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8/9/2019 Latin America Tax Treaty Update 2002
http://slidepdf.com/reader/full/latin-america-tax-treaty-update-2002 1/26
Recent Developments in Latin America Tax Treaty Network
Jorge Gross
International Tax Partner,
Latin American Tax Group
PricewaterhouseCoopers, Miami, FL
8/9/2019 Latin America Tax Treaty Update 2002
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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
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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
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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
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Residence (Article 4)
Permanent Establishment (Article 5)
Business Profits (Article 7)
Independent Personal Services (Article 14)
Differences between Andean Pact
Model and UN Model
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Argentina
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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
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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 ± Treaty Network
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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
Argentina ± Treaty Network
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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.
Argentina ± Treaty Network
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Brazil
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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.
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Brazil ± Treaty Network
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
royalties other than trademarks).
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
royalties other than trademarks).
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Brazil ± Treaty Network
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.
The complete treaty network is now as follows:
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
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Brazil ± Treaty Network
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
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Chile
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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.
The complete treaty network is now as follows:
Argentina Canada Mexico
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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.
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Mexico
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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.
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Mexico ± Treaty Network
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.
The complete treaty network is now as follows:
Belgium Canada Chile
Denmark Ecuador Finland
France Germany Ireland
Israel Italy Japan
Korea Luxembourg Netherlands
Norway Portugal Singapore
Spain Sweden Switzerland
UK US
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Mexico ± Treaty Network
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.
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V enezuela
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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.
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V enezuela ± Treaty Network
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.
The complete treaty network is now as follows:
Barbados Belgium Bolivia
Colombia Czech Republic Denmark
Ecuador France Germany
Indonesia Italy Netherlands
Norway Peru Portugal
Sweden Switzerland Trinidad Tobago
United Kingdom United States
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V enezuela ± Treaty Network
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.