Challenges of the U.S. and Mexico tax systems with regards ... of the Mexic… · Challenges of the...
Transcript of Challenges of the U.S. and Mexico tax systems with regards ... of the Mexic… · Challenges of the...
Challenges of the U.S. and Mexico tax systems with regards to the cross-border digital economy
Dra. Lillian Sumi Imaoka
Mex Co.Mexican Suppliers
Mexican Customers
Mex Co. is a Mexican Project Management Company with industry-specific sales.
Dividend
Assets
Services
Related Party Country B
Related Party Country C
Related Party Country D
Related Party Country ADutch.com
Services and equipment
Antilles Holding
Netherlands
Other countries
Netherlands Antilles
Services
Mexico
For Tax Administrations Digital Economyis not a single-industry challenge
Mex Co.
Dividend
Dutch.com
Antilles Holding
Netherlands
Other countries
Netherlands Antilles
Mexico
Dividend payment
Royalty/Services payment
The compensation agreed in the intercompany transaction is an initial subscription payment per user, and a fixed fee per click or download of online information:- Intellectual property $$$- Services / Technical Assistance $S- Training $
However, the content is available online is not entirely developed by Dutch.com
Dutch.com
Know-how
Local Adapt.
IP, Technical info.
Know-how
Technical Assistance
Online platform
develop. & maintenance
Information and
experience gathering /
storage
Data analysis and
classif.
Training
Dutch.com offers users (related parties exclusively) access to an online platform with technicalinformation useful globally to any operative company within the Multinational Group, including:• Intellectual property.• Know-how based on previous experiences from any operative company.• Technical assistance.This information is constantly updated with users’ experiences (operative companies).
Operative CompanyAvailable to
Update or Input of new data
Dutch.com Functions / Activities
Tax Administration’s ChallengesRegardless of the industry, Tax Administrations face BEPS issuescaused by Digital Economies singularities:
Permanent Establishment
• Is there significant economic presence?
• Revenues• Interaction with users
Characterization of payments
• Services (Art. 7 business profits).
• Know-how, IP (Art. 12 royalties)
• Software license• Database user
access• A combination?
Functional/DEMPEAnalysis
• Creating value in the intercompany transaction:
• Users experience• Online platform• Gathering/storage
functions• Data analysis and
classification• Know-how development
• How to attribute value?
Taxation challenges on Digital EconomyGabriela Pellón, Galicia Abogados, S.C.Edgar Klee, Haynes & BooneRaúl Navarro, Chevez, Ruiz, Zamarripa y Cía., S.C.Moderator: Raúl Villarreal Garza, Procopio
The digital World is perceived differently…
The World’s biggest
transportation
company
Hasn’t got any
vehicles
The World’s
biggest media
company…
Doesn’t create
content
The World’s most
valuable retail
company…
Doesnt’s have any
stock
The World’s biggest
lodging company…
Doesn’t own real
estate
The videoconference
company with the
widest reach…
Doesn’t have
telecomm
infrastructure
Digital businesses and its characteristics
• Multinational presence without physical presence. Digital businessmodels enable companies to have economic presence in severalcountries without the need to have any physical presence on them.
• Reliance on intangible assets (Including intellectual property rights“IP”). Digital business models invest and rely heavily on intangibleassets, such as brands, patents, software or code property rights,copyrights.
• Data, user participation and synergy created with IP rights. Digitalbusiness models might rely on the interactions that their usersmaintain between them and the information shared by such usersthrough a given platform.
Digital businesses’ characteristics
1. E-commerce
Products and content
providers
Product sale(B2B)
Product re-sale
(B2B)Customers
Product price / fees for access to content.
$
$
2. Multilateral platforms
Controlled transaction
User / Provider User / Customer
• Promote the network• Customer management• Intermediary services implementation• Platform maintenance
• Fee payments• Advertisement fees• Data collection
3. Vertical growth in digital businesses
• Digital businesses generate their own production chain.
• Example: Amazon (Warehouses and storage), Netflix(original productions).
Commercializingcompany
End customers
One Company, several business lines
• Digital economy is characterized by its dynamism and flexibility. Companiescan easily create new business lines.
• New business lines = new value creation models, new legal relationshipsand income sources = new tax consequences. Example (Amazon):
Provider
Final Customer
CommercializingCompany (reseller)
Intermediary(Source State)
Sale Resale
Sale
FeeServices consideration
Multilateral business(network)
E-commerce
Vertical Growth
Digital Economy Taxation-
Legal Framework
Applicable framework - Mexico• Income Tax Law
• OECD transfer pricing guidelines.
• Value Added Tax Law
• Digital Services Tax Law Bill
• Double Taxation Treaties’ framework• OECD Model Tax Convention• Commentaries on the OECD Model Tax Convention• Multilateral Instrument - Action 15 BEPS
International Background
Technical Advisory Group (TAG) reports
OECD (2000-2001)
Action 1 Final Report – Digital Economy Tax Challenges(Oct 2015)
OECD international guidelines on
VAT and sales taxes
(Dec 2015)
Unilateral taxation
measures on Digital Economy
emerge 2015 (India, UK, Italy)
OECD interim report published
– Taxation challenges on the economy digitalization. (Mar 2018)
European Union’s
Directives issue proposals for the to tax the
Digital Economy(Mar 2018)
Multilateral instrument to adopt preventive measures as regards to BEPS (Action 15)
Relevant aspects of the Digital Economy
1. Permanent Establishment
2. Tax Havens
3. Transfer Pricing
4. Payments characterization
5. Value Added Tax
1. Permanent EstablishmentSales Co(Ireland)
Subsidiary Co(Mexico)
• Local marketing and productpromotion
• Interaction with customers• Significant negotiating role
• Software location• Transactions proccesing• Marketing strategy
Payments (i.e. $100)
Services payment (i.e. $10)
Customers(Mexico)
1. Permanent Establishment – Dependent Agent
Income Tax Law – Article 2
Article 5 of the Tax Treaties under the OECD Multilateral Instrument
Execute contracts in name and on behalf of the foreign
resident for tax purposes
Habitually executes contracts or habitually
develops a substantial role in the execution of such contracts without being
modified by the company
2. Tax Havens – Patent Boxes
Holding Co(Spain)
Patent Box Co(Switzerland)
• Mantains owners, technical people and developers• Charges fee for development to the Patent Box Co
(costs+markup)• Pays general corporate income tax (25%)
• Hires development services from Holding Co• Legally owns the software• Charges to Clients around the World• Pays taxes at a preferential rate (7%‐8%)
Service fee payment(costs+markup)
Pays royalties
• Software users at global scale• Where the software is “standardized – off
the shelf”, there is no tax withholding onroyalties’ payments
2. Tax Havens – Mexico’s Test
¿Is Patent Box Co a tax haven?
• Tangible goods commercialized out of Switzerland
• Services rendering from within Switzerland
• Services rendering out of Switzerland
• Services rendering through a digital platform (SaaS)
Passive income test
SI
NO
SI
?
Holding Co(Mexico)
Patent Box Co(Switzerland)
Pays Service fee
Pays royalties
• 20%+ of net income comes from passive acitivies = Tax haven
• Where income is originated from services or goods sold out of residence country = passive income
3. Transfer Pricing
Patent Box Co(Switzerland)
• Is the owner of the software• Licenses the software to a distributor in Colombia• Pays taxes at a preferential rate (7%‐8%)
Low risk distributor(Colombia)
• Pays licensing royalties (3% sobre ventas)• Sublicenses the software to Clients in Colombia• Develops local marketing activities• Promotes the platform to acquire new users• Pays general corporate income tax (33%)
End users/Clients(Colombia)
Royalties for the software licensing
Sublicensing royalties
3. Transfer Pricing1. BEPS actions’ 8, 9 and 10 main purpose is to align the transfer pricing results with the value
creation. This is achieved when the value attribution for tax purposes is consistent with theeconomic activity that generates such value.
2. The OECD Council approved changes to the Transfer Pricing Guidelines in March, 2016.
3. The income assessment regarding intangibles shall comprise the developed functions, usedassets and assumed risks in the following:
Development,
Improvement,
Maintenance,
Protection and
Exploitation of the intangible
4. Payments characterizationTransaction/operat
ionIT
Withholding Tax treaties Examples
Purchase/disposalof tangible and
intangible goods
No sourcedincome N/A
Services 25% ¿Business profits? 0%
Software 25% 10%-15% exceptwhen “standardized”
Publicidad 25% ¿Business profits? 0%
5. Value Added TaxOECD Recommendation VAT Law/ Customs’ Law / International Trade
RegulationsDestination principle
The intermediary shall be obliged to be registered as withholding agent
The importer is the legal and economic bearer of the VAT
Recommendation is aimed to simplify VAT registry (accountability) to foreign residents
1. Every taxpayer is obliged to have the same register.
2. PE presumption where an establishment is registered for VAT purposes.
Facilitate the imports VAT collection with the elimination of exemptions on low-cost products and collecting through post services and shipping companies
Exemption over low-cost goods (USD$300)(International Trade Regulation 3.7.1.-Exención sobre bienes de menor valor ($300 USD) (Reglas Generales de Comercio Exterior 3.7.1. – Merchandise shipping through postal services)
Data, data, data…
Customers (World)
Permanentestablishment
Tax Havens
Transfer Pricing
• Withholding at source
• VAT
?Digital value creation
Data, data, data…2007
Anyone who lives in Philadelphia, studies philosophy and has between 18 and 22 years
2009Anyone who lives in Philadelphia, studies
philosophy and has 21 years
2013Anyone who lives in Philadelphia, studies
philosophy, has 21 years and purchased a blue shirt within the last year.
2014Anyone who lives in Philadelphia, studies
philosophy, has 21 years, purchased a blue shirt within the last year and owns a pair of white shoes.
2016Anyone who lives in Philadelphia, studies philosophy, has 21 years, purchased
a blue shirt within the last year, owns a pair of white shoes, earns more than USD$20,000 and is passionate about cars.
Unilateral Measures to tax Digital Economy
Initial Positions (2014-2017)
Significant economicpresence
Special taxes Anti-avoidance measures for multinationals
Israel
India
India
Italia
Hungary
Diverted profits tax in UK (google tax)
BEAT in EUA
Directives Proposal – European UnionDirective Proposal.- Temporary tax on digital services:
Directive Proposal.- Digital Permanent Establishment:
3% tax rate over gross income obtained by a Company within the EU (regardless of its location), from the following activities:
• Online advertising;• The utilization of a web platform that allows
users to interact with each other, and can also facilitate the provision of goods and services between such users;
• Transmission of data collected from users and generated from the digital interaction of such users.
The tax is only applicable to entities whose gross income exceed the following thresholds:
• Global income = EUR 750 million; • EU income = More than EUR 50 million
Digital permanent establishment as a consequence of having a “significant digital presence”.
An entity has significant digital presence if at least one of the following conditions are met:
• The proportion of the total income in any given Fiscal year obtained from the provisionof digital services to users located within the member State exceeds EUR 7 million;
• The number of users that receive digital services within a member State in any given Fiscal year exceeds 100,000;
• The number of concluded contracts for the provision of digital services to users within a member State in any given fiscal year exceeds the amount of 3,000.
Measures in Mexico (Digital Services Tax Law Bill)
Proposed bill on digital taxation services in Mexico
3% tax rate over net income (deductible items are not specified) obtained by a Mexican resident or a foreign resident with a permanent establishment in Mexico (regardless of the place in which the are generated) from the following activities:
• Online advertising;• The utilization of a multilateral web platform that allows users to interact with each other, and
can also facilitate the provision of goods and services between such users;• Transmission of data collected from users and generated from the digital interaction of such
users.
The tax is only applicable to entities whose gross income exceed MXN$100’000,000 (USD$ 5’260,000)
Exempt activities:• Streaming content, communication and payment services;• Financial services; and• Data transmission by financial services providers.
Measures in America – Netflix, Uber Tax
Argentina – 21% VAT charged on users
United States – 6% ‐ 9% State Tax
Brazil – 2% over gross income
Peru – 30% withholding on digital services