12 GAARS, SAARS an Update on Tax Litigation Trends

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Joaquin KersmanAbogadoBaker & McKenzie Sociedad CivilAv. Leandro N. Alem 1110, Piso 12C1001AAT Buenos AiresArgentinaTel: +54 11 4310-2219Fax: +54 11 4310 2299 [email protected]

Argentina

Anti-Avoidance Rules

1. General AntiAvoidance Rule: Economic Reality Principle Tax Authority may consider real transaction and/or

economic relationship. Inappropriate structures may be re-characterized # with substance over form principle GAAR applicable to Tax Treaty situations?

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2. Specific AntiAvoidance Rules, include: CFC Rules Tax Havens Rules Derivatives Characterization Transfer Pricing Sixth Method Tax Treaties SAARs: Beneficial Ownership, Residency

Rules.

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Anti-Avoidance Rules

Memorandum 64/09

GAAR Challenge

Arguments

ARGENTINE RESIDENTS

AUSTRIAN HOLDINGS

UNDERLYING ENTITIES

- No dividend taxation

- No interest taxation

- No wealth tax

ARG

ABROAD

Equity / Debt

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Tax Treaties SAARs: The Austria Case

The Molinos Case

Other Tax Treaties being challenged. Switzerland, Spain?

ARGENTINE RESIDENTS

CHILEAN PLATFORM

UNDERLYING ENTITIES / ASSETS

- No taxation on Chilean sourced revenues

ARG

ABROAD

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Tax Treaties SAARs: The Chile Case

Argentine Corporate Entity characterization

Legality Requirement

Conclusions

BANK OF TOKYO, JAPAN

BANK OF TOKYO, ARGENTINE BRANCH

- No Personal Assets Tax

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GAARs In Favor of Taxpayers:The Bank of Tokyo Case 2012

LENDER (USUALLY RELATED)

ARGENTINE DEBTOR

INTEREST35% WHT21% VAT

LOAN IN FOREIGN CURRENCY

ABROAD

ARG

DEDUCTS INTEREST + EXCHANGE RATE LOSSES

FORMAL REQUIREMENTS NO GUARANTEES

NO COLLECTIONS OR CLAIM BY LENDER33340312/8

Debt Recharacterization As Equity

FOREIGN COMPANY

FIXED PLACEDEPENDENT AGENTS

ABROAD

ARGCARRIES ON

BUSINESS

DOMESTIC LAW vs. TAX TREATIES

PERMANENCE TIME LIMITS

PRECEDENTS33340312/9

Permanent Establishment Risk

1. Private rulings are available: Binding for both parties

2. Statute of limitations: 2002 to 2008 6 years2009 onwards 5 years

3. Payment during tax audits penalties are reducedno further interestmoratoriumsno further questioning

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Tax Proceedings in Argentina: Recommendations

4. No term for audit procedure. Dealing with tax audits.

5. Attachments require Justice intervention. Term.

6. Plea bargaining & negotiations.

7. Exchange of information.

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Tax Proceedings in Argentina: Recommendations

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Luiz Felipe FerrazMattos Filho, Veiga Filho, Marrey Jr e Quiroga Advs.Tel (55 11) 3147 7870www.mattosfilho.com.br

Brasil

Overview

Principle of Legality

Constitutional rule in favor of formal approach

Substantive approach

General Anti-Avoidance Rule (GAAR) discussion on constitutionality

Special Anti-Avoidance Rules (SAAR) admission in certain cases E.g. long-term loans exempted from WHT on interest /

capitalization and subsequent capital reduction (in 5 years) taxation

Discussions:

Law: dissimulation, simulation

Courts: abuse of form33340312/13

Overview

Dissimulation Article 116 of National Tax Code

Scope Sham Transactions

Need of ordinary law to define procedures

Effort of previous Tax Administration to regulate

Simulation in structures

That apparently grant of transfer rights to parties other than those indicated

That contain false declaration, confession, condition or clause

With pre- or post-dated documents

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Substance

Abuse of Form

Taxpayer abuses of right to self-organization with the predominant purpose of paying less taxes

Simulation not necessarily present

Substance over form discussions

Decision of the administrative courts have verified the economicsubstance of the transaction

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Premium Amortization

Seller

Company C

Buyer

Net Equity 100

Investment 100Premium 20Cost 120

Cash 120Cost (100)C. Gain 20

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Premium Amortization

Investment 100Premium 20Cost 120

Discussions on substance

Appraisal report

Transfer of premium

Cash flow

Internal premium

Economic reason/Lack of business purpose

Special purpose vehicle

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Company C

Buyer

Net Equity 100

CFCs

CFC profits are considered distributed to the Brazilian holding company accrual basis

Profits before deduction of corporate taxes

Net equity pick up revenue

No deduction of CFC losses

No Horizontal consolidation CFC profits individually taxed

Vertical consolidation allowable 2nd tier CFC profits consolidated at 1st tier

CFC losses only offset profits of same CFC

Brazil

Abroad

Brazilian Co.

CFC CFC

CFC

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CFCs

Tax planning difficulties Liquidation of Brazilian quota/

shareholder or of CFC Merger, spin off of CFC Alienation of CFC

Tax planning challenges Substance, treaty shopping Eagle case

DTT conflicts Article 7 corporate profits Article 10 dividends

Most common structures Netherlands tax credit Luxembourg tax credit Austria exemption / tax credit Spain exemption

Brazil

Abroad

Brazilian Co.

CFC

Taxation on distribution

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Vale Case

Brazil

Abroad

Brazilian Co.

CFC

Issue: CFC taxation on accrual of profits

Distribution not considered

Superior Court of Justice (STJ) Profits from CFC are subject to

taxation

No taxation of currency exchange variations obtained through the equity accounting method

Federal Supreme Court

ADIN CNI Supreme Court

Marcopolo case

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Eagle Case

Brazil

Abroad

Brazilian Co.

Spain

Uruguay

Brazilian CFC rules sought to tax the underlying business profits of the subsidiary

Brazil-Spain treaty not applicable

Uruguayan profits automatically distributable to Brazil

Question: treaty shopping? Conduit transaction?

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Eagle I CaseRuling 101- 95.802 of Oct 19, 2006

Brazil

Abroad

Brazilian Co.

Spain

Uruguay

1st Assessment: Taxation on profits levied at the level of

CFC; Article VII of Tax Treaty; Only Spain may tax;

2nd Assessment: Taxation on dividends distributed on a

non-profit basis; Article X of Tax Treaty; Brazil and Spain: limit of 15% Dividends taxable in Spain = Brazil may

grant exemption; Reference made to 1995 edition of OECD

commentary; Held: CFC rule conflicts with treaty and

therefore does not apply.

Eagle II CaseRuling 101-97.070 of Dec 17, 2008

Ruling recognized the application of article VII of Tax Treaty;

Ruling limited the protection to SpanishCo own profits;

Ruling considered that the legal concept of controlled entity encompassed second tier;

Law is based on the assumption of an availability of the controlled entities profits what is only possible for first tier entities;

Article 1st, 6 of IN 213/02, determined a vertical consolidation of lower tier profits on the first tier.

Brazil

Abroad

Brazil Co.

Eagle

Spain

(Canary)

Uruguay Argentina

No Tax Treaty Tax Treaty

Tax Treaty

Equity Pick-up

So PauloAl. Joaquim Eugnio de Lima 44701403 001 So Paulo SP BrasilTel (55 11) 3147 7600Fax (55 11) 3147 7770

Rua Campo Verde 61 3andar01456 010 So Paulo SP BrasilTel (55 11) 3035 4050Fax (55 11) 3035 4067

BrasliaSHS Q.6 Bloco C Cj A sala 1901 70322 915 Braslia DF BrasilTel (55 61) 3218 6000 Fax (55 61) 3218 6090

Rio de JaneiroAv. Presidente Wilson 231 Cj 403/40420030 021 Rio de Janeiro RJ BrasilTel (55 21) 3231 8200Fax (55 21) 2262 6675

New York135 East 57th Street 12th FloorNew York, NY, USA 10022Tel (1 646) 695 1100Fax (1 646) 695 1110

www.mattosfilho.com.br

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Eduardo Martnez-MatosasGomez-Acebo & Pombo Avda. Diagonal 640 08017 Barcelona - ESPAATel.: (34) 93 415 74 00Mov.: (34) 670 458 738Fax: (34) 93 415 84 [email protected]

Spain

General anti-avoidance rules: Re-characterization Abuse of law (conflict in the application of a tax provision) Sham transactions (simulation)

Review of Anti-Avoidance Rules

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Specific anti-avoidance rules (among others): Implementation of the EU Parent-Subsidiary Directive Tax havens Special regime for reorganizations Thin Capitalization / New (March 2012): debt incurred for

intra-group acquisition of shares New (March 2012): Earning stripping rules OECD Disregard Doctrine (Transfer Pricing Guidelines)?


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Artificial Leverage Fraud of Law(Central Economic-Administrative Court (TEAC):

Decisions of 5 October 2011, 1 June 2010, 8 October 2009, 25 June 2009,17 May 2007)

Non Spanish

Parent

Non Spanish

Sub

Spanish Sub Finance Co

Non Spanish

INITIAL SITUATION

Non Spanish Parent

FINAL SITUATION

New Spanish

Holding

Finance Co

Non Spanish

Spanish Sub

Non SpanishSub

Capital

Contribution

Loan

Purchase price

Tax Consolidation

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Artificial Leverage Fraud of Law(Central Economic-Administrative Court (TEAC):


A MNE which owns a Spanish active profit-generating company (Spanish Sub) enters into the following transaction:1. Contribution of Spanish Sub to a newly created Spanish Holding

company (New Spanish Holding).2. New Spanish Holding enters into a loan agreement with the finance

company of the group (resident in a EU low-tax country).3. With the proceeds of the loan New Spanish Holding acquires the shares

of a non-Spanish subsidiary at market price.4. New Spanish Holding and Spanish Sub will file consolidated tax

returns.

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Artificial Leverage - Fraud of Law(Central Economic-Administrative Court (TEAC):


Non Spanish Parent

New Spanish

Holding

Finance Co

Non Spanish

Spanish Sub

Non SpanishSub

Capital

Contribution

Loan

Purchase price

Tax Consolidation

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As a result of the transaction: Interests paid to Finance Co deductible out of the profits

of Spanish Sub. Interests are low-taxed at Finance Co. Future dividends and capital gains derived from non-

Spanish Sub will be exempt of Spanish CIT under participation-exemption (or ETVE regime).

Spanish Thin Capitalization rules and Transfer Pricing regulations have been correctly observed by the taxpayer.



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Non Spanish Parent

New Spanish

Holding

Finance Co

Non Spanish

Spanish Sub

Non SpanishSub

Capital

Contribution

Loan

Purchase price

Tax Consolidation

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TEAC has recurrently ruled the existence of Fraud of Law (GAAR) and denied interest deductions, based on the following*: The only aim of the transaction was to create leverage in the

Spanish Sub (reducing groups tax burden). No substantial change in the group structure after the

transaction: it was a mere repositioning of shares within the group.

The Spanish group did not enter into leverage to buy, but, conversely, bought to enter into leverage.

No economic, strategic or financial reasons for the transaction. No need to enter into leverage.

*Exception: TEAC 1 June 2010

Artificial Leverage - Fraud of Law(Central Economic-Administrative Court (TEAC): Decisions of 5 October 2011, 1 June 2010, 8 October

2009, 25 June 2009,17 May 2007)

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EU Parent-Subsidiary Directive: 0% wht on dividends paid between EU qualifying companies.

Anti-abuse provisions under Spanish Law can apply if majority of voting rights are owned by non-EU residents, except that:

In case of a pure EU Holding company: it has been set up with a sound business purpose (in practice=substance).

What level of substance?

Additionally: possible application of anti-treaty shopping provisions: is EU Holding the beneficial owner of the dividends?

EU Holding

Spanish Sub

Dividends

0% wht?

Non EU

100%

100%

Abuse of EU Parent-Subsidiary Directive

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Netherlands 2

Spain

Dividends

0% wht? NO

USA

100%

100%

Netherlands 1

100%

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Spanish Supreme Court (21 March 2012 and 4 April 2012): denies application of 0% wht.

Netherlands 2 employed 10 to 19 employees involved in treasury management of the group.

It was not proved that Netherlands 2 performed management activities.

A company is not deemed to have substance merely because it has employees.

Need to prove that the employees render the management activities effectively (difficult in practice).

Taxpayer not able to prove bona fide commercial reasons to set up Netherlands 2, other than benefiting of the EU Parent-Subsidiary Directive.

Netherlands 2 performed business (production) activities. However, the Court stated that substance test must be met at the level of the direct shareholder.


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Hybrids: Brazilian juros sobre o capital prprio (JsCP) Spanish participation exemption (ETVE)

Main features of JsCP (Interests on Net Equity): JsCP can be considered as dividends

according to Brazilian Commercial Law.

Brazilian Law allows deduction of JsCP in Brazilian CIT (same tax treatment as interest payments).

JsCP should be considered as interests for Double Tax Treaty purposes (art. 11): subject to withholding tax.

Spanish participation exemption regime (incl. ETVE regime): 100% exemption in Spanish CIT on

dividends and capital gains derived from qualifying foreign subsidiaries. Should JsCP qualify as dividends?

Brazil

Spain

Interests on net equity (Juros sobre o capital proprio)

Spanish Part.-Exemption (ETVE)?

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Hybrids: Brazilian juros sobre o capital prprio (JsCP) Spanish participation exemption (ETVE)

Spanish TEAC (13 April 2011) Denies application of Spanish participation

exemption regime (incl. ETVE regime) to JsCP. Reasons:

JcSP qualify as interest under Brazilian tax rules; therefore, they cannot qualify as dividends for Spanish participation exemption regime.

JsCP payments are deductible for Brazilian CIT purposes.

According to Spain-Brazil Double Tax Treaty, the definition of dividends and interests needs to be made according to Brazilian Law.

The aim of the Spanish participation exemption regime is to avoid double taxation: non existent in JsCP payments.

Brazil

Spain

Interests on net equity (Juros sobre o capital proprio)

Spanish Part.-Exemption (ETVE)?

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Hybrids: Profit Participation LoanDebt vs. Equity

Spanish National High Court (2 February 2011)

Recharacterization as Equity of a Profit Participation Loan (subordinated debt).

Consequently: denial of deduction of interest payments in Spanish CIT.

Key aspects taken into account by the Court:

No maturity date.

Termination by mutual agreement.

Possibility to convert into shares.

Interest payments contingent to the existence of profit.

Spain

Netherlands

Recharacterizedas Equity

Participative Loan

Interests: not deductible

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Spanish National High Court (19 January 2011)

Spanish parent receives bank loan and with the proceeds grants loan to its Brazilian sub.

In Brazil: wht applied on gross interest paid.

In Spain: non access to full foreign tax credit: only applicable to net income. Effective taxation of interests could be

over 100% of profits obtained. Application of Matching Credit: 20%

deemed withholding tax. Many DTTs provide for a preferential tax

treatment on interests paid to banks.

Brazilian-Source Interests Spanish FTC

Brazil

Spain

Interests

15% wht

Full Foreign Tax Credit =15%?Bank

Loan

Interests

Loan

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Exchange of Notes to Spanish-Brazilian DTT (2003): technical assistance fees are characterized as royalties.

In Spain: non access to full foreign tax credit: only applicable to net income.

10% (MFN clause; DTT Brazil-Israel): Possibility to request refund in Brazil if

15% wht applied.

Spanish Tax Authorities can deny Foreign Tax Credit on the excess if 15% wht applied.

Application of Matching Credit: 25% deemed withholding tax.

Brazilian-Source Service Fees Royalties Characterization Restriction of Spanish FTC

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Brazil

Spain

Payment of Fees 10% wht

Not entitled to full foreign tax credit (10%)

Technical Assistance

Employment expenses

Net income computation: the source State levies wht on the gross income obtained but the residence State restricts the application of the foreign tax credit to the net income (income minus related expenses) Possible solution (OECD): withholding at source based in net income

(deducting operational expenses which have a direct economic connection).

Spain adopts this approach since January 1, 2010, but only on payments to EU residents (i.e. to avoid EU potential discrimination).

Incorrect application of foreign withholding tax established by DTT (e.g. due to not complying with local formalities / certificate of residency, etc.). Foreign Tax Credit only allowed up to the limit established by the DTT.

Spain - Most Frequent Problems on Application of Foreign Tax Credit

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Nathalie Rodriguez ParsHoet Pelaez Castillo & DuqueCentro San Ignacio, Torre Kepler, Piso 4Av. Blandin, Urb. La CastellanaCaracas 1060, VenezuelaCaracas 1060, VenezuelaWeb: www.hpcd.com+58 (212) 201.85.82+58 (212) 2637744 fax

Venezuela


GAARS Economic reality principle/substance over form/Re-

Characterization : VAT Art. 52 (Sept. 1993) Tax Code Art. 16 (Oct 2001) Income Tax law (Oct.1999)

Contracts, companies and in general acts may be disregarded when main purpose is to reduce taxes The ITL presumes reduction of taxes is the main purpose, unless taxpayer proves otherwise (shifts burden of proof taxpayer must prove legitimate business purpose)

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SAARS Low Tax Jurisdictions: >20% tax or blacklisted Transactions are deemed with related parties: transfer pricing

and special tax returns Funds Received from LTJ are deemed taxable dividends Thin capitalization rules Presumed dividends regulations

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Debt Push Down

ParentParent

Foreign HoldcoForeign Holdco Finance Co(Low-Tax)Finance Co(Low-Tax)

VencoVenco

Foreign

Venezuela Loan

Thin Capitalization Rules 1:1 basis Exchange Control Regime Adjustment for Inflation issues Withholding on interest payments Withholding on dividend payments

and/or capital gains

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Debt Push Down

Thin Capitalization Rules 1:1 basis Exchange Control Regime Adjustment for Inflation issues Withholding on interest payments Withholding on dividend payments

and/or capital gains

ParentParent

Ven HoldcoVen Holdco

Finance Co(Low-Tax)

Finance Co(Low-Tax)

Ven OpcoVen Opco

Foreign

Venezuela

LoanMerge

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Circular Structures

Venezuelan Co /Individual

Venezuelan Co /Individual

Spanish Co (ETVE)

Spanish Co (ETVE)

Venezuelan CoVenezuelan Co

Venezuelan Issues beneficial owner is a

Venezuelan resident Abuse of form

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VenezuelanIndividual

VenezuelanIndividual

Spanish Co (ETVE)

Spanish Co (ETVE)


SPF

Limitations on Exit

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Foreign CoForeign Co


Venezuelan Issues

Dividend tax withholding 34% if non treaty UBO or reduced rate from 10% to 0%if treaty benefit.

Capital gain tax withholding 34% if non treaty UBO or 0% if treaty benefit.

Foreign exchange control regime restrictions and issues.

Dividends/ Return of Investment/Capital

Reduction

Combining Royalties & Service Fees

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Royalties Allocate between royalties

and service fees Royalties subject to 30.6%

withholding taxService Fees Services fees subject to

withholding tax 34% if non-domiciled 2% if domiciled

Services subject to corporate tax of 15% - 34%Branch Non transfer pricing between Non-Treat Co and branch Possible withholding tax on presumed dividends to Non-Treaty Co

Non-Treaty CoNon-Treaty Co

P.E.Branch?

P.E.Branch?

Royalties & Service Fees Ven Client

Ven Client

Splitting Royalties & Service Fees

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Ven Sub Assign service fees to Ven Sub Corporate tax of 15% - 34% No WHT (or reduced) on dividends

to Foreign Treaty CoForeign Treaty Co Non Treaty Co licenses to Treaty Co. 5% - 10% WHT on royalties

(depending on treaty) No transfer pricing between Foreign

Treaty Co and Ven Sub (assignment)Risks: Beneficial owner Abuse of form

Non-Treaty CoNon-Treaty Co

Fees

ServicesVen ClientVen ClientVen Sub or branch

Ven Sub or branch

ForeignTreaty CoForeign

Treaty Co Royalties

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Tax assessments (2005) Service Contracts in the oil industry (subject to 34% tax) were in fact oil primary activities (50% tax). Abuse of form

Corporacin LR-39, C.A. (SCJ 2011) Abuse of form. Court disregarded the incorporation of a new entity with same shareholders and same activity with the sole purpose of avoiding joint liability of pending tax debts.

Pfizer (SCJ 2010) Abuse of form on income tax. Proagro Case (SCJ 2009) abuse of form: the purpose to

reduce taxes must be evident, tax administration may not disregard form when there is a legitimate business purpose.

Abuse of Forms Recent Cases

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Policlinica La Arboleda Case (SCJ 2008) and Publitotal (SCJ 2007) Abuse of form: there must be evidence that the main purpose was to reduce taxes

Geoservices Case (SCJ 2007): Court rejected recharacterization of tech assistance as royalties and applied DTT with France as business profits (art. 7).

Abuse of Forms Recent Cases

12 GAARS, SAARS an Update on Tax Litigation Trends

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