2014 Luxury & Fashion - Baker McKenzie
Transcript of 2014 Luxury & Fashion - Baker McKenzie
© 2014 Baker & McKenzie
2014 Luxury & Fashion Industry Conference for Multinationals
Trends and Nuances for
Emerging Markets
Michael Coleman
Raymundo Enriquez
Karyn Koiffman
Suchint Majmudar
Loke-Khoon Tan
Investing in the Maghreb,
Brazil, India and Mexico Michael L. Coleman
Raymundo Enriquez
Karyn Koiffman
Suchint Majmudar (BMR Advisors)
Overview of International
Trade Patterns
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Algeria, Morocco and Tunisia
‒ Location: Northwest Africa
‒ Population: 1% of the global population
38.7 million Algerians – the 4th largest economy in Africa
33.2 million Moroccans – the 5th economic strength in Africa
10.8 million Tunisians – among the top 15 destinations for Foreign
Direct Investment (FDI) flows in Africa
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Foreign Direct Investments
Algeria USD 2.7 billion in 2012 and 2.8 billion in 2013
Main investor: Kuwait (23%) – U.S.: 13% in 2012
Morocco USD 2.8 billion in 2012 and 2.5 billion in 2013
Main investor: France (43%) – U.S.: 2% in 2013
Tunisia USD 1.1 billion in 2011 and 1.9 billion in 2012
Main investors: Qatar (31%) and France (15%)
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Income Tax Treaties
Algeria Double taxation treaties entered into with more than 20 countries
worldwide (but NOT with the U.S.)
Withholding tax rates paid by resident taxpayers to non-resident companies applicable to:
- Dividends: 15% => 15% (Treaty with France)
- Interest: 10% => 10/12% (Treaty with France)
- Royalties: 24% (4.8% for the use of computer software) => 5/10/12% (Treaty with France)
Morocco Double taxation treaties entered into with more than 50 countries
worldwide (including the U.S.)
Withholding tax rates paid by resident taxpayers to non-resident companies applicable to:
- Dividends: 15% => 15% (Treaty with France), 25/10% (Treaty with UK), 15/10% (Treaty with US)
- Interest: 10% => 10/15% (Treaty with France), 10% (Treaty with UK), 15% (Treaty with US)
- Royalties: 10% => 5/10% (Treaty with France), 10% (Treaty with UK), 10% (Treaty with US)
Tunisia Double taxation treaties entered into with more than 50 countries
worldwide (including the U.S.)
Withholding tax rates paid by resident taxpayers to non-resident companies applicable to:
- Dividends: 5% => 20/12% (Treaty with UK), 20/14% (Treaty with US)
- Interest: 20% => 12% (Treaty with France), 10/12% (Treaty with UK), 15% (Treaty with US)
- Royalties: 15% => 5/10/15/20% (Treaty with France), 15% (Treaty with UK), 10/15% (Treaty with
US)
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Customs Agreements
Algeria E.U. Partnership Agreement + Member of the Greater Arab
Free Trade Area (GAFTA) + Trade and Investment
Framework Agreement with the U.S.
Recently negotiated Association Agreement with EU which
provide for removal of all Customs duties on imports into
Algeria of goods manufactured in EU and vice versa by 2020
Morocco E.U. Association Agreement + Member of the GAFTA + Free
Trade Agreement with the U.S.
Tunisia E.U. Association Agreement + Member of the GAFTA +
Trade and Investment Framework Agreement with the U.S. +
Bilateral Agreement of Investments Promotion and
Protection with the U.S.
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Favorable Customs Regime
‒ As part of the Euro-Mediterranean Partnership
(Euromed), Morocco and Tunisia have an Association
Agreement with the EU, which grants duty-free access to
the EU market for manufactured goods
Accordingly, textile and footwear manufactured in either
country can be imported duty free from Morocco/Tunisia.
Similarly, Morocco/Tunisia may import goods
manufactured in the EU free of Customs duties.
‒ Morocco and Tunisia are part of the Pan-Euro-
Mediterranean system of cumulation of origin, which makes
it simpler to import products from the EU that are
manufactured in more than one country throughout the
Mediterranean basin.
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Brazil ‒ The largest and most populous country in South America
(population of over 202 million - 6th largest population in the
world)
‒ Growing middle class
‒ Despite recent years' slow down in economy, South America's
leading economic power
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Brazil – Customs Agreements
‒ MERCOSUR
‒ Free trade agreements between MERCOSUR and
over 10 countries
‒ Duty preference agreements with 5 countries
‒ Preferential Regional Tariff Agreements (between
certain countries in Latin America)
‒ Other agreements in negotiation
‒ No customs agreements with the U.S.
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India
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Mexico
Structuring Strategic
Investments
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Algeria, Morocco & Tunisia –
Structure of Investment Inbound Algeria 49/51 rule => requirement of at least 51% Algerian resident
ownership of foreign investments for all activities
Morocco 1995 Investment Charter with foreign exchange provisions
favoring foreign investors => foreign investment permitted in
nearly every sector, with restrictions in specific industries
(essentially agriculture and fisheries). The percentage of
foreign ownership does not affect the status of the company.
Tunisia In principle, no limitation (up to 100% foreign equity)
- Service activities other than totally exporting: foreign equity
must be lower than 50%, an authorization of the Superior
Commission of Investment being required beyond.
Distribution (wholesale and retail) activities qualify as
services for 51/49 requirement.
- Agricultural sector: foreign equity up to 66%
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‒ In regard to each of Algeria, Morocco and Tunisia, but
particularly Morocco, the new local foreign-owned
entity may redeploy its financial and human resources
into other jurisdictions (such as sub-Sahara or the
Arab/Gulf region) with which the jurisdiction of the
original investor does not have double taxation or
trade/Customs treaties.
‒ In most cases, redeployment of capital would be
subject to foreign exchange controls on export of
capital.
What needs to/could be done once
investment is inbound?
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Repatriation Funds Outbound
Algeria In principle, foreign investors can repatriate dividends, profits,
and real net income out of their assets through transfers or
liquidation. In practice, due to the 51/49 % equity
requirement, It may take longer to obtain official permission
from the Central Bank to make transfers/payments or for the
local bank to proceed with the transfer.
Morocco Freedom of repatriation of funds (free transfer of foreign
capital invested, dividends and capital gains) once all
accrued taxes in force in Morocco have been paid or settled.
Tunisia Freedom of repatriation of funds without taxation and further
restrictions, except for investments in non-export activities
where an authorization of the Central Bank of Tunisia is
required.
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Brazil – Structure of Investment Inbound
‒ Foreign investment restrictions in certain specific
industries only
‒ Foreign investments are subject to control of Brazilian
Central Bank, but NO prior approval required
‒ Foreign direct investment and investment in capital
markets are subject to registration with Brazilian
Central Bank and annual disclosure (if applicable
thresholds are met) to enable remittance of dividends,
repatriation of capital, etc.
‒ Attorney in fact needs to be appointed (and financial
institution in case of investment in capital markets)
‒ Restrictions of flow of funds in foreign currency
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Brazil – Repatriation Funds Outbound
‒ No authorization required – accounting and corporate
rules apply with regard to distribution of dividends and
repatriation; distribution of interest on equity possible in
Brazil
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India
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Mexico: Presence and Vehicles
20
Tax Considerations and
Repatriation of Profits
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Corporate
Income Tax
Of 19% or 25% (trade and services) on profits from business carried on in
Algeria (draft Finance law for 2015 provides for a uniform 23% rate).
Reduced rate for investment capital companies and listed companies
Dividends Exempt from withholding tax if received by other resident companies but
subject to withholding tax (15%) when distributed to resident individuals or
non-residents.
Capital Gains Realized by resident companies subject to corporate income tax at the
standard rate.
Royalties Subject to corporate income tax if derived by residents. Royalties paid to
nonresidents subject to a withholding tax (24%) in full satisfaction of the
tax liability.
VAT At a standard rate of 17% and reduced rate of 7%.
Customs
Duties
From 0% to 30%
Exemptions For qualifying new investments.
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General Rules for Tax – Algeria
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Corporate Tax Ordinary rate of 30% - discounted rate of 17.5% for exporting
companies. Foreign contractors carrying out engineering, construction or
assembly projects relating to industrial installations may opt for a 8%
rate on gross revenues. Other favorable tax provisions apply to export
zones (zones franches) and hydrocarbons.
Capital Gains
Tax
30% (subject to certain exceptions).
VAT Standard rate of 20% - reduced rates of 7, 10 and 14%
Royalties Royalties derived by non-resident legal persons are subject to a final
withholding tax at the rate of 10% on the gross amount, unless a lower
treaty rate applies: e.g. 5% (for copyright royalties in respect of the
production/reproduction of literary, artistic or dramatic work) or 10% (for
other types of royalties) if the recipient IP licensor is located in France;
the rate remaining 10% for the UK and the US.
Favorable Tax
Provisions
Export zones (zones franches), hydrocarbons
Exemptions 23
General Rules for Tax – Morocco
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General Rules for Tax – Tunisia
Classical Corporate
Taxation System
Corporate Tax (25%) on income from activities carried on in Tunisia.
Increased rate (35%) for banks, insurance, factoring, hydrocarbon
services companies, telecommunication operators.
Reduced rate (10%) for export companies.
Dividends Not subject to tax. As from 01/01/15: withholding tax of 5% on the
distribution of dividends to non-resident persons.
Capital Gains Subject to corporate tax at the standard rate. Capital gains on
shares realized by non-residents subject to tax in Tunisia.
Exemptions may apply subject to certain conditions.
Royalties Subject to corporate tax if derived by residents. Royalties paid to
non-residents subject to a 15% withholding tax in full satisfaction of
the tax liability if no treaty. US treaty rate: 10/15%; UK treaty rate:
15%; France treaty rate: 5/10/15/20%.
Favorable Tax
Provisions
Standard rate of 18%.
Exemptions From 0% to 43%
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Algeria, Morocco & Tunisia –
Profit Repatriation Rules
Algeria Foreign investors can repatriate profits through transfers or
liquidation. It may take longer to obtain official permission
from the Central Bank to make transfers, or for the local bank
to proceed with the transfer.
Morocco Free repatriation of profits (only for foreign residents, non-
residents and Moroccans residing abroad)
Tunisia Freedom of repatriation of profits without taxation and
restriction, except for investments in non-export activities
where an authorization of the Central Bank of Tunisia is
required
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‒ Morocco and Tunisia have bilateral investment treaties
with US
‒ No bilateral investment treaty between US and Algeria
(although Trade and Investment Framework Agreement
exists)
Algeria, Morocco & Tunisia –
Investment Protection Rules
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Brazil – General Rules for Tax
Foreign direct investments in Brazilian companies
Dividends Exempt from withholding income tax. IOF-Exchange currently at a zero
rate.
Payment of Interest
on equity
Withholding income tax at 15% rate (increased to 25% in case of
beneficiaries located or domiciled in low tax jurisdictions) on the amount of
interest paid, credited or capitalized. IOF-Exchange currently at a zero
rate.
Return of Capital
In case the amount in foreign currency remitted proportionally exceeds the
amount in foreign currency registered with the SISBACEN, this will be
considered a capital gain subject to 15% tax rate. Capital reduction subject
to waiting period (90 days for limited liability companies and 60 days for
corporations) for opposition by third parties (creditors).
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Brazil – General Rules for Tax
Investments in capital market
Withholding Income
Tax
In case of portfolio investments carried out by foreign investors investing in
the stock exchange, commodities, future or similar markets, gains are
exempt from withholding income tax provided that the investor is not
domiciled in a low tax jurisdiction.
However, this exemption does not apply to certain combined operations
which give rise to predetermined revenues, which are subject to withholding
income tax at a 15% rate (i.e. (i) options of purchase and sale at the stock
exchange, commodities or future market, (ii) term transactions, at the stock
exchange, commodities or future market, in case of covered sales and
without daily adjustments, and (iii) operations at the over the counter
market)
IOF-Exchange
According to Decree No. 6,306/07 (as amended), the remittance of gains
resulting from investments in capital market is subject to the IOF-Exchange
at a zero rate.
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India
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Mexico
Practical Tips
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Risk/Benefit Assessment Chart – Algeria
Risks Benefits
- Protectionist measures with
restrictive foreign investment
rules
- Bureaucracy
- Corruption; however, abatement
programs are in progress
- Weakness of financial/banking
sector
- Legal uncertainty regarding IP
rights, particularly in regard to
new technologies
- Complex legislation
- Instability
- Strategic location
- Low cost of energy inputs
- Skilled and cheap labor force
- Emerging/growing consumer
market - growing demand for
modern infrastructure and
consumer products
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Risk/Benefit Assessment Chart – Morocco
Risks Benefits
- Excessive dependence
vis-à-vis agriculture and
vulnerability to oil and
gas prices
- Bureaucracy
- Strategic location
- Stability
- Favorable legal framework (Investment
Charter; protection of IP rights; extensive
tax and Customs network)
- Tax advantages
- Low wages
- Young and well-educated population
- Strong growth
- Liberalization of Moroccan economy
- Liberalization of external financing
- Freedom of repatriation of funds/profits
- Generally pro-business attitude of
governmental decision makers
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Risk/Benefit Assessment Chart – Tunisia
Risks Benefits
- Heavy bureaucracy
- Corruption
- Strategic location
- Stability
- Tax incentives and grants
- Repatriation of capital and dividends
- Coverage of social contributions
- Coverage of vocational training
- Coverage of infrastructure spendings
- Benefits granted to investment support
- Employment incentives
- Qualified, productive workforce at
competitive salary levels
- Additional benefits when investments
are of importance or interest to the
national economy or education
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What is the most efficient strategy to get back investment in a foreign
country?
‒ If JV is created, whether for resale or manufacturing, it is critical that the
JV partner be reliable and cooperative. Exit rights should be clearly
defined in JVA.
‒ Monitor continuously contractual performance of local contractual party
(whether distributor/sales representative, IP licensee/JV partner).
‒ Investment may be structured so as to be held by country having
favorable double taxation treaty provisions.
‒ Judicious transfer pricing combined, where possible, with IP royalties
licensing.
‒ If pass-through of start-up and/or subsequent operating losses is
important for U.S. tax planning purposes , select the limited liability type
of entity (SARL) which is officially recognized in each of the 3 host
jurisdictions.
Algeria, Morocco & Tunisia –
Tips on Planning an Exit Strategy
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‒ Stringent consumer protection rules and e-commerce restrictions (E-
commerce Law enacted in 2013)
‒ Other tax considerations:
High tax burden over imports of good
Complex set of rules and numerous layers of taxes, which restrains the
development of local industries
ICMS tax war between various states which unilaterally grant tax
incentives for purposes of attracting new companies and more
investments
Limitation for the tax deduction of payments relating to patents, know-
how and technical assistance of up to 5% of net sales and payments
relating to trademarks of up to 1% of net sales. Limitation of remittance
abroad for payment of royalties to foreign affiliated entity (5% for patents,
know-how and technical assistance and 1% for trademarks)
Thin capitalization, transfer pricing and NOLs
Brazil
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India ‒ Structure: LLP vs Company
‒ Functions: Sourcing vs Manufacture
‒ Use of debt instruments
ECBs
CCDs
‒ Certainty on TP and tax positions
APA
AAR
‒ Exit Planning
Recapitalisation
Debt-pussh down
37
Facilitates repatriation
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Mexico
Trends in Hong Kong /
China Loke-Khoon Tan
IP Trends
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Asian Brands Going Global
41
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3D Printing
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Risks of Passing Off
43
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Investment in Luxury Brands in Asia
45
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Supply Chain & Customs
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Anti-corruption Initiatives
47
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Accessible / Affordable Luxury
48
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Digital Branding
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Chinese Platforms
50
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© 2014 Baker & McKenzie
All rights reserved.
2014 Luxury & Fashion Industry Conference for Multinationals
4 September 2014
The Harvard Club, New York, NY