Tax in Cross-Border Deals 2014 - LATIN LAWYER

21/11/2013

\ Tax in Cross-Border Deals 2014 – LATIN LAWYER

In your jurisdiction, can the acquisition of a domestic target limit the target’s use of existing tax attributes, such as net operating loss carry forwards or tax credits? Are there strategies or structures to preserve such attributes?

No, in Paraguay the acquisition of a domestic target cannot be a cause of limitation or loss of tax attributes. The general rules on expiration of tax cred-its are applied only in a general way, without taking into account the transfer of shares or companies.
When companies that are resident in your jurisdiction are sold to foreign investors, is it more common to sell stock or assets?
When selling companies to foreign investors, it is normal to sell the shares, although, it is also possible to carry out a transfer of assets.
Are there particular structures that generate a step-up in the tax basis of assets in a tax-efficient manner?
It is not applicable according to Paraguayan tax legislation.
Are there structuring opportunities that would enable a foreign acquirer to provide equity consideration to the shareholders of a domestic target in a tax-deferred manner? Are the rules similar if both the acquirer and the target are domestic?
It is not applicable according to Paraguayan tax legislation.
Can management generally roll over its equity in an acquisition in a tax-deferred manner? Are there certain circumstances where a tax-deferred rollover is difficult or impossible?
It is not applicable according to Paraguayan tax legislation.
Which holding company structures are typically used by foreign investors to acquire domestic targets in your jurisdiction?
They are usually structured through corporations that own shares in other companies (divisions) of the group, according to the organisational structure adopted for the different branches of business, and the design and planning of the commercial processes in the most efficient way possible.
What types of tax benefits typically arise in connection with transactions in your jurisdiction? Do the parties typically address allocation of such benefits in the transaction documents?

There are special regimes that provide tax benefits, such as the Maquila regime, Law No. 60/90 of Promotion of Investments and the Law of Free Trade Zones, among others.It is not normal for parties to refer specifically to such benefits in their contracts; however, it is common for transaction documents (contracts) to address issues related to responsibility for taxes.
Do real estate transactions (or transactions involving real estate holding companies) create special tax issues in your jurisdiction?
No, real estate transactions do not create special situations in Paraguay.
Are there other categories of transactions(involving other types of assets or specific types of entities) that raise distinctive tax issues (for example, in the United States, transactions involving real estate investment companies and regulated investment companies)?

The Paraguayan tax system, in general, applies equal tax treatment to companies regardless of the adopted corporate type.
Does your jurisdiction impose any distinctive taxes (eg, non-income taxes) that need to be specifically addressed when structuring and documenting cross-border deals?

Yes, VAT must be taken into account in the structure of cross-border deals, as well as Income Tax. In these cases, VAT applies to services that are used or exploited in the country, regardless of the place where the contract is concluded, the domi-cile, residence or nationality of those involved in the operations, as well as who receives the payment and the place where the payment comes from.
Do withholding taxes apply to transactions either from or into your jurisdiction?

Yes, in terms of cross-border deals, tax withholding applies when the law considers that it is an income from a Paraguayan source (Income Tax) or if it meets the principle of territoriality of the VAT.

Retention (usually VAT and Income Tax) is applied in the payment source.

Whoever pays, accredits or settles income to non-resident persons is obliged to make the applicable deductions and pay them to the Treasury, being jointly responsible for the payment of such taxes if it is not retained, and releasing the debtor once the retention is performed.
If withholding taxes apply to a transaction,what are the rates? Can they be reduced by treaty or are there structuring techniques or certification processes to avoid or mitigate the tax cost?

Non-resident companies that obtain income from a Paraguayan source will be subject to tax withholding.

In terms of income taxes (IRACIS), the rate for non-residents is 30 per cent. However, to determine the withholding net income, irrefutable presumptions are established (presumptions that do not allow evidence to the contrary) according to parameters provided by Law, establishing which portion of the income will be considered as from Paraguayan source.

Thus, the tax rate will be applied on the “n” per cent of the gross amount paid, credited or sent to the recipient abroad, where it turns out that the lowest direct rate is 3 per cent and the highest 30 per cent.

Operations Portion of rent from Paraguayan source Rate Retention with absorption Insurance premiums covering risks in the country. 10% 30% 3.09% Operations of passages, radiograms, phone calls, transmission of audio and video, transmission and reception of data over the internet protocol and other similar services provided from the country to abroad and from abroad to the national territory. 10% 30% 3.09% International news agencies. 15% 30% 4.71% Distributors of cinematographic films or television tapes and any other similar means of projection. 40% 30% 13.64% Operations of international freight. (Exportation freights are exonerated.) 10% 30% 3.09% Use of containers. 15% 30% 4.71% Loans from abroad: gross amounts paid, credited or remitted to banks or financial institutions or other lending institutions of recognized trajectory in the financial market and multilateral credit organisations, based abroad, in concept of interests and commissions for loans or operations of similar credits. 20% 30% 6.38% Other activities by default. 50% 30% 17.65% Income or gross amounts credited, paid or remitted from branches, agencies or subsidiaries of foreign people, located in the country, not included in the above tables. 100% 30% 42.86% In terms of income tax, only two treaties are effective for preventing double taxation of the income tax, which have been signed with Chile and China, and which could eventually be used to mitigate costs or plan its distribution.

There are also some international treaties to avoid double taxation in matters of air, land or water transportation.
Are VAT or transfer taxes significant? If so, in which types of transactions?

VAT levied on sale of goods, not personal services and the importation of
goods.

The general VAT rate is 10 per cent. There are lower rates than the mentioned. Currently, to all exceptional cases a 5 per cent rate is applied.

In the case of services and technical assistance, where the concept of territoriality extends to all those who are used or exploited in the country, it is important to pay attention to the applicable rate; so for example, in the case of financing the rate is 5 per cent. The same rate is applied in the cases of cession of usage of goods and transfer of real estate.

Law No. 5061/2013 will become effective in 2014 and as a result, the rate of 5 per cent VAT for financing will only be applicable to the interests, commissions and surcharges of loans granted by intermediate financial institutions regulated by the banking law. In addition, the rate of 5 per cent would not be applicable to the leasing of general goods, but only to the rental of buildings, except statutory provisions to the contrary.
Are there strategies to mitigate VAT or transfer taxes? What party typically bears the costs of VAT and transfer taxes?

Each case must first be analysed. However, the seller is the subject forced to pay the tax that will be supported economically by the buyer.

According to the Law, the seller is always a taxpayer. However, from an economic point of view, and by the very nature of this tax, it is transferred to the purchaser and so on until the final consumer.

Since this is an issue that goes beyond the legal sphere, in terms of cross-border deals it is common to provide that the “agreed price” is tax free. Thus, the buyer must absorb the VAT, mitigating the payment of the taxes for the seller.
What is the statute of limitations for tax claims in your jurisdiction?

Tax claims prescribe in 5 years, counted from 1 January of the following year in which the obligation must have been paid.

According to the peaceful interpretation of the courts and of the Supreme Court, this term is computed from the day following the closing of the fiscal year. So, for the fiscal year ended on 31 December 2012, the term starts on 1 January 2013. However, the tax administration interprets that the computation of the prescription starts on January 1 2014.

The action for collecting the pecuniary sanctions and interests has the same statute of limitation than the respective tax.

With respect to evasion offences, the term is computed from 1 January of the following year in which the offences were committed.
In your jurisdiction, can a target be liable for taxes of other members of the consolidated group of which it was a member prior to an acquisition? Is the tax authority likely to assert such a liability against a target?

No, in Paraguay there are no rules governing tax consolidation of business groups. By application of the principle of legality, the tax administration cannot assert or apply a liability of this type.
Is there a typical approach to pre-closing tax indemnification in your jurisdiction?

There is no legislation about this since contractual freedom is wide in private law. However, such approaches would not be enforceable against the tax authority.
Are indemnification payments under a purchase agreement taxable to the recipient? Is an indemnity obligation in your jurisdiction typically grossed up for taxes?

Indemnification payments that only involve payments for damages are not taxed in Paraguay. Under this context, any compensation agreed upon in the process of acquisition of a local company shall not be taken into account for calculating income tax, provided that what is being paid only involves payments for damages. Any patrimonial increase above this measure will be considered taxable. VAT is not applicable.
Under what circumstances would an investor in a target in your jurisdiction have a tax filing obligation in your jurisdiction solely as a result of its equity interest in the target company?

When a non-resident makes an investment to purchase shares in a local company, he pays income tax (IRACIS) via withholdings of taxes.

It is necessary to explain that the income tax rate is 10 per cent. However, when the company distributes profits, an additional rate of 5 per cent is applied, and when profits are remitted abroad (a non-resident) an additional rate of 15 per cent will apply, based on the amount effectively paid.
In your jurisdiction, are there techniques to efficiently push debt down into subsidiaries in jurisdictions with high tax rates?

There is no specific legislation applicable in this regard, although planned commercial transactions could have this effect.
Describe any limitations, such as earnings stripping or royalty stripping rules, that limit the ability to effectively shift taxable income when structuring M&A deals.

There is no specific legislation applicable in this regard.
Is there transfer pricing legislation in your jurisdiction that could apply to transactions among a target and its subsidiaries or affiliates? If so, how restrictive is it?

Yes, but “transfer prices” legislation is incipient. In addition, tax administration has conducted inspections with this objective using the principle of interpretation of the economic reality as a legal tool.

For income tax, the existing legislation today presumes, in absence of proof to the contrary, that in the case of importers, the cost of goods introduced in the country cannot be higher than the wholesale price at the place of origin, plus transport and insurance costs to Paraguay. Any difference above such price will constitute taxed net income. In the case of exports where the prices have not been set or where the declared price is lower than the price of the wholesale and retail in the country plus transport and insurance costs until the place of destination, this last price will be considered as the basis for determining net income.

On the other hand, Law No. 5061/2013 was recently enacted, which, inter alia, gives mechanisms of price adjustment to the export of certain types of goods, thus modifying the rules of the Income Tax.

This Law provides mechanisms for price adjustments starting in 2014, applicable to exports of goods whose international prices are of public knowledge, through transparent markets, stock exchanges and the like.

Thereby, for the purposes of payment of income tax, according to this law, prices entered in the export documents must comply with prices established by markets or stock markets to the date of compliment of the shipping, or in its default, the previous day in which there is a price. For future operations it empowers the Executive Branch to regulate the application of the rule.

The adjustment of price determined in such a way shall constitute the net income of Paraguayan source for liquidating income tax, without admitting proof to the contrary.
Does your jurisdiction have anti-deferral regimes that apply to operations and income of subsidiaries (for example, a controlled foreign corporation regime, whereby a parent entity would be required to take into income undistributed income earned by a subsidiary)? Do these regimes affect cross-border planning?

There is no specific legislation applicable in this regard.
Are there exit strategies, besides stock or asset sales, that are used in your jurisdiction to achieve tax benefits?

Yes, for example, a merger, split-up and other forms of company restructuring could be applied. Generally it is considered that they do not generate effects in terms of income tax, and the same happens with the VAT.
Discuss your tax treaty network and how that facilitates or impacts tax structuring for cross-border deals.

Our network of international tax treaties is minimal, since only two treaties are currently in force in order to avoid double taxation regarding income tax. One signed with Chile (includes taxes on the assets) and another one signed with China.

In addition, there are a few treaties to avoid double taxation in the field of transportation, especially air transportation, such as Argentina, Chile, Uruguay, Germany, Belgium and others.

Because of the short extension of our network of tax treaties, we consider that its usefulness is limited to particular situations where a corporate group has established or may establish a company with which it is possible to operate in certain situations in order to mitigate the tax impact.
Does your jurisdiction identify certain jurisdictions as tax havens and subject them to adverse tax consequences when they are involved in M&A transactions? Give details.

No, the Paraguayan legislation does not have rules limiting commercial operations with any jurisdictions such as those having tax benefits or are con-sidered tax havens.
Describe any material state, provincial or local taxes that may arise in an M&A deal involving a target, a buyer or a seller located in your jurisdiction.

We consider that merger or split-up operations do not generate taxable income, VAT is not applicable.

The transfer of shares of a Paraguayan company that generates a surplus to the seller will be taxed by income tax; however, such operation will not generate VAT if the seller communicates to the Tax Administration this fact within a certain period, and will be totally exonerated from VAT from 2014 without such notice.
Are there any proposed laws or regulations that could significantly change how transactions are structured in your jurisdiction?

Although Law No. 5061/2013 was enacted in October 2013, which amended rules relating to VAT and income tax, and will take effect in 2014, it does not affect by itself the form of structuring of cross-border deals except in what refers to the export of goods priced in a transparent market (see question 22).

In the past, the Tax Administration presented to Congress a draft Law that regulates transfer pricing. This draft would be more complex with respect to the standard approved by Law No. 5061/2013. However, it has not been treated yet, but we can say it is “dormant”.
What are the corporate tax rates applicable in your jurisdiction on ordinary income and capital gains? Are there any other categories of income subject to preferential rates that are relevant in M&A deals in your jurisdiction?

The general rate of commercial income tax is 10 per cent. Additional fees will apply in the event that the local company decides to distribute profits, in the following manner:
- a rate of 5 per cent on distributed profits; or
- when such profits are going to be referred abroad an additional withholding of 15 per cent will be applied to nonresident shareholders or partners.
There is not another category of income tax relevant to M&A.
Does your jurisdiction impose any taxes as a result of the indirect transfer of a company organised in your jurisdiction?

No, in this case the Paraguayan legislation will not apply any tax. It will be considered as a case of no incidence.
Are there significant tax issues relating to foreign currency matters in transactions in your jurisdiction involving buyers or sellers resident in other jurisdictions?

There are not significant tax issues worth mentioning.
Discuss and describe any other relevant tax issues in cross-border M&A transactions in your jurisdiction that are not covered in the prior questions.

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