Corporate Tax Planing update
Argentina – Brazil
11th Annual Latin American Tax Conference
Miami, Florida
10-11 March 2010
Joaquin Kersman and Claudio Moretti
Agenda
– Planning relating to funding of Brazilian and Argentine
companies
– Monetization of Tax Credits
– Acquisitions - Assets Vs. Stock
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Planning relating to
funding of Brazilian
and Argentine
companies
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ARGENTINA
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Funding of Argentine companies
– Loan
– Advantages
– Deduction of interests
– Reduction of wealth taxes
– Disadvantages
– Taxation of interests
–Thin capitalization rules would not be applicable if:
– Withholding rate on interest is 35% (applies to non-banking
lenders) and/or
– The lending company is not related and located in a low tax
jurisdiction
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Funding of Argentine companies
– Capital Contribution
– Advantages
– No taxation on dividends
– Disadvantages
– No deduction of dividends
– No reduction of wealth taxes (0.5%)
– Nevertheless, capital contribution is recommendable since it
allows:
– Avoidance of foreign exchange controls
– No impact on mandatory interest (? loan)
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BRAZIL
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Thin Capitalization Rules
– Introduced by Provisory Measure No. 472, of December 15, 2009
– Limitation on the deduction of interest payments to related parties
abroad – as defined by the transfer pricing legislation
– Beneficiaries established in regular tax jurisdictions - Debt equity
ratio: 2:1
– the debt held by each related party should not exceed two times
the net equity of the Brazilian company held by such related party,
and
– the total debt held by all related parties should not exceed the total
net equity of the Brazilian company held by all related parties
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Thin Capitalization Rules
– Beneficiaries established in low tax jurisdictions or subject to
privileged tax regime (as defined by Articles 24 and 24-A of Law
9,430/96), regardless of any effective equity participation held by the
foreign party in the Brazilian entity – Debt equity ratio: 0.3:1
– the debt held by each party established in low tax jurisdiction or
subject to privileged tax regime should not exceed thirty percent
of the net equity of the Brazilian company, and
– the total debt held by all parties established in low tax jurisdiction
or subject to privileged tax regime should not exceed thirty
percent of the net equity of the Brazilian company
– The concept of debt in principle includes all types of financing
transactions and also transactions with third parties where a related
party act as guarantor, attorney in fact or as intervening party
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Thin Capitalization Rules
– Rules are in force as from March 16, 2010 for purposes of the CSLL
calculation (at a 9% rate)
– It can be argued that the new rules apply only as from Jan 1, 2011 for
purposes of the IRPJ calculation (at a 25% rate)
- Provisory Measure should be converted into Law after 60 days from its
publication, which can be extended for another 60-day period
- Further regulations should be enacted in the next months
- Many controversial aspects: export finance, advances for purchase of
goods, floating rate notes, situation where the lender is a sister
company, debt with low tax jurisdictions (2.3 : 1 debt equity ratio)
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Thin Capitalization – Scenario 1
Assumptions – Brazil Co.:
Parent
– Loan with A = 2000
– Interest on loan = 200
– Net Equity = 800
A
B
Cash $2000
Regular Tax
Jurisdiction
60%
C
40%
Brazil
Loan
$2000
Brazil Co.
Interest Deductible on loan with A:
– Total Net Equity = 800
– Equity Interest A (60%) = 480
– Debt/ Equity Ratio 2:1 = 960
– Maximum Interest Deductible = 96
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Thin Capitalization – Scenario 2
Assumptions – Brazil Co.:
Parent
– Loan with C = 2000
– Interest on loan = 200
Loan
$2000
A
B
Cash $2000
Regular Tax
Jurisdiction
60%
C
40%
Brazil
Brazil Co.
Loan
– Net Equity = 800
Interest Deductible on loan with C:
– Total Net Equity = 800
– Equity Interest C = 0
– Equity Interest All Related Parties (100%) = 800
– Debt/ Equity Ratio 2:1 = 1.600
– Maximum Interest Deductible = 160
$2000
–
Potential Controversy: Nothing is deductible
because C has no interest in Brazil Co.
( this result is unlikely = too conservative)
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Thin Capitalization – Scenario 3
Assumptions – Brazil Co.:
– Loan with C = 1760
Parent
Low Tax
Jurisdiction
– Loan with D = 240
– Interest on loans = 200
Loan $240
Loan $1760
– Net Equity = 800
Interest deductible on loan with C:
A
Cash $2000
B
C
D
Low Tax
– Total Net Equity = 800
– Equity Interest with C = 0
– Equity Interest All Related Parties = 800
Regular Tax
Jurisdiction
60%
40%
Loan
$1760
– Debt/Equity Ratio 2:1 = 160
– Maximum Interest Deductible = 160 (1)
Brazil
Interest deductible on loan with D (Low Tax):
Brazil Co.
Loan $240
– Total Net Equity = 800
–Debt/Equity Ratio 0,3:1 = 2400
–Maximum Interest Deductible = 24
(2)
Total Deductibility: (1) + (2) = 184
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Thin Capitalization – Summary
Loan with Regular Tax Loan with Low Tax
Jurisdiction
Jurisdiction (*)
Total
Total Interest
Deduction
Scenario 1
$ 2000
N/A
$ 2000
$ 96
Scenario 2
$ 2000
N/A
$ 2000
$ 160
Scenario 3
$ 1760
$ 240
$ 2000
$ 184
(*) Interest Subject to 25% WHT
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Interest on Equity – Opportunity
– Deductibility at 34% / WHT at 15% (25% if beneficiary is in low tax jurisdiction)
– TJLP Interest rate over net equity accounts, except for: (i) the revaluation
reserve (reserva de reavaliação), and (ii) the reserve for adjustment of fair
value (ajuste de avaliação patrimonial) – Article 59 of Law No. 11,941/09
– Deduction is limited to either (i) 50% of the current profits (before any
deduction of IOE), or (ii) 50% of the retained earnings
– Decisions (Nos. 107-08.941/07 and 101-96.751/08 – CSN ) from the
Administrative Court of Tax Appeals (CARF) recognized the possibility to
declare and deduct IOE accumulated with respect to past years. In the same
sense, Superior Court of Justice’s Decision No.1.086.752 (date Feb. 2009)
– Opportunity: deduction currently of the IOE calculated over the net equity of
prior years
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Interest on Equity – Opportunity
Years
Net Equity Accounts
Capital
Retained Earnings
Reserve Fair Value
Current Earnings
Interest on Equity
2007
100,00
-20,00
0,00
-10,00
2008
2009
2010
100,00
-30,00
0,00
-5,00
100,00
-35,00
0,00
450,00
100,00
415,00
0,00
60,00
Interest Rate (TJLP)
6,3750%
6 ,2496%
6,1248%
6,0000%
Basis for TJLP
TJLP over Net Equity
80,00
5,10
70,00
4,37
65,00
3,98
515,00
30,90
IOE Deductible each Year
0,00
0,00
4,00
30,90
IOE Deductible in 2010
Sum IOE Deductible in 2010
related to Prior Years
5,10
4,37
3,98
30,90
Profits Limitation
50% Current Earnings
50% Retained Earnings
44,36
-5,00
-10,00
-2,50
-15,00
225,00
-17,50
30,00
207,50
Controversial Aspects:
- Reserve: need to calculate the net equity of a given year reducing the IOE payable in one year from the net equity of the
company in the following year
- Accrual regime: losses in the year vs. mere postponement
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Monetization of Tax
Credits
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ARGENTINA
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Tax Credits
– VAT Credits
–
–
–
–
–
–
Possibility of offsetting, refunding or transferring. Requirements
Technical balance
Freely disposable balance
Exports
Alternatives for recovering VAT credits
The Argentine Supreme Court of Justice has rejected the refund of technical
balance in re “Alicalis de la Patagonia S.A.”
– Income Tax: use of tax losses
– Tax losses may be deducted from taxed income originate in the following 5
fiscal years
– Limitations. Sales of shares. Foreign source income
– Adjustment for inflation
– The Argentine Supreme Court of Justice has admitted the applicability of
adjustments for inflation to taxable income in re “Candy S.A. c. AFIP y otro”
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BRAZIL
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Monetization of ICMS credits
– Issue: Accumulation of ICMS credits caused by the ICMS supported
by the company and not recovered in the sale of goods to third parties
– Main causes for the accumulation of ICMS credits:
–
–
–
–
Exportations – ICMS tax free
Deferrals
Reduced rate
Presumed credits
– The Corporate Income Tax Regulations do not allow the deduction of
the ICMS because this kind of tax (a VAT-type) is considered to be a
“recoverable tax”. Therefore, the law does not allow the use of
accumulated ICMS tax credits to decrease the taxable amount for the
assessment of Corporate Income Taxes (IRPJ and CSSL)
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Monetization of ICMS accumulated credits
– Ordinary alternatives to manage with ICMS accumulated credits
– Transfer the credits to other affiliates that have a higher volume of
transactions in which the ICMS is due.
– Problem: this alternative is only available for affiliates located
within the same state
– Reorganizations: Use the accumulated credits to paid-in new
companies in view of corporate reorganizations
– Problems: 1) only available in case the reorganization is made
among companies located within the same state; 2) some states
does not allow the use of ICMS credits; 3) risk of audit and
application of the “substance of form doctrine”
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Monetization of ICMS accumulated credits
– Judicial alternative – Authorization to deduct the ICMS accumulated
tax credit from the tax basis of the Corporate Income Tax and social
Contribution on Net Profit.
– Plead for an injunction to repel the application of the corporate
income tax regulations that expressly prevent the deductibility of
such expenses.
– The argument is based on the fact that the ICMS was indeed
supported by the taxpayer, as there is no forecast on the
recovering the ICMS credit. Income tax must be levied on the
actual income – constitutional rule.
– The injunction has the effect of differing the assessment of the
corporate income taxes, as the taxpayer shall add the respective
revenue to the tax basis as soon as it offset the ICMS
accumulated tax credit or monetize it.
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Monetization of ICMS accumulated credits
– Precedents issued by the Federal Superior Court of Appeals and
Federal Court of Appeals for the 4th Circuit (Decision No.
1.011.531 dated May 20, 2008):
– “But when it comes to exporting companies immune to the
payment of ICMS, which cumulates every month and cannot be
transferred to third parties nor reimbursed to the taxpayer by the
state, the standard regulation that prevents the ICMS to be
considered as a cost (art. 289, § 3, of Decree 3000/99)
eventually leads to the taxation of a non-existent income in
respect to the IRPJ and CSL”
– This final decision authorizes the deduction of ICMS credits
accrued by the taxpayer (related to export transactions, which were
not offset against taxable transactions during the fiscal year), for
Corporate Income Taxes purposes (at a 34% combined rate)
– Upon the transfer of the ICMS credits to third parties or
reimbursement by the State Government, the amounts of accrued
credits shall be added to the calculation of the income taxes
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Acquisitions - Assets
Vs. Stock
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ARGENTINA
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Asset Vs. Stock Acquisitions
-Advantages
-Disadvantages
-Stock
- Low tax impact
- Use of tax losses
- Short and simple process
- Transfer of contingencies
- No possibility of amortizing
the shares´ acquisition cost
-Assets
- No transfer of certain tax
contingencies
- Amortization of property
- Tax impact on seller
- No transfer of tax losses
- Burdensome process
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BRAZIL
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Local Acquisition of Assets
Local Acquisition of Assets: through a Local Acquisition
Vehicle (or an existing Brazilian entity)
Foreign
Entity
Brazilian
Target
Brazil
$
Newco
Assets
Inventory
Fixed Assets
Others
– Sale of fixed assets: PIS and COFINS levied on revenues
do not apply on the sale of fixed assets. IPI should only
apply if the fixed assets were imported within 5 years or
manufactured by the Brazilian entity. ICMS should not apply
on the sale of fixed assets
– Sale of inventories: as a general rule, PIS, COFINS, IPI (if
applicable) and ICMS should apply to the transaction. As a
general rule, such taxes can be creditable by Newco (for PIS
and COFINS purposes, the amounts will be creditable for
Newco only in case Newco is taxed under the noncumulative system)
– Tax losses carryforwards (NOLs) recorded by the Brazilian
entity are not written-off upon the sale of assets
–
Effects to NEWCO:
– If the transaction is deemed as a sale of business
(“going concern”) there is a risk of tax succession
liability at Newco’s level on a secondary basis.
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Acquisition of Stock
Acquisition of Stock: through a Local Acquisition
Vehicle (or through a local buyer)
Seller
Target
$
Acquisition Vehicle
(or local buyer)
Target
– Sale of shares is exempt from ICMS, PIS, Cofins and
IPI
– The Seller located in Brazil will calculate capital gain
(or loss) upon the difference between the sales /
purchase price and the book value of the investment
in Newco
– Capital gains will be taxable at a 34% combined
rate. The amount due can be offset by the
Brazilian Seller against existing NOLs – limited
to 30% of the taxable income)
– The Seller located abroad will calculate capital gains
based on the difference between purchase price and
the registration of the foreign investment with the
Central Bank (“RDE”)
– Capital gains (of a foreign seller) will be subject
to the incidence of the withholding income tax
rate of 15% (or of 25% in case the seller is
located in a low tax jurisdiction)
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Local Acquisition of Stock – Payment of
Goodwill
Buyer
Goodwill – difference between the price paid
and the book value (net equity) of the
investment, based on one of the following:
– Expectation of future profitability
Purchase Price = 60
– Difference between accounting value and
market value of fixed assets
Investment= 20
Goodwill = 40
Target
– Other Intangibles/ Other economic
reasons
Net Equity = 20
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Local Acquisition of Stock
– Requirements for Tax Amortization of Goodwill
– Economic study supporting the amount and the nature of goodwill
paid in the acquisition of the investment
– Liquidation of the investment (i.e., merger of acquisition vehicle into
Target)
– Goodwill based on expectation of the Target’s future profitability
– amortization: maximum 1/60 per month - minimum 5 years for
tax purposes
– Goodwill based on the difference between the accounting and
market value of fixed assets – depreciation: remaining period of
the assets’s useful life
– Goodwill based on other intangibles: no tax amortization allowed
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Local Acquisition of Stock
Merger / Amortization of Goodwill (based on expectation of future
profitability)
Buyer
Target
– The merger of the target into the Buyer (or viceversa) is required to the allow the tax amortization of
goodwill paid in the acquisition of the Target
– The merger based on book value is generally a tax
free reorganization
– After the merger, goodwill paid in the acquisition of
Target may be amortized for tax purposes, limited to
1/60 per month (minimum amortization period is of 5
years)
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Acquisitions In the Capital Market
– Resolution No. 2,689 of the Central Bank
– If investment is held in the stock exchange and sold therein – WHT on
capital gain is zero
– IOF on distribution of dividends and IOE also zero
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Alternative for investments in closely held
corporations
Investment through an Equity Investment Fund (FIP)
–Taxation of the FIP: Under current legislation, the FIP is not subject to
taxation in respect to the acquisition and disposal of investments in Brazil.
In addition, the income received from such investments is not taxed at the
FIP’s level. Conversely, the corporations where FIP will hold equity interest
participation are normally subject to all Brazilian taxes applicable to a
standard legal entity.
– Taxation of the Investor:
– Income - Foreign investors not domiciled in low tax jurisdictions and
under Resolution 2,689/2000: 0% WHT. In order to be entitled to this tax
benefit, the following additional conditions must be met (otherwise, the
WHT rate is 15%):
(i) the FIP cannot hold in its portfolio, at any time, debt securities
exceeding 5% of the FIP’s net equity, and
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Alternative for investments in closely held
corporations
(ii) the foreign investor cannot hold, individually or jointly with related parties,
quotas representing (a) 40% or more of all the FIP’s quotas or (b) 40% or
more of the total income of the FIP. (the so-called “40% Test”)
– Foreign investors domiciled in low tax jurisdictions: 15% WHT.
– Brazilian individuals: 15% WHT (or to progressive rates that may vary from
15% to 22.5% - in case certain requirements are not complied with), as a
definitive taxation for the individual.
– Brazilian entities: 15% WHT (or to progressive rates that may vary from 15%
to 22.5% - in case certain requirements are not complied with), as a mere
anticipation of the corporate income tax due by the legal entity (at a combined
rate of 34%).
– Capital Gains - from 0% to 15%, depending on the case.
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Alternative for investments in closely held
corporations
Investment through an Equity Investment Fund (FIP)
A
25%
B
25%
C
25%
D
25%
Brazil
Brazilian
FIP
S.A.
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Thank you
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