechanisms higher tax rates applicable to the manufacturer and importer. Concentration of the taxation in the first link of the chain 29

Brazil Tax substitution regime ICMS Transactions within the state are easy to manage Problem arising in transaction with taxpayers located in different states State of destination imposes the payment of the tax upfront in the moment the goods enter into the establishment (absence of States protocol) Obligation for the buyer to pay the ICMS (cash disbursement) before the reselling of the goods within or outside the State Ongoing tax litigation on the constitutionality of such measures 30

Chile Administrative Substitution of Taxpayer Since 1975, Tax Administration is empowered to substitute VAT taxpayer Generally imposing withholding obligation on buyer By administrative ruling It requires buyer to issue purchase invoices Generates a withholding agent for all or part of the fiscal debit or output of the vendor Used to control evasion Primarily in activities such as agriculture, stock breeding, construction and mining 31

Chile Administrative Substitution of Taxpayer Legal substitution applies only in few cases Administrative substitution very common Technically, administrative substitution is, in our opinion, against the Chilean Constitution In the construction industry, construction enterprises may request substitution of taxpayer in case of installation-type services. Application commonly used by construction enterprises to ensure VAT on those services gets paid to the Government, thereby becoming VAT credit that may be imputed against output VAT in the future. 32

Colombia Withholding agents appointed by the law Withholding is equal to the 50% of the tax at moment of payment or accrual Monthly withholding tax return Withheld amount is a credit to the supplier Supplier may request the refund of the withheld amount 33

Colombia Reverse charge mechanism Services rendered inside the country by nonresidents are subject to VAT, withheld by the local customer No VAT is detracted from the payment Colombian customer could credit the selg-withheld VAT Exception: Services excluded from the tax by law 34

Mexico Applicable to Payer for: Professional services to individuals Rents to individuals Freights to individuals and corporations Commissions to individuals Withholding Agent Pays the Tax on Behalf of the Supplier Amount Paid is a Credit for the Supplier Refunds of supplier s non-creditable input VAT available in principle 35

Peru Withholding Agents Appointed by the Tax administration Purchaser appointed as Withholding Agent withholds 6% of total purchase price; must issue a withholding certificate to the supplier Exceptions: transactions with good taxpayers or with other Withholding Agents Collection Agents Appointed by the Tax Administration System applies to final users and certain domestic transactions 36

Venezuela Special taxpayers and Public Entities designated as withholding agents Elevated withholding rate: 75% of the invoiced VAT. In certain cases 100%. VAT taxpayers subject to withholding face cash-flow problems excess VAT withholding 37

Venezuela Excess VAT withholding could be assigned or used to offset other federal taxes Requires the previous authorization of the Tax Administration. Approval could take several months or even years Result = severe cash-flow problems for VAT taxpayers selling assets or providing services to special taxpayers and/or public entities 38

Venezuela Cash-flow issues Purchases Sales Price Paid 100 Price charged 200 VAT (12%) +12 VAT (12%) +24 (Bs.18 withheld) Total 112 224 VAT due by the Taxpayer 24 (fiscal debits in sales) -18 (VAT withheld) -12 (fiscal credits in purchases) -6 (excess VAT to be carried forward to the following three months) 39

VAT Pitfalls Defining Export of Services To Apply 0% VAT [change title in View/Header and Footer] 40 40

Overview Non-residents need 0% rate of VAT on payments to parties in the country Payments for exports of goods are generally Zero rated or tax exempt In Latin America, payments for exports of services are often not zero rated That is a problem Especially important in locating export manufacturing operations and shared services centers 41

Overview Defining export of services i.e. payment is zero rated Generally said to depend on whether enjoyment is abroad One approach enjoyment is abroad if the party is abroad Makes sense benefit to party is where party is located Alternative prove where foreign party uses the service Presents a problems Some countries have a list of exports of services 42

Argentina Relatively Liberal Definition of Exports of Services Zero rate of VAT generally applies if services are economically used by a foreign party outside of Argentina Makes Argentina a relatively attractive jurisdiction for locating a shared services center 43

Brazil Taxes embraced: PIS / COFINS and ISS (Municipal) Issues Divergent definitions of export of services for purposes of PIS/COFINS and ISS exemption PIS/COFINS broad definition of export of services Ruling looks to the location of the beneficiary Export of services if funds flow into Brazil Private letter ruling no. 19/2007 Services were provided in Brazil, but the result was verified in a foreign country (international freight) 44

Brazil ISS municipal tax on services Controversies on the definition of exportation of services Look to the result of the services Export of services IF the conclusion of services is verified abroad Court decision restrictive interpretation on exportation of services Open definition for PIS/COFINS helps making Brazil a relatively attractive jurisdiction for a shared services center Planning for ISS choose location low rate of ISS Transfer pricing rules may create issues 45

Chile As per 2007 Customs Regulation, a specific ruling is no longer required by each taxpayer to get exportable services qualification. There is now a list of pre-approved services deemed to qualify as exportable service with VAT benefits (zero-rate and input VAT refund). E.g.: call centers. The Tax Authority in a 2008 Rev Ruling requires that the listed service is prima facie subject to VAT, to allow for input VAT outputs recovery. 46

Chile Alternative use the new non-taxable presence of a foreign company in Chile no VAT Could provide services (export services) to non-chilean companies Would operate in Chile through powers of attorney and local employees Income would be in the foreign country Especially useful if that company can get a foreign tax credit for withholding taxes on the service payments 47

Colombia The foreign entity must have no activities or business in Colombia. There has to be a written agreement. The services are fully performed in Colombia to be used exclusively abroad. The local company has to be registered as an exporter of services before the Ministry of Commerce, Industry and Tourism. 48

Mexico Statute Defines Which Services Provided to a Foreign Party Qualify as Zero-Rated Exports of Services E.g. maquiladora processing services technical assistance and related services Problem nonrecoverable VAT on invoices to foreign parties for most services being provided by a Mexican party 49

Peru Only services listed in Annex V can qualify as an exportation of services provided that: There was actual consideration for those services evidenced by an invoice duly registered in the company books The exporter is domiciled in the country The user or beneficiary of the services is not domiciled in the country The use, exploitation or enjoyment (aprovechamiento) of the services takes place entirely outside Peru 50

Venezuela The Beneficiary is a Non-Domiciled Party That consumes, uses or benefits from the services exclusively outside Venezuela VAT Law and Regulations Fail to Define When a Service is Used Exclusively Outside Venezuela 51

Venezuela Favorable Court Decision of November 10, 2003 4th. Superior Tax Court C. Steinweg Venezuela, C.A. vs Treasury Facts Venezuelan corporation rendered inspection, shipping and warehousing services of Venezuelan export merchandise goods bought by foreign non-domiciled corporations. Tax Administration considered that the inspection and shipping services performed in Venezuela were subject to VAT as local services. 52

Venezuela Favorable Court Decision of November 10, 2003 Taxpayer argued that the whole of the services were of benefit to the recipients outside of Venezuela. Court held in favor of the taxpayer On the rationale that the VAT system adopted by Venezuela follows the destination principle, under which, services and goods should be taxed at the place of consumption. 53

Venezuela Facts of the 3Com case US$ Foreign Company Services Sales (U.S.) (Venezuela) 3Com Repair Clients 54

Venezuela Unfavorable Court Decision of January 6, 2008 3Com International, Inc., Sucursal Venezuela vs. Treasury Venezuelan corporation rendered marketing, promotion and technical support of products sold by a U.S. company to its Venezuelan customers. In 2004 Tax Court held in favor of the taxpayer On the rationale that the U.S. company benefited from the services outside Venezuela 55

Venezuela Unfavorable Court Decision of January 6, 2008 Reversed by the Supreme Court on appeal in 2008 On the grounds that the Venezuelan customers benefited from the services in Venezuela (technical support) Even if they did not pay any compensation for such services. 56

VAT Pitfalls and Improvements Importation of Services [change title in View/Header and Footer] 57 57

Argentina Tax Burden on Importation of Services 10.5% or 21% Argentine party must be VAT registered taxpayer The place of use or consumption must be located in Argentine territory Argentine party recognizes output VAT on the amounts paid to the foreign provider and the following month claims an input VAT equal to the output VAT paid the previous month for the imported service 58

Brazil Tax Burden on Importation of Services ISS (ranging from 2% to 5%) PIS (1.65%) and COFINS (7.6%) Withholding tax of 15% or 25%, depending on the service CIDE (10%) may also apply depending on the service IOF-Exchange (0.38%) PIS/COFINS generate credits for taxpayers under noncumulative system provided that the service is considered as input ISS, CIDE, IOF and Withholding tax are not VAT-type of taxes. 59

Chile The Importation of Services is generally VAT exempt Deep relationship between VAT and wht on outgoing payments: Income Tax Act provides for VAT exemption on outgoing payments for services (rendered by nonresidents) subject to wht Rev Ruling extended VAT exemption to services legally exempt from wht What happens with wht-exempt services under Double Tax Treaties (practical approach) 60

Colombia VAT Issue on Importation of Technical Assistance Services Payments by Colombian party to an entity located abroad for technical Services rendered abroad to party in Colombia The Council of State annulled the reference to the triggering of VAT on technical services Technical assistance services do not involve an advisory service. Technical assistance services are subject to VAT 61

Peru Services rendered by entities outside the country but used in the country are subject to VAT (19%) unless VAT service is VAT exempt. In the importation of services and in-country use of services rendered outside the country, the VAT must be paid first to be able to use the tax credit tax credit from domestic transactions cannot be used to offset the VAT (RTF 5631-2-03) 62

Venezuela Tax Burden on Importation of Services General Rate 12% Reduce 8% rate on importation of specific items (livestock, meat and certain food) Beneficiary of services, if regular VAT taxpayer, must selfassess and pay VAT to the Treasury Beneficiary of services is entitle to claim input VAT on VAT paid Issue: When the beneficiary is not a regular VAT taxpayer (e.g., individual purchase a software license on-line), transaction is a taxable event but in practice escapes VAT liability 63

VAT Taxable events [change title in View/Header and Footer] 64 64

Taxable events Supply of goods Import Supply of Services Venezuela (also): Self-consumption of movable property Exportation 65

Supply in same country as where goods are located: Supply A Sale B 66

Import A X Taxable event (import) Sale B Transfer of title before import. Supply 67

Import A Sale X Taxable event (import) X B Supply Transfer of title: import by A 68

Thank you 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.