wealth management wealth management Tax Tax “In much of Latin America, services. At the state level, ICMS applies to goods and some transportation and communications differences in rules around services, but no other services.” withholding taxes vary so The location of the transaction and its partici- pants can also affect the status. And, as in the case greatly that it can dramatically of Argentina, it’s the buyer that is responsible for A taxing issue hinder efficient business” calculating and deducting the tax, rather than, as with most standard taxes, the seller. Managing withholding taxes can be a cumbersome task for A straightforward approach corporations. This is particularly true in Latin America, where on the sale of goods and certain construction ser- Fortunately, Mexico has simplified things a little: navigating the complexities requires local expertise, according to vices, up to 100 percent for ‘blacklisted’ taxpayers it’s primarily income tax and VAT transactions Ana Paula Maciel, Principal Tax Research Analyst at Vertex, and identified as high risk by the authority. that are subject to a withholding regime, making While this sounds confusing, things get its regulations at least a little easier to navigate Ernesto Levy, Senior Leader of Global Indirect Tax at Intuit even trickier at the provincial level. According than the country’s South American counterparts. to Maciel: “At this level, Argentina’s approach Here, income tax withholding generally applies to Understanding tax regulation can be challeng- whereby the seller is mandated by the government to withholding and collection taxes applied to payments made from entities to individuals for ing at the best of times. In much of Latin Amer- to collect an advanced payment of taxes from the turnover tax qualifies as complex.” There are professional service. These local entities operate ica, rules around withholding taxes on B2B buyer at the time of invoicing. 24 autonomous tax jurisdictions, and each as the withholding tax agent and, as with Argenti- transactions vary so greatly it can dramatically one handles withholding and collection taxes na and Brazil, withholding is triggered upon pay- hinder efficient business. The issue with Argentina based on a unique set of regulations. There are ment. The withholding tax rate is 10 percent, and This fact is especially concerning when it Both of these regimes are used heavily in Ar- then various exemptions to consider; certain it’s applied to the net amount of the transaction. comes to the consequences of non-compliance. gentina; they can be found at the federal, pro- transactions may be excluded under different There are nevertheless still a few niggling For example, in Argentina, failure to pay taxes can vincial and municipal levels of government provincial tax regimes. In some cases, sales of details that companies need to navigate around. result in hefty fines of up to 10 times the amount (see Fig 1) and are applied within almost all capital goods are excluded from withholding Transactions between local entities aren’t usu- not paid. Effectively managing B2B transactions, tax categories, including income tax, VAT and and collection taxes, for example. ally subject to VAT withholding, but for those therefore, is of the essence. turnover tax. According to Levy: “This approach “As a result, there are numerous different that are, the rates vary – for example, from four Doing so, however, requires an in-depth un- complicates business and tax compliance in withholding and collection tax rules, proce - percent for ground transportation of goods, to derstanding of the individual, country-specific the country. Tax departments must collaborate dures and calculations that buyers and sellers of 16 percent for scrap to be used as raw material regulations that govern each jurisdiction. World closely with finance and accounting teams, in- goods and services need to follow”, added Levy. or sold. Independent personal and commission Finance spoke to Ana Paula Maciel, Principal vesting significant time in tax management and “Usually, in order to be designated as either a services, meanwhile, demand a payment of 10.67 Tax Research Analyst at leading tax solutions compliance activities.” withholding or collection agent, a taxpayer must percent. All of these rates are normally applied firm Vertex, and Ernesto Levy, Senior Leader Then there are the various regulations within have activities in the jurisdiction. Some prov- to the net amount, but in some circumstances of Global Indirect Tax at Intuit, to find out more each government level: on the federal side, almost inces might also make the determination based come off the VAT amount. about how Argentina, Brazil and Mexico differ all goods and services are subject to withholding on the company’s revenue; under this approach, There are further complications that apply in regulations, and what businesses can do to income tax, and the majority of registered taxpay- larger companies tend to bear more of the brunt to all three countries, however. If the value of streamline their processes. ers are required to act as withholding tax agents. of withholding taxes.” individual goods and/or services isn’t itemised There are, however, some exemptions, including on an invoice, for example, withholding tax cal- Navigating the complexities chargebacks, currency exchange transactions and The Brazilian system culations becomes more difficult. “Chargebacks, In Maciel’s words: “Withholding tax is a govern- payments made to government institutions. Over in Brazil, things are almost as complicated, payments in kind and instalment payments also ment requirement for the buyer of goods or servic- “The calculation is highly complex, in part be- with a system that can at times be unpredictable. tend to create additional layers of difficulty in the es to deduct a specific amount from the payment cause it requires the buyer to track all payments “The Brazilian tax environment remains one of determination and management of withholding made to the supplier.” However, what sounds made to each taxpayer within a specific category the most complex and fast-changing in the world”, taxes,” added Levy. “Finally, some tax authorities simple in theory is far more complex in reality, throughout the month”, said Levy. “The total pay- Maciel said. “It’s important to recognise this con- provide software that taxpayers are required to especially when various external factors – such as ments for each category must then be compared dition in a country where indirect taxes and VAT use for reporting – and compliance – purposes.” the various levels of government at play (federal, to each threshold.” withholding taxes apply only to services.” Fortunately, there are solutions to these issues provincial and municipal) and frequently chang- When it comes to VAT withholding, rates in The country is home to more than 80 different – namely drawing on exterior knowledge and us- ing rules – are taken into consideration. Argentina vary depending on the type of goods or taxes. Those on VAT include: IPI, a federal tax on ing technologies to streamline complex, tax-relat- “Several common challenges crop up when services being supplied – ranging from 50 percent manufactured goods; PIS, a federal contribution ed data. “Withholding taxes in Argentina, Brazil tax functions address withholding tax require- applied to corporate gross revenues and used for and Mexico can be managed”, said Levy. “The ments in Argentina, Brazil and Mexico, not the government’s social integration programme; leading approaches to doing so typically feature least because each country has multiple forms Fig 1 Argentina’s withholding taxes COFINS, which funds social security and is ap- a blend of overall tax expertise, local knowledge, of withholding taxes, rates and procedures”, said plied to monthly invoicing; and ISS, a municipal leading tax data management practices and sup- Maciel. “Rules, rates and calculations are subject service tax applied on services provided to a third porting tax automation.” Federal level to frequent adjustments and legislative changes, party. Those on the corporate tax side include: Software platforms such as those offered especially during periods of economic stress, in Income tax General withholding tax IRPJ, a corporate income tax calculated on a com- by Vertex can help simplify systems and take which governments are hungry for faster ways to Specific withholding tax pany’s gross income; CSSL, a social contribution the pressure off the companies themselves. Al- collect revenue. Tax managers grappling to man- VAT General withholding/collection tax tax on net profit; and INSS, or National Institute though the platforms can’t control the changes age withholding taxes in these countries may feel Specific withholding/collection tax of Social Security contributions, calculated on themselves, they can help organisations react to that the rules, scattered throughout government employees’ monthly salaries. them. That’s well worth noting during a period Provincial level layers, change at least every 100 days.” “It is important to keep in mind that some of of flux, when regulations are, according to Ma- When it comes to withholding, Brazil and Ar- Turnover tax General withholding/collection tax these taxes apply differently, or do not apply at all, ciel, likely to undergo a series of rapid changes. gentina are two of the most complex countries in Specific withholding/collection tax depending upon whether a transaction involves a This is expected to be the case over the coming the world. This is not helped by the fact that, in good or a service”, said Maciel. “For example, at years – but whether that’s for better or for worse SOURCE: Vertex and Intuit the latter country, a collection regime also applies, the federal level, IPI applies to goods but not to remains to be seen. n 000 | Summer 2017 Summer 2017 | 000.