Latin America Tax Treaty Update 2002

8/9/2019 Latin America Tax Treaty Update 2002

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Recent Developments in Latin America Tax Treaty Network

Jorge Gross

International Tax Partner,

Latin American Tax Group

PricewaterhouseCoopers, Miami, FL



PricewaterhouseCoopers

Treaties in Latin America generally provide for:

Allocation of taxing authority.

Permanent establishment definition.

Reduction of withholding taxes.

Non-discrimination practices.

Resolution mechanism.

Treaty Network in Latin America




Latin American tax treaties are generally influenced by

these model treaties:

Andean Pact Model (based on Decision No. 40 of the

Cartagena Agreement of November 16, 1971).

OECD Model.

UN Model.

Treaty Network in Latin America




Tax treaties that followed the Andean Pact Model favoredsource based taxation. The Andean Pact includes Bolivia,

Colombia, Ecuador, Peru and Venezuela.

Only two treaties follow this model:

± Argentina-Bolivia (10/30/76) ± Argentina-Chile (11/13/76)

The UN Model attempted to accommodate both territorial

and worldwide tax systems recognizing the right to tax in acountry based on a company¶s residency while also

facilitating taxation at the source through ³limited force of

attraction´ principles.

Andean Pact Model vs UN Model




Residence (Article 4)

Permanent Establishment (Article 5)

Business Profits (Article 7)

Independent Personal Services (Article 14)

Differences between Andean Pact

Model and UN Model




Argentina




Treaties drafted mostly along the UN model, even though two

of its treaties follow the Andean Pact model (Bolivia and

Chile).

Not much relief for lowering withholding taxes.

Sometimes rates are higher than domestic rates (Austria and

Sweden).

Treaty with Brazil contains unlimited taxation rights based on

source.

PE follows 6 months construction clause except for Italy

which is 9 months.

Argentina ± Treaty Network




Royalties:

Definition is broader and can include technical services,

computer software, news and motion pictures.

Rates can be lowered to 10%, treaty with Canada andSpain, or to 15%, 5% and 3% (depending on the nature of

the payment), treaty with Finland.

Treaties can have matching credits or sparing clauses.





Argentina entered into new tax treaties with Australia,

Belgium (both effective in 2000), Switzerland (effective in

2001) and Norway (effective as of January 2002)

The complete treaty network is now as follows:

Australia Austria Belgium

Bolivia Brazil Canada

Chile Denmark Finland

France Germany Italy

Norway Spain Sweden

Switzerland The Netherlands United Kingdom





Applicable withholding rates with Latin American countries vs. Europeancountries:

Interest Dividends* Royalties LOB*

Non-Treaty 15.05 0r 35% 0 or 35% 21, 28 or 31.5% NA

Bolivia*** 15.05 or 35%*** 0 or 35% 21, 28 or 31.5% No

Brazil*** 15.05 or 35%*** 0 or 35% 21, 28 or 31.5% No

Chile*** 15.05 or 35%*** 0 or 35% 21, 28 or 31.5% No

Austria 12.5% 0% or 35% 15% No

Netherlands 12% 0% or 35% 3, 5, 10 or 15% No

Switzerland 12% 0% or 35% 3, 5, 10 or 15% No

* Withholding applies only if distribution exceeds accumulated taxable income.

** Treaty applies local law withholding rates.

***In general, 35% rate applies only to tax haven entities.





Brazil




Brazil ± Treaty Network

Extensive treaty network.Generally follows UN Model.

In some cases, treaty articles can be broader than both UN

and OECD models (i.e. article 14 of Brazil-Austria treaty).

Not much relief in withholding rates except for Japan(12.5%).

Several treaties have sparing clauses and matching credits.

Treaties have a rather expansive definition of royalties

which includes technical assistance (except Brazil-France).

Definition of services is much broader than both UN and

OECD model and provides for taxation rights to source

country regardless of the existence of a PE.





Many treaties signed by Brazil provide for tax-sparing credits:

a contracting state agrees to grant relief from residence

taxation on source taxes that have not actually been paid.

Tax sparing opportunities derived from Brazilian treaties:

Canada (20% credit on 15% withholding on interests and

royalties other than trademarks).

Ecuador (25% credit on 15% withholding on interests and


Germany (20% credit on 15% withholding on interests and

25%* or 20% credit on 15% withholding on royalties).

Japan (25% credit on 15% withholding on royalties, 20%

credit on 12.5% withholding on interests).

Korea (20% credit on 15% withholding on interests and






Brazil signed new tax treaties with Chile on April 2001 andwith Ukraine on January 2002, however no effective date has

been set. The treaty with Portugal was terminated as of January 2000, however a new treaty was signed on May of

2000 with a retroactive effective date of January 2000.


Argentina Austria Belgium

Canada China Czech Republic

Denmark Ecuador Finland

France Germany Hungary

India Italy Japan

Korea Luxembourg Netherlands

Norway Philippines Portugal

Slovak Republic Spain Sweden





Applicable withholding rates with Latin American countries vs. European

countries:

Interest Dividends Royalties* LOB**

Non-Treaty 15% 0% 15% NA

Argentina 15% 0% 15% No

Ecuador 15% 0% 25% or 15% No

Belgium 15% 0% 25% or 15% No

Denmark 15% 0% 25% or 15% No

Netherlands 15% 0% 25% or 15% No

* New 10% contribution is imposed on payments of royalties by Brazilian

entities to foreign recipients. Withholding tax still applies.

** Limitation of Benefits Clause




Chile




Chile ± Treaty Network

Chile signed a new tax treaty with Brazil on April 2001 andwith Norway in October 2001, however no effective dates

have been set. Treaties signed with Ecuador, Peru and

Poland are also pending an effective date.


Argentina Canada Mexico




Chile ± Treaty Network

Applicable withholding rates:

Interest DividendsRoyalties LOB*

Non-Treaty 35% or 4%** 35%*** 30% NA

Argentina**** 35% or 4%** 35%*** 30% No

Canada 15% or 4%** 35%*** 15% No

Mexico 15% or 4%** 35%*** 15% No

* Limitation of Benefits Clause.

**

Only applicable to financial institutions accredited before the central bank.*** 15% First Category Tax (Income Tax) is credited towards dividend withholding.

**** Treaty applies local law withholding rate.




Mexico




Mexico ± Treaty Network

Only OECD member.Has concluded more OECD model treaties than any other

country in the region.

Very aggressive treaty program.

Can have UN type clauses in treaties, such as 6 months PE for

construction and certain limited force of attraction clausesi.e. Mexico-US treaty.

Treaties tend to uniformly reduce withholding rates.

First country to have a treaty with the US.





Mexico signed a new tax treaties with Luxembourg and Portugal(both effective as of January 2002). Mexico also signed a treaty with

Romania on August 2001, however no effective date has been set.


Belgium Canada Chile

Denmark Ecuador Finland

France Germany Ireland

Israel Italy Japan

Korea Luxembourg Netherlands

Norway Portugal Singapore

Spain Sweden Switzerland

UK US





Applicable withholding rates with Latin American countries vs. European countries:

Interest* Dividends Royalties LOB

Non-Treaty 4.9, 10, 21 or 40% 7.7% 5%15 or 40% NA

Chile 15% 5 or 7.7% 15% No

Ecuador 10 or 15% 5% 10% No

US 4.9, 10 or 15% 5 or 7.7%*** 10% Yes

Denmark 5% or 15% 0 or 7.7%**** 10% No

Netherlands 5 or 15% 0 or 7.7%*** 10% No

Sweden 10 or 15% 5 or 7.7%*** 10% No

* Lower withholding rate applies on interest payments to banks or on publicly traded securities.

*** Lower withholding rate applies if the beneficiary owns 10% of the payer company.

****Lower withholding rate applies if the beneficiary owns 25% of the payer company.




V enezuela




V enezuela ± Treaty Network

Negotiating treaties at a feverish pace since its tax system

changed to worldwide taxation.

Except for Andean Pact, almost all treaties are OECD based.

Treaty rates definitely reduce withholding rates negating theneed for some planning such as back-to-back loans.

Second country in tax region to have a US treaty.





Venezuela entered into new tax treaties with Barbados andIndonesia (both effective on January 2001) and Denmark

(effective as of January 2002). Venezuela also signed newtreaties with Canada (July 2001) and China (April 2001),

however no effective date has been set.


Barbados Belgium Bolivia

Colombia Czech Republic Denmark

Ecuador France Germany

Indonesia Italy Netherlands

Norway Peru Portugal

Sweden Switzerland Trinidad Tobago

United Kingdom United States





Applicable withholding rates with Latin American countries vs. European countries:

Interest DividendsRoyalties LOB

Non-Treaty 4.95 or 32.3%* 34% 30.6%** No

Bolivia 4.95 or 32.3%* 34% 30.6%** No

Colombia 4.95 or 32.3%* 34% 30.6%** No

Ecuador 4.95 or 32.3%* 34% 30.6%** No

Peru 4.95 or 32.3%* 34% 30.6%** No

United States 4.95 or 10%* 5 or 15%*** 5 or 10% Yes

Netherlands 5% 0 or 10%**** 5, 7 or 10% No

* Lower withholding rate applies on interest payments to banks. Rates based on local law. 32.3% net rate since 34% rateapplies to 95% of the taxable income.

** 30.6% net rate since 34% rate is applied to 90% of the taxable income.

*** Lower withholding rate applies if the beneficiary owns 10% of the payer company.

**** Lower withholding rate applies if the beneficiary owns 25% of the payer company.

Latin America Tax Treaty Update 2002

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