9h ANNUAL U.S. - LATIN AMERICAN TAX PLANNING STRATEGIES CONFERENCE

Electronic Tax Compliance: Processes, Systems, Inspections & Litigation

Miami – June, 2016

Chair Lionel Nobre – Dell (MWV) - Porto Alegre, Brazil Speakers Daniel Hora do Paço – Petrobras – Rio de Janeiro, Brazil Florencia Misrahi – Cargill – Buenos Aires, Argentina Jaime Filho - Cisco - Miami, United States

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Agenda

Statutory Environment Electronic Compliance Managing an Electronic Audit Tax Audit Trends Best Practices

Statutory Macro Environment

External Factors Rapidly increasing accounting, tax and regulatory requirements Push for tax and accounts transparency and unprecedented levels of political focus Aggressiveness of authorities Significant increase in tax controversy activity and intensity “Real time electronic reporting” for accounting and tax purposes Fight for talent

Business Driven Factors

Expanding business presence in LATAM – need to grow the business! Changing business placing new demands on legacy systems Increasing reliance on manual process & workarounds IT investments not keeping pace with regulatory change and not scalable Acquisitions and shift in business model adding statutory complexity OPEX challenges mean we are asked to do much more with less Link between systems/processes documentation and talent to prepare financial statements & defend

audits 3

Strong expectation that these trends will continue

LatAm E-environment in May-2016

Country Electronic Invoicing

Electronic Accounting Other e-info Electronic

Filings Electronic

Audit

Brazil Aug-2009 Jun-2009 Yes Yes Mandatory

Mexico Jan-2011 Jul-2015 Yes Yes Optional

Argentina Jan-2011 n/a Yes Yes Mandatory

Chile Nov-2014 n/a Yes Yes No

Colombia 2016* n/a Yes Yes Optional

Peru Optional** n/a Yes Yes No

Panama n/a n/a Yes Yes No

Puerto Rico Not available n/a No Yes No

Costa Rica n/a n/a Yes Yes No

Guatemala n/a n/a Yes No No

El Salvador n/a n/a Yes Yes No

* Decree 2242 approved in Nov2015. Additional regulations are still in process to determine start date and companies involved.

** Mandatory for Dell starting in July 15th, 2016.

The average time invested on compliance in LATAM: 618hs as per The

World Bank “Paying Taxes 2016” World average time invested 268hs Additionally complicated tax system (i.e.: VAT, Income Tax and other

taxes), and multiple tax authorities levels and jurisdictions, dynamic tax legislations.

Region Country # Hours

Latin America Brazil 2.600

Bolivia 1.025

Venezuela 792

Ecuador 654

Argentina 405

Paraguay 384

Mexico 334

Uruguay 310

Peru 293

Chile 291

Colombia 203

Region Country # Hours

Asia Pacific China 318

Japan 330

India 243

Europe Portugal 275

Italy 269

Germany 218

Spain 167

France 132

UK 110

North America Canada 131

USA 175

Tax Compliance Environments

Sample Regulatory & Business Requirements

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Income Tax SPEDSocial security

SPEDSocial security

SPEDOEM business OEM business

Roll out BTS-Smart Selection

Roll out BTS-Smart Selection

Roll out BTS-Smart Selection

Services Tax code

Services Tax code

Services Tax code

Services T&C Services T&C Services T&CCPRB SPED CPRB SPED CPRB SPED

New Solutions New Solutions New Solutions New SolutionsParts by Dell Parts by Dell Parts by Dell Parts by Dell

PIS/Cofins SPED PIS/Cofins SPED PIS/Cofins SPED PIS/Cofins SPEDODM Production ODM Production ODM Production ODM Production ODM Production

Assets SPED Assets SPED Assets SPED Assets SPED Assets SPEDRetail business Retail business Retail business Retail business Retail business Retail businessOracle Localiz Oracle Localiz Oracle Localiz Oracle Localiz Oracle Local Oracle Localiz

Fcont-RTT Fcont-RTT Fcont-RTT Fcont-RTT Fcont-RTT Fcont-RTTTax SPED Tax SPED Tax SPED Tax SPED Tax SPED Tax SPED

Inventory SPED Inventory SPED Inventory SPED Inventory SPED Inventory SPED Inventory SPEDAccgt SPED Accgt SPED Accgt SPED Accgt SPED Accgt SPED Accgt SPEDe-Invoice e-Invoice e-Invoice e-Invoice e-Invoice e-Invoice

ICMS Substitution

ICMS Substitution

ICMS Substitution

ICMS Substitution

ICMS Substitution

ICMS Substitution

PAC PAC PAC PAC PAC PACPWC Audit PWC Audit PWC Audit PWC Audit PWC Audit PWC Audit PWC Audit

IFRS IFRS IFRS IFRS IFRS IFRS IFRSBlue Line Blue Line Blue Line Blue Line Blue Line Blue Line Blue Line Blue Line Blue Line Blue Line

Recof BCC Recof BCC Recof BCC Recof BCC Recof BCC Recof BRH Recof BRH Recof BRH Recof BRH Recof BRH Recof BRH Recof BRH Recof BRHPPB BCC PPB BCC PPB BCC PPB BCC PPB BCC PPB BRH PPB BRH PPB BRH PPB BRH PPB BRH PPB BRH PPB BRH PPB BRH

CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12* CY13* CY14*

HEADCOUNT 6 7 9 9 11 13 17 20 TBDTAX/CUSTOMS AUDITS * 1 1 1 1 1 1 2 8 NA

NUMBER OF IDR´s 3 0 3 3 4 5 18 34 NATAX/CUSTOMS ASSESSM. NEW* 1 0 1 1 1 1 3 3 NATAX/CUSTOMS ASSESSM. ONGOING* 4 4 4 4 4 5 8 7 NA* Main audits and assessments

Main Drivers • Regulatory & Tax requirements increasing YoY

• Support business transformation • Increase in tax audits & litigation • Requires improved quality of data and easier access to information (“state of the art” record retention) • Demands full attention from a specialized tax team (“SWAT team”)

Regulatory requirements

Business transformation

Electronic Tax Systems

Electronic systems (i.e.: Electronic invoicing, etc.) – “Big Brother” systems have been implemented by many tax authorities in Latin America (i.e.: Brazil, Mexico, Argentina, Chile, etc). because that: (a) facilitates compliance; (b) improves cash flow; (c) reduces the cost of revenue administration; and (d) creates new tools for identifying areas for audits/investigation (e) eliminates possibility of corruption

From a taxpayer perspective these electronic systems are an opportunity to:

(a) automates compliance, requiring connections between a corporation’s internal systems and tax preparation; and (b) promotes harmonization and standardization.

In some cases commercial software vendors satisfy this need (e.g. Brazil and Chile, but their

availability is not widespread throughout the region.)

Brazil and Mexico have now implemented Electronic Accounting Systems

MWV COMPANY CONFIDENTIAL

Latin American Compliance – Are we really different?

Source: RISI, Freedonia

Exceptionally time-consuming compliance due to: Hyper inflation history; Low tax morale & high tax evasion; Need to “tropicalize” business practices Form over substance rules

Greater focus on electronic invoicing and “big brother tax systems” Lack of harmonization in tax approaches, calculations, and comparability for

the region: Indirect taxes Transfer Pricing Treaties Capital flows Income tax Accounting bases (IFRS vs. local GAAP vs. US GAAP)

Significantly less experience with tax systems than Europe or Anglo North

America 8

Electronic invoicing process – Peru

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Requirements Summary as established by the tax authorities (SAT)

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► On October 2014 ► Every time it changes

Charter of accounts

Trial Balance

Accounting Entries

Trial Balance of: Due Date:

July October 2014

August November 2014

September & October December 2014

November & December January 2015

Starting 2015_____ ► On authorities’ request ► Compensations ► Refunds

Regulated Entities

•Minimum chart CNBV*

Non Regulated Entities

•Grouping Code Appendix 24

*CNVB: National Banking and Securities Commission

100% of the data needs to be in Spanish

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Main obligations of mexican taxpayers

• CUFIN – Net tax profit

account • CUCA – Contributed capital

account • NOL’s – Updated NOL’s • Tax cost basis of shares

• Keep books for 10 years • Support documentation of

transactions • Issue electronic invoicing • Obtain transfer pricing

studies • Obtain electronic invoicing • Verify the authenticity of

electronic invoices

• Income tax • Payroll withholding tax • Service withholding tax • Foreign payments • Foreign Intercompany

transactions • REFIPRE payments • Paid dividends

• VAT • Monthly DIOT • Service withholding tax

• Income tax • Accrued Income • Tax rate

• VAT • Cash flow VAT payable • Cash flow VAT in favor

Self tax determination

Informative Returns

Tax books and records

Other tax obligations

Brazil: Regulatory and Tax Compliance Environment

IT Systems

New Legislation New Business

Eletronic (Realtime)

Compliance – Tax, Trade, Siscoserv, Central Bank, Others

Audits

Other External Factors: Economic, Social,

Political

MWV COMPANY CONFIDENTIAL

People – How to adapt to the electronic environment?

Source: RISI, Freedonia

Corporations need to adapt as to guarantee an/the:

Investment in electronic tools that "talk" with ERPs;

Implementation of automated processes;

Development or hiring of professionals with knowledge of Tax Systems (tax rules and IT);

Greater integration with other departments (accounting, treasury, IT, payroll, etc);

Interaction with “software houses” (IT consultants and software vendors);

Familiarization with “on line” inspections by local revenue authorities.

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LATAM Electronic Tax Audit Overview

Closing Meeting

• Audit may take a few days and weeks or potentially several years (up to 15 years depending on the country). • Multiple audits or court cases underway at any time either as part of a regular cycle or “ad hoc” – audits will start

electronically or through a Tax Official´s visit. • Company´s position reviewed quarterly, provisions made as necessary.

The electronic environment does not give taxpayer´s the option to commit errors, since they will be “watching” every single transaction on a real time basis and can automatically issue

electronic IDRS and Assessments “Do it right the first time” is mandatory since you cannot fix anything on the back-end

Tax (Compliance/Litigation) Involvement: owns and leads the audits and all communications around the audits. Tax coordinates approach and briefing on rules of engagement, provides technical analysis & arguments, gathers/reviews documentation, & decides the best negotiation strategy including the use of an external legal advisor - or accountancy firm.

Finance, Local In-country Company Officers, Accounting Teams Involvement: responsible for the collection of supporting documentation: including accounting records and context, retrieval from systems and archives, provision of contextual background and history, assistance with language/culture, etc

Electronic filing of appeal

Electronic Assessment

Electronic data cross

reference

Electronic Clarifications

Electronic data cross

reference

Electronic IDR

Electronic data cross

reference

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Responding to Tax Audits In-House Professionals X Tax Advisors Brazil – In-House, typically; Argentina / Chile – Tax Advisors and/or auditors

combined with in house team; Mexico – also Tax Lawyers because in litigation

process taxpayer is not allowed to provide new evidence that was not offered during audit process.

Dealing with auditors Define a leader to coordinate the tax audit procedure

is mandatory! Only trained people should be allowed to interact

with auditors

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Responding to Tax Audits

Audits focused on Local Tax Matters In-House professionals/Advisors with strong local

background must be involved

Audits focused on cross-border transactions Global Tax teams must be involved – Global

Policies must be taken into consideration; Advisors (when necessary) must have strong

International Tax background (Transfer Pricing, DTAs, CFCs, etc).

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Responding to Tax Audits

Answering official requests Official requests have to be answered, but only restricted

to what was asked. Brazil: not obliged to produce documents to tax auditors.

If produced, document has to be provided. Mexico: New rule obliges taxpayers to submit all

information

Settlements: Not common in the Region Brazil - not possible; Mexico – recently settlements became available

(with intercession of Taxpayers “Ombudsman”); Chile and Argentina – may be possible in limited

circumstances;

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Responding to Tax Audits

Litigation is potentially the next step The tax audits are of key importance to

subsequent tax litigation. Answers given during the audit can affect decisively any argument to be used during litigation and determine the odds in favor or against the taxpayer

Keep tax litigation experts (In-House or external) involved since the beginning of audit process

If there are tax planning's behind – recall all assumptions adopted on the implementation

Cooperative environment and cross-function expertise are essentials

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Tax Audit Trends

Brazil: Transfer Pricing – Import and export transactions Customs Valuation – Stronger on certain

economic sectors; Reorganization and M&A – Goodwill and

Aggressive Tax Planning; Brazilian CFC rule; Tax incentives (Federal & State) Federal and State VAT; Payroll Tax (INSS)

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Tax Audit Trends

Mexico: Focus on cross border transactions – BEPS

guidelines; Transfer Pricing – All perspectives; Identification of “bad practices” massively used. Exchange of information with tax authorities from

other countries. Future trend – electronic audits (e-billing, monthly

filing of books, electronic salary receipts) Judicial injunction (“Amparo”) against electronic

reporting.

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Tax Audits Trends Argentina: Deductibility of Interests on I/C Loans; Transfer Pricing; Customs Valuation – Stronger on certain economic

sectors. Chile: Transfer Pricing – Goods, Services, Intellectual

Property; Deductibility of Marketing Expenses (with non-related

parties). Colombia: Customs Valuation; Transfer Pricing – Importation of Goods.

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Tax Litigation Department – Structures

Tax Litigation Report/Control Tax litigation requires report/control on: risk assessment: remote, possible, probable, more

likely than not, less likely than not disbursement schedule (cash deposits) (updated) amounts in discussion (updated) deposits amount when tax clearance certificate is available or not if there is reserve in the accounting books

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Tax Litigation – Important Aspects

If Assessed check if the assessment is complete and accurate confront informations given with facts informed in the

assessment think about information not given analyze if correct procedure has been followed

Amnesties Common in the region – Brazil, Mexico, Peru &

Colombia; Apply to an amnesty request analysis and controls;

Best Practices Main problem: Tax authorities today are more organized and have more information/data than taxpayers have including data from clients,

providers¨& competitors!!

Tax authorities are commencing criminal investigations (Brazil & Argentina) at the same time as the tax audits, plus they are

already publicising their efforts and accusing taxpayers in the press – can become a reputational issue from day one.

• Compliance needs to be close to perfect

• Requirement for specialized resources to pro-activitely monitor quality of the information/data being processed/filed

– Same team is the first contact person for IDR respone together with seasoned tax controversy professionals (in-house/external)

• Tax professionals need to develop skills that allow them to:

1. Work with large volumes of data as to make sure that data is correct, consistent, available and in the right format

2. Clearly identify what the IDR is aiming at and what the Tax Authorities might conclude based on the information they received

3. Take into account the potential direct and indirect consequences related to the data required under the IDR; and

4. Develop a line of defense from an IT as well as a legal/tax perspectives.

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MWV COMPANY CONFIDENTIAL

Questions?

Source: RISI, Freedonia 26

Lionel Nobre – lionel_nobre@dell.com Florencia Misrahi - Florencia_Misrahi@cargill.com Jaime Filho - jfilho@cisco.com Daniel Hora do Paço – dpaco@petrobras.com.br