AUGUST 2021 Brazil moves into second phase of its income reform

Brazil ratifies treaties Latin America with Switzerland and UAE: Tax Insights top points of the DTAs Peruvian tax authorities target ultra high net worth families

Colombia: Considering the unilateral rules on the Tax on Industrial, Commercial, and Services Activities LATIN AMERICA TAX INSIGHTS 2

Latin America Tax Insights

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Welcome to the second issue of LatAm Tax Insights. In this issue, we call your attention to the most recent tax measures undertaken or proposed by some LatAm tax authorities to address the negative effects of the pandemic on national coffers.

The approaches vary from incentives corporate income from As we look farther ahead in to additional taxation, as follows: 31 percent to 35 percent and a 2021, we will be watching for tax 3 percent surtax to determined developments along these lines: • Argentinean authorities issued a financial institutions; tax audit (i) further strengthening of tax new corporate income tax rates strengthening provisions (income audits supported with the multitude classification, aiming to provide tax billing and revised beneficial of widely available e-invoicing/e- some relief to smaller companies. ownership provisions); and filing tools; (ii) additional tax limitations to existing projected revenue-generating reforms; and • Brazil’s Ministry of Economy tax benefits (creditability of (iii) a variety of opinions on what released its second-phase tax municipal turnover tax) . Here, constitutes a reasonable rate and reform package to Congress our colleagues in Colombia basis of taxation per country in the (please see our coverage of the share some conclusions recently context of the OECD Pillar 1 and first phase here). This second released by a commission of 2 discussions. We do not foresee phase seeks to increase revenue experts on negative effects arising any elimination of the multiple via an additional tax (withholding from the municipal-level turnover effects on e-commerce; tax on dividend/profit in Colombia. A detailed if anything, the rates will likely distribution); by revoking some dedicated article will be increase, more jurisdictions will likely currently allowed deductions; and presented by DLA Piper Colombia enact such taxes; and we may even by enhancing income tax and/or when the package presented see multiple geographic levels of effects of certain reaches a more advanced taxation per country in the region. sources of income. Companies discussion stage at Congress. active in Brazil may wish to Please enjoy this issue, and to learn review their current Brazilian tax • Mexican tax authorities have more about the implications of each position before these changes issued a very interesting – of these topics on your business, are enacted. albeit not binding – guidance please contact our authors. report on the effective • In Colombia, the national payable income tax rates SAT government has withdrawn a tax expects 40 key economic reform package after it met with sectors to be contributing. widespread, intense opposition and presented a revised draft • Finally, our Peruvian colleagues reform package to Congress on report on how SUNAT has been July 20. The revised draft moved very actively seeking additional away from the controversial revenue using privileged provisions of the initial draft information filed by taxpayers package (which would have who were seeking advantage John Guarin increased the tax burden and of 2017’s tax amnesty, and Latin America Tax Desk compliance obligations of the issuing somewhat restrictive T +1 212 776 3877 general public) and is aimed at interpretations of existing tax [email protected] increase revenue introducing yet treaty provisions. Time will tell another normalization tax (tax whether such positions will amnesty charge applicable at time be upheld. of trueing up undeclared revenue/ assets); an increase in the

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Brazil moves into second phase of its income tax reform In this article, we take a look at key elements of this second phase of the Brazilian Tax Reform which Congress will be voting on.

Brazil’s Ministry of Economy has TAXATION ON THE DISTRIBUTION cumulative taxation on profits or delivered the second phase of OF PROFITS AND DIVIDENDS dividends. The WHT due on the the Brazilian Tax Reform to the Currently, profits and dividends profits or dividends may be offset House of Representatives (Bill No. distributed to both individuals against the WHT levied on its 2,337/2021). The first phase of and legal entities (resident or own distributions, and the profits the reform dealt with taxation on nonresident in Brazil) are tax received by the legal entity will consumption, proposing to replace free. The proposal aims charging not be included in the calculation the social contributions levied on profits and dividend distributions bases of the beneficiary's income gross revenues (PIS and COFINS) with a withholding income tax tax and social contribution on net with a contribution on goods and (WHT) levied at a 20 percent rate profits (CSLL). services (CBS), through Bill No. (increased to 30 percent in the • In case the beneficiary is 3,887/2020. The second phase, case of beneficiaries located in tax domiciled abroad, the WHT delivered to the legislators on June havens), as explained below: rate levied on the profits or 25, deals with income tax reform for dividends distributed will be 20 individuals, companies and financial • In case the beneficiary is an percent, except for remittances investments (Bill No. 2,337/2021). individual domiciled in Brazil, to beneficiaries domiciled in a the WHT levied on the profits or country with favored taxation (tax We emphasize that, for the dividends distributed will be due haven) or subject to a privileged proposed provisions be enforced exclusively at source (definitive tax regime, who will be subject to as of January 2022, Bill No. taxation model). If profits and an increased rate of 30 percent. 2,337/2021 must be approved dividends have been distributed in the two legislative houses of by a micro or small business, such the Brazilian Congress (House of funds will be exempt up to the Currently, profits and Representatives and Senate) and amount distributed of R$20,000 dividends distributed to both then be ratified by the President by (about US$3,825) per month. December 31, 2021. The information individuals and legal entities • In case the beneficiary is a legal provided in this newsletter is based entity domiciled in Brazil, there (resident or nonresident in on the original text of the bill, will be a mechanism to avoid which may change. Brazil) are tax free.

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DISGUISED DISTRIBUTION OF PROFITS (DDL) Considering that the profits and dividends will be subject to withholding income tax upon distribution, the bill proposes measures to avoid abusive shifting of profits by enhancing anti-abuse rules – to avoid the so-called Disguised Distribution of Profits (DDL) – authorizing tax authorities to recharacterize certain transaction conducted between the legal entity and its related parties:

(i) sale or purchase of property for an amount above market value

(ii) loan granted to a related party if, on the date of the loan, the 2022 (as indicated below). The subject to income tax on their lender has retained earnings or most significant increase will be capital gain at rates between 15 profit reserves, calculated as of in the exemption bracket, which percent and 22.5 percent. January 2022 will increase from the current • Anti-deferral rules for income (iii) payment to a related party of R$1,903.98 (about US$364) earned by individual’s offshore: rents, royalties, interest or technical to R$2,500 (about US$478), Currently, individuals pay income assistance in an amount that corresponding to an increase tax on income earned from an exceeds market value of 31 percent. entity held abroad only when the (iv) carrying out any other • Limitation of the simplified entity distributes dividends. The business with a related party under discount: The option for the proposal creates an automatic favorable conditions, understood simplified discount of 20 percent taxation regime, which obliges as more advantageous conditions of in the Individual individuals to recognize the for the related party than those Income Tax Return will be limited income of their subsidiaries, prevailing in the market or in which to taxpayers with taxable income provided the entity is located in the legal entity would contract that does not exceed R$40,000 a country with favored taxation with third parties (about US$7,650) in the calendar () or is a beneficiary year. Currently, there is no limit. of a privileged tax regime. The (v) forgiving (withdrawing) a debt intent is to prevent individuals of a related party and • Optional update of the value from retaining income on entities of properties: Between January (vi) licensing, assigning, or offshore without paying income 1, 2022, and April 29, 2022, establishing rights for a related tax in Brazil. owners of properties acquired party to carry out business under until December 31, 2020, will be • Repeal of the income tax favorable conditions. allowed to update the properties’ exemption of capital gains value and tax basis, paying only arising from the sale of assets INCOME TAX CHANGES 5 percent of income tax on the located abroad, which were FOR INDIVIDUALS difference. Currently, individuals acquired by the taxpayer • Update of the individual income are not allowed to update their when he/she was not a tax brackets: Tax brackets will property’s value because, upon resident in Brazil. be updated as of calendar year the property’s sale, they are

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INCOME TAX CHANGES FOR • Obligation to elect the actual related to investments abroad LEGAL ENTITIES profit method: This expands should not be included in the • Repeal of the deductibility of the situations in which the law investment cost (basis) at the Interest on net equity (JCP): The requires the taxpayer to calculate time of calculating the capital proposal denies the deduction of the CIT under the actual profit gain or loss. JCP after December 31, 2021, for method, including companies (i) • Return of capital in kind: The CIT purposes. that explore credit securitization return of capital with the delivery activities; (ii) that earn significant • Reduction of the corporate of the legal entity’s assets must (more than 50 percent) passive income tax (CIT) rate: The base be made at fair market value. income arising from royalties rate will drop in two stages: The intention is to subject the or management fees, rent or from the current 15 percent difference between the market purchase and sale of their own to (i) 12.5 percent ​​in 2022 and value and the book value of the properties (excluding royalties (ii) 10 percent from 2023. The assets to capital gain taxation. for the distribution, licensing or additional CIT of 10 percent assignment of use of software and • Tax regime applied by special for profits above R$20,000 per real estate developments); and (iii) partnerships (SCP): To avoid the month remains applicable. whose main activity or purpose reduction or elimination of the Therefore, considering the surtax is the exploitation of property payment of taxes by choosing of 10 percent and the CSLL (at a 9 rights of author or image, name, the allocation of expenses percent rate, except for financial brand or voice. and revenues, directing them institutions), the CIT combined rate according to the tax regime of the • Stepped-up basis (mais-valia) would be 31.5 percent in 2022 and SCP, the proposal requires the SCP and goodwill: In the case of 29 percent as of 2023. to adopt the same tax regime of merger or spinoff, the proposal its managing partner. adds new limits for the deduction • Quarterly calculation of of the mais-valia and eliminates • Capital gain on indirect CIT under the actual profit the possibility of deducting transfers: Currently, legislation method and allowance for loss goodwill for events occurring only provides for the taxation of compensation without the 30 from January 1, 2023. the non-resident's capital gain on percent lockup: All companies direct disposals of assets in Brazil. must calculate CIT quarterly. The • Acquisition of additional There is no specific provision proposal repeals the option of equity interest in a controlled for indirect sales, in which calculating the CIT annually. On company: The excess recorded intermediary entities located the other hand, companies will in a shareholders’ equity account abroad that hold assets located be able to offset losses accrued in the case of an investor who in Brazil are sold. The proposal in a period in the following three acquires additional equity interest includes rules for calculating the quarters without the 30 percent in a controlled company will be capital gain on indirect sale of lockup. Currently, tax losses may allowed to be considered in the shares of foreign entities which be carried forward indefinitely, book value of the investment, but hold assets in Brazil, in one or provided that the offsetting does with additional restrictions. more transactions, in a 12-month not exceed 30 percent of the • Period for the deductibility of period, in the case of the taxable profits in any given period. amortizable intangible assets: following conditions: • Standardization of CIT A minimum period of 20 years • If, at any time 12 months calculation bases: CIT in Brazil will be established unless a prior to the transfer date, the involves two taxes – corporate different term is provided by market value of the assets income tax (IPRJ) and the CSLL, the law or contractually. located in Brazil corresponds which have some differences in • Foreign exchange variation to 50 percent or more of terms of calculating taxable base. on investments abroad: The the market value of the The proposal intends to equalize proposal intends to make clear transferred non-Brazilian both taxable bases. that foreign exchange variation entity and 10 percent or more

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of the ownership or economic rate of 15 percent, regardless of structure, particularly in benefits of the interests in the investment term. This rate case of investors located that entity are transferred; or replaces the current system of in tax havens or privileged regressive rates, which starts at tax regimes without a DTT • If the market value of the 22.5 percent for investments of with Brazil. participation in the assets up to 180 days and are reduced located in Brazil exceeds • Accelerate closing of M&A to 15 percent for investments US$100 million and 10 transactions to take advantage of longer than 2 years. percent or more of the grandfathering rule of goodwill ownership or economic • End of deferral for closed-end amortization under current rules. benefits of the interests funds: Closed-end funds will • Accelerate distribution of profits in the non-resident entity be subject to taxes annually or capital reduction (at book value is transferred. in November. of assets under current rules). • Stock option plans: Payments • Equity investment funds • Review financing structures: JCPS of bonus and profit sharing (FIP): Equity FIPs, which do not vs. loans for rate arbitrage and to shareholders and directors qualify as investment entities, tax deductions (subject to transfer by means of delivering shares must be treated as a company pricing and DDL rules). of the company will not be for tax purposes. deductible for CIT purposes. • Evaluate potential impact of • Real estate investment funds Only payments to employees enhance DDL rules. (FII): Income will will remain deductible. be revoked, and the distribution Our team at Campos Mello • Repeal of the rule that exempts of income will be taxed at the Advogados, in cooperation companies that elect the deemed rate of 15 percent. with DLA Piper, can assist you profit method from maintaining in case you have any questions • Stock, commodity and futures commercial bookkeeping: about these developments. market: Quarterly taxation Currently, legal entities that elect will be imposed at a rate of 15 the deemed profit regime for Alex Jorge percent for all markets. Losses calculating CIT are exempt, for Partner and Co-Head of Tax, may offset income from all tax purposes, from maintaining Campos Mello Advogados operations, including day- commercial bookkeeping, as long T +1 212 335 4541 and fund shares traded on the as the cash book is maintained. [email protected] stock market. • Capital contribution in kind of KEY TAKEAWAYS (POSSIBLE Victor Kampel companies and other entities MEASURES BEFORE DECEMBER Partner, Tax, abroad: The proposal requires 31, 2021) Campos Mello Advogados that assets used by the Brazilian The proposed reform, if approved, T +55 11 3077 3539 shareholder (individual or legal will significantly impact foreign [email protected] entity) to increase the capital investors doing business in Brazil. of companies or other entities Accordingly, taxpayers should Marcelo Siquiera abroad to be made at market consider the following actions T +55 21 3262 3011 value. The intention is to subject before December 31, 2021: [email protected] such transactions to capital gain taxation. • Review current investment Laura Kurth INCOME TAX CHANGES FOR structures by: T +55 21 2217.2040 FINANCIAL INVESTMENTS [email protected] • reducing legal entities, • Unification of the equity funds particularly holding Alex Jorge and Victor Kampel are partners; and fixed income rate at 15 Marcelo Siqueira is a senior associate; and companies and percent: The proposal provides Laura Kurth is a lawyer with independent Brazilian law firm Campos Mello Advogados, for the establishment of a fixed • modifying shareholding in cooperation with DLA Piper.

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Brazil ratifies income tax treaties with Switzerland and UAE: top points of the DTAs

Brazil’s network has increased in 2021. President Jair Bolsonaro recently ratified two new income tax treaties (DTAs), between Brazil and Switzerland and Brazil and the United Arab Emirates (UAE). Both DTAs will enter into force on January 1, 2022.

A DTA between Brazil and Also note that, under Brazilian Alex Jorge Singapore was also approved by domestic legislation, UAE is Partner and Co-Head of Tax, the Brazilian Senate in 2021, but considered to be a low-tax Campos Mello Advogados this DTA is still pending ratification jurisdiction, and certain regimes T +1 212 335 4541 by President Bolsonaro. in Switzerland and Singapore are [email protected] considered to be privileged tax Currently, Brazil has 33 DTAs in regimes. Therefore, regardless of Victor Kampel force and the growing number of the DTAs, transactions with entities Partner, Tax. these agreements is seen as a way in UAE and entities classified Campos Mello Advogados to encourage foreign investments, as privileged tax regimes in T +55 11 3077 3539 promote the development of Switzerland and Singapore will be [email protected] economic and commercial relations, subject to rules, foster tax cooperation and curb thin capitalization, and stricter tax Marcelo Siquiera abusive tax planning. deduction rules in Brazil. T +55 21 3262 3011 [email protected] The new Brazilian DTAs incorporate Please find below some of the key some recent changes promoted by provisions of the Brazil-Switzerland Laura Kurth the Organization for Economic Co- DTA and the Brazil-UAE DTA, T +55 21 2217.2040 operation and Development (OECD), effective as of January 1, 2022. [email protected] based on the Base Erosion and Alex Jorge and Victor Kampel are partners; Profit Shifting (BEPS) action plans, Our team at Campos Mello Marcelo Siqueira is a senior associate; and and the United Nations (UN) in its Advogados, in cooperation with Laura Kurth is a lawyer with independent Brazilian law firm Campos Mello Advogados, 2017 treaty models. DLA Piper, can assist you in case in cooperation with DLA Piper. you have any questions.

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Key provisions of the DTAs

DTA PROVISIONS AND BRAZIL-SWITZERLAND DTA BRAZIL-UAE DTA COMMENTS

RESIDENCY The person who is a tax In Brazil, a resident shall resident, according to the be considered to be any per- Stricter rules apply in the domestic legislation of the son who is considered case of the Brazil-UAE DTA contracting state. Effective a tax resident according in order to prevent certain place of management as to Brazilian domestic tax planning strategies tie-breaker rule. legislation. such as treaty shopping. In the EAU, a resident is (a) an individual domiciled in the EAU; and (b) a legal entity which meets both requirements: it is incorporated in the EAU and has its effective place of man- agement is in the EAU (which must be evidenced by the fact that it is controlled by resi- dents in the EAU or by EAU’s governmental institutions).

DIVIDENDS – MAXIMUM i. 10%, if conditions are met, i. 5%, if the beneficial owner WITHHOLDING TAX (WHT) including if the beneficial own- is a government or any of its RATE er is a company (other than a political subdivisions. partnership) that directly holds Currently, dividends are at least 10% percent of the ii. 15% in other cases. exempt in Brazil under capital of the company paying domestic legislation, but a the dividends, within a period bill from the federal of one year. government now being analyzed by Congress would ii. 15% in all other cases. tax dividends at 20% as of January 1, 2022.

Interest – maximum WHT i. 10%, if the beneficial owner i. 10%, if the beneficial owner rate is a bank and the loan was is a bank and the loan was granted for at least five years granted for at least five years to the purchase of to finance the purchase of equipment or investment equipment or investment projects, or projects, or

ii.15% in all other cases. ii. 15% in all other cases.

Treats interest on net equity Treats INE as an interest (INE) as an interest payment payment for treaty purposes for treaty purposes (item 9 of (item 5 of the Protocol to the the Protocol to Brazil-Switzer- Brazil-UAE DTA). land DTA).

Royalties – maximum i. 15% for use of trademark 15% in all other cases, WHT rate including technical assistance ii. 10% in all other cases, (item 6 of the Protocol to including technical assistance Brazil-UAE DTA). (item 10 of the Protocol to the Brazil-Switzerland DTA).

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Key provisions of the DTAs, continued

DTA PROVISIONS AND BRAZIL-SWITZERLAND DTA BRAZIL-UAE DTA COMMENTS

Technical services – 10% on the payment of 10% on the payment of compensation maximum WHT rate compensation for technical ser- for technical services. vices. For the first time, Brazil has in- Under the Brazil-UAE DTA, cluded (in both the Swiss and Under the Brazil-Switzerland “compensation for technical services” UEA DTAs) a specific article DTA, “compensation for technical means any payment as regarding technical services, services” means any payment as consideration for any service of a clearly following recommenda- consideration for any service of a managerial, technical or consulting tions of the UN treaty model. managerial, technical or consulting nature, unless payment is made: nature, unless payment is made: i. to an employee of the person making i. to an employee of the person the payment making the payment ii. by virtue of teaching at an educational ii. by virtue of teaching at an institution or teaching provided by an educational institution or teach- educational institution or ing provided by an educational institution or iii. by an individual for services for the personal use of an individual. iii. by an individual for services for the personal use of an individual.

Capital gains The source state may tax the capital The source state may tax capital gain arising from the sale of gain from the sale of property Under Brazilian domestic property (with no limitation). (with no limitation). legislation, non-resident capital gains are generally subject Since the UAE is considered to be a to WHT at progressive rates low-tax jurisdiction, Brazilian tax from 15% to 22.5% (except for authorities may subject such gains to beneficiaries located in low-tax the fixed rate of 25%. jurisdiction, which is subject to the fixed rate of 25%).

Elimination of Entitles Brazilian residents to a Entitles residents in both contracting deduction of tax credits for taxes states to a deduction of tax credits paid in Switzerland. for taxes paid in the other contracting state. Exempts Brazilian-sourced income received by Swiss residents that is Item 3 of Article 25 provides for a taxable in Brazil under the treaty “tax sparing” to UAE residents that from tax in Switzerland. In addition, receive dividend income from Brazilian it allows a deduction in Switzerland residents that are entitled to certain for taxes paid on dividends, royal- income tax benefits (tax sparing related ties, interest and technical service to the underlying corporate income tax income in Brazil. due in Brazil, when such tax is reduced because of additional tax deductions.

Entitlement to treaty benefits N/A Article 29 of the Brazil-UAE DTA sets out additional limitations to enjoy the treaty benefits in the case of income derived from certain activities performed in the UAE, if subject to low/no taxation in the UAE.

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Currently, Brazil has 33 DTAs in force and the growing number of these agreements is seen as a way to encourage foreign investments, promote the development of economic and commercial relations, foster tax cooperation and curb abusive tax planning.

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A “benchmark” disclosure of income tax effective rates by Mexican tax authorities

On June 13, 2021, the Mexican tax authorities (SAT) published on their website a list setting out the expected effective tax rates for 40 different economic activities/industries, including mining, manufacturing, retail and wholesale businesses, financial and insurance services, and the automotive and pharmaceutical industries.

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The expected effective tax rates are for tax years 2016, 2017, 2018 and 2019.

In determining the expected See our recent alert on the effective tax rates, the SAT defined benchmarks for a more in- the effective tax rate as the depth review. current income tax liability on the corresponding tax return for the In both cases, these individuals will year divided by the gross taxable be exempted from this income for that year. when the total value of their assets, included and valued according The SAT expects large taxpayers to to the Personal Assets compare the effective tax rate terms, regardless of the treatment corresponding to their economic they have against such tax and activity on the list with their actual without any non-taxable minimum rate for each applicable tax year and, threshold deduction, does not if necessary, correct or modify their exceed AR$200million (US$2.3 tax position by filing an amended million) inclusive. annual tax return.

Additionally, the SAT indicated that taxpayers with an effective tax rate greater than the referenced rate have a low risk of audit, while taxpayers with a lower-than- referenced effective tax rate have a higher risk of audit. Calafia Franco Jaramillo Currently, the SAT is working on Foreign Legal Consultant determining the effective tax rates T +1 212 335 4823 of the remaining economic activities [email protected] included in Annex 6 of the current Miscellaneous Tax Resolution and will eventually publish these rates on its webpage.

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Peru targets ultra high net worth taxpayers

The Peruvian tax authorities have initiated an aggressive audit campaign targeting ultra high net worth (UHNW) taxpayers who successfully filed for the Peruvian tax amnesty in 2017.

In that year, around 7,000 UHNW Any foreign source taxpayers filed for the Peruvian tax amnesty, which generally income filed by the provided for a reduced tax rate on taxpayers during all previously undeclared income. The rate, of either 7 percent or 10 these years which fell percent, depended on whether such below the Peruvian income was or was not repatriated. tax authorities’ The aforementioned amnesty also estimate thus established that any information filed by the taxpayers within this results in a deemed special regime would remain tax deficiency. confidential – for the eyes only of the special amnesty task force Peruvian UHNW taxpayers who filed assembled for such purposes – for the tax amnesty in 2017 are now and sealed from any future audits. required to review their five-year- This was later confirmed by the old bank records and tax filings task force itself. (including those related to the tax amnesty), in order to challenge the Following the dissolution of Peruvian tax authorities’ assumption. the task force, however, the ested in other countries. But in Peruvian tax authorities recently 2020, the main trend in the region reopened the tax amnesty filings. is the increase in transfer pricing Based on the information about audits with significant adjustments foreign assets provided by these in its intercompany transactions. UNHW taxpayers in 2007 the tax authorities have estimated a 5 percent return on these assets for the years 2016-2018.

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Peruvian tax authorities issue ruling on Peru-Chile double tax treaty applicability to Chilean investment funds

In a recent set of revenue rulings, the Peruvian tax authorities concluded that the Peru-Chile double tax treaty does not apply to Peruvian source business income related to real estate derived from an investment fund set up in Chile.

According to the aforementioned Also, corresponding foreign tax rulings, a Chilean investment credit may become questionable fund does not qualify as a in Chile, as Chilean investment “resident” of Chile pursuant to the funds are generally considered double tax treaty mentioned above fiscally transparent. and, thus, the benefits of the treaty do not apply. In contrast, application of the Peru-Chile double tax treaty would As a result of the position taken by arguably have provided a 0 percent the Peruvian tax authorities, the tax rate on the aforementioned Chilean investment fund shall qualify business income, because no as an opaque business entity located would in a foreign non-treaty jurisdiction – have been created, or a 5 percent pursuant to domestic tax legislation withholding tax rate, if the Chilean – and shall thus be subject to the investment fund had been ruled regular 30 percent withholding tax fiscally transparent and the treaty rate on business income, whether or benefits had been awarded to the Erik Lind not said entity creates a permanent Chilean individual tax residents, Partner establishment in Peru. participants in that fund. T +1 511 616 1200 [email protected]

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Colombia: Considering the unilateral rules on the Tax on Industrial, Commercial, and Services Activities

The Tax Expenditures Report – Indeed, whenever a taxpayer the sharing economy, and online prepared by Colombia’s Tax Experts performs activities in more than one subscription services). Commission to design a structural municipality, the question of where tax reform1– has recommended this activity is performed arises. For instance, according to these abolishing the municipal level Tax rules, digital content services are on Industrial, Commercial, and To address this issue, Law 1819 of levied depending on the number of Services Activities (commonly known 2016 established certain criteria subscribers listing Medellin as their as ICA, for its acronym in Spanish), a to define in which municipality the domicile. Underlying these rules is an Colombian municipal-level turnover activity is deemed performed. For assumption that ICA applies to the tax. The report states: instance, it establishes that transport place where the service is consumed services are understood to be rather than to the place where the “The local business turnover tax (ICA) performed in the municipality from service activity is performed. is a particularly distortive tax that which the product is dispatched (the should be abolished. Because it is starting point). Besides the legal uncertainty that levied on turnover instead of profits, these rules promote, serious issues it forces businesses with a high Unfortunately, some municipalities exist regarding their legality and turnover but low profit margin to face – such as Medellin, Cali, Rionegro constitutionality. a very high effective tax rate levied and Flordiablanca – are disregarding 1Article 137 of Law 2010 of 2019 created the Tax 2 on their profits.” the criteria established in Lay 1819 Experts Commission to analyze the convenience of 2016 and creating their own of maintaining certain tax benefits in Colombia and to propose a structural tax reform. The The Commission’s observations rules to determine where the activity Commission presented this proposal in 2021. underscore the thoughts of is performed. 2Tax Experts Commission (2021). Tax Expenditures observers throughout Colombia, Report. https://www.dian.gov.co/dian/Documents/ who are calling for the ICA to be For example, Medellin enacted rules Tax-Expenditures-Report-By-Th-Tax-Experts- Commission.pdf abolished. By levying gross income, to determine territoriality for activities they note, the ICA does not assess in the digital economy (such as the taxable capacity of taxpayers, and activities performed through apps, it affects low-margin businesses in a disproportionate and unjustifiable way. In most cases, it disregards one of the key elements of businesses: costs and expenses.

Moreover, observers in Colombia have long expressed deeper concerns about the ICA’s legal uncertainty. The origin of this uncertainty is how to identify the municipality where the commercial, services, or industrial activities are performed.

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In a theoretical example, a taxpayer Municipal tax rules cannot 1819 of 2016). develops and operates an app contradict the criteria defined in in Bogota that allows its users Law 1819 of 2016. In fact, Article In sum, while the Tax Experts to listen to music throughout 313 (4) of Colombia’s Constitution Commission has recommend Colombia. Where must the taxpayer establishes that Municipal Councils abolishing the ICA, for the pay the ICA tax? On the one hand, may “vote for taxes and local time being it remains in effect. Bogota may argue that the service expenditures in accordance with Taxpayers performing activities in activity is performed there, since the the Constitution and the Law.”3 different territories in Colombia taxpayer developed and operates That is, unless a future national law may wish to determine whether the app in this municipality. On establishes otherwise, municipalities these municipalities recently the other hand, using its unilateral cannot enact unilateral rules to enacted unilateral rules defining rules, Medellin would argue that apply the ICA tax on the service the territoriality of this tax, and the activity should be levied in this consumption (such as Medellin did). determine how such unilateral rules municipality, since some of the may affect their tax position. To app’s users are domiciled there. The Constitutional Court has ruled learn more about the implications of That is, both municipalities may on a similar issue, stating that the these rules for your business, please demand the payment of this tax. ICA is a tax that levies the activity, contact the authors. This not unlikely situation creates not the good or service.4 legal uncertainty for certain type of businesses. The Council of State, Colombia’s highest tax court, has interpreted Andres Gonzalez Becerra Moreover, some observers regard this issue in a similar way. For Partner these rules not just as creating example, in Decision 24097 of 2020 T +57 1 3174742 legal uncertainty but as effectively it analyzed the territoriality of real [email protected] illegal and even unconstitutional. estate activities.5 In this case, the Colombia’s Law 1819 of 2016 clearly taxpayer was in Medellin and, from Juan Pablo Fernandez sets out certain criteria to determine there, managed some real estate Associate activities’ territoriality. For services, located in other municipalities T +57 1 3174720 it established that they are deemed (such as Itagui). The Council of State [email protected] performed in the municipality where concluded that, even if the service the activity is “performed,” not where is consumed in other municipalities 3This translation is taken from the following the service is “consumed” (with some (eg, Itagui), the taxpayer only had source: Coward, M., Heller, P., Vellve, A., and specific exceptions). to file its ICA tax returns in Medellin Max Planch Institute. Colombia's Constitution of 1991 with Amendments through 2005. since its activities are performed https://www.constituteproject.org/constitution/ there (eg, lease collection, payment Colombia_2005.pdf of public services). 4Constitutional Court, Decision C-056 of 2019.

5Council of State. Decision 24097 of 2020. Hence, generally, the municipality where the service is consumed is irrelevant: this tax levies the performance of activities, not the consumption of goods or services.

Therefore, there are grounds to consider that these municipal unilateral rules are illegal and unconstitutional, taking into account that municipalities cannot create or modify ICA’s territoriality criteria established by national laws (Law

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Argentina introduces amendments to its corporate income tax rates

Argentina’s Congress has passed a law which modifies the country’s income tax regime, providing a new rate for corporate entities. The reform, passed in June, creates three categories, depending on the net income of the taxpayer for tax periods beginning on or after January 1, 2021.

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The law additionally modifies existing limits on income tax deductions for fees paid to directors, trustees and managing partners.

The rates for each category are Previously set at a fixed 25 as follows: percent on net taxable income, the tax deduction limit has now • Companies with net taxable been increased to 40 percent on income lower than ARS5 million payments made to women and (US$50,000) will be taxed at a 60 percent on payments made to rate of 25 percent. transgender individuals.

• Companies with net taxable For the increased rates to apply, income between ARS5 million women or transgender personnel (US$50,000) and ARS50 million participation must exceeds ($500,000) will be subject to a minimum quotas established by law. fixed payment of ARS1.25 million and further pay income tax on any Each category’s tax base and excess over ARS5 million at a rate threshold will be updated annually of 30 percent based on changes in the Consumer • Companies with net income over Price Index (Índice de Precios ARS50 million (US$500,000) will al Consumidor), published by be subject to a fixed payment the National Statistics Institute of ARS14.75 million and further (Instituto Nacional de Estadísticas pay income tax on any excess y Censos or INDEC). over ARS50 million at a rate of 35 percent .

A further dividend/profit distribution withholding tax of 7 percent will apply on dividends distributed to Argentine resident or non-residents, regardless of the entity’s tax category above described. Augusto N. Mancinelli The law additionally modifies Partner existing limits on income tax T +5411 41145500 deductions for fees paid to directors, [email protected] trustees and managing partners.

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