On January 30, 2019, Normative Instruction n° 1,870/2019, issued by the Federal Revenue Office (RFB), was published in Brazil’s Official Gazette, amending several provisions of Normative Instruction n° 1,312/2012, which regulates the Brazilian transfer pricing rules. Continue Reading
US government sanctions Petróleos de Venezuela, authorizes US persons to engage in certain limited transactions
By: Ignacio E. Sanchez and Melanie Garcia
The United States government has issued new sanctions in response to the growing unrest in Venezuela. On January 23, the United States recognized Juan Guaido as the new interim President of Venezuela. Nonetheless, Nicolas Maduro has refused to step down. US Secretary of State Mike Pompeo stated that the latest US sanctions related to Venezuela’s state producer of oil are meant to “preserve the core pillar of Venezuela’s national assets for the people and a democratically elected government.”
On January 28, 2019, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated Petróleos de Venezuela S.A. (PdVSA) as a Specially Designated National (SDN). With this designation, US persons, including US entities, their foreign branches and US citizens or permanent residents located anywhere in the world, are now prohibited from engaging in any transactions with PdVSA or any entity owned 50 percent or more by PdVSA, unless otherwise authorized. This designation has wide-ranging impacts, as PdVSA owns or is part of joint ventures around the world, including several within the United States.
OFAC has sought to limit these potential wide-ranging impacts on US persons by concurrently issuing a series of General Licenses authorizing US persons to engage in certain transactions with PdVSA and/or certain of its 50 percent or more owned subsidiaries. These General Licenses, described further below, create a complex web of limited authorizations for US persons with various expiration dates.
Whether a General License authorizes a particular transaction is highly dependent on the specific facts and circumstances of that transaction. These summaries should not serve as a substitute for a review of the language and requirements of the actual General Licenses.
Read more here.
ICC update – Conduct of Arbitration
By: Ben Sanderson and Silvia Farre
On 1 January 2019, new updates to the Note to the Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (the Note) became effective. According to the ICC Court President, Alexis Mourre, the updates, “reflect the Court’s continuous efforts … to provide more transparency in its practices, increase the efficiency of our arbitrations and offer an ever wide range of services to users“. The most significant updates are set out at the link below:
CHILE: TDLC rejects request to eliminate restrictions on the integration in the electricity market
By: Felipe Bahamondez and Carolina Bawlitza
Chile’s Tribunal for the Defense of Free Competition (TDLC) rejected the plea of Celeo Redes Chile Limitada, which had requested that the government modify “the legal precepts necessary to introduce a greater degree of competition in the generation, distribution and electric transmission markets.” In particular, the requested regulatory amendment sought to:
• Eliminate the prohibition against companies that own or operate national transmission systems from participating in electricity generation or distribution activities and
• Eliminate the restriction against generating companies, distributors and non-price-fixing customers from participating individually in a maximum of 8 percent and, as a whole, up to 40 percent of the total investment value of the national transmission system.
The TDLC considered that, given the position adopted by the Ministry of Energy in the process, which “not only noted the proposal…. but also spoke openly in its favor,” the recommendation to the government is inofficious.
Given the above, the indicated restrictions shall remain in force as long as the National Congress of Chile does not approve a bill aimed at eliminating them.
Changes to reporting requirements for severance payments in Puerto Rico
By: Mariana Muniz and Juan Carlos Feliciano
For tax year 2018, employers in Puerto Rico will be required to report certain severance payments, as discussed further below, as “exempt wages” on Withholding Statement Form 499R-2/W-2PR (the Puerto Rico equivalent of the US W-2 Form – PR Form W-2),1 as opposed to Form 480.6D.
Under Section 4.3 of Act 4-2017, known as the Labor Transformation and Flexibility Act, which amends Section 1 of Act No. 80 of May 30, 1976 (Act No. 80), known as the Unjust Dismissal Act, severance payments as well as any equivalent voluntary payment made by the employer to employees on account of their dismissal, are excluded from the definition of gross income and as such are not subject to Puerto Rico income tax, whether such payment is made at the time of their dismissal or later, or whether it is made by reason of a settlement agreement or pursuant to a judgment or administrative order.
The amount of the severance payment excluded from the definition of gross income, and not subject to Puerto Rico income tax, is equal to the severance payment that would be payable pursuant to the provisions of Act No. 80. Severance payments that are made in excess of such amount are subject to Puerto Rico income tax.
Read more here.
PPP projects in Latin America: resolving disputes through investor-state arbitration
By: Alison Fagan, Maria Pereira, Silvia Farre
Public-private partnership (PPP) projects in Latin America are on the rise. There is a great need for infrastructure investment across the region, but often, Latin American governments cannot commit public finances to fund the huge investment costs such projects entail.
PPPs offer a solution – harnessing the power of private finance to provide multiple public services. However, in the course of such projects disputes may sometimes emerge. Investment protections may be found in the PPP contracts, but also under international law. Indeed, except in Brazil, investors find they may be able to settle disputes around PPP projects via investor-state arbitration, the use of which may increase as the number of PPP projects in the region grows.
Read more here.
This article is also available in Spanish.
Corporate reporting obligations in changes of shareholders of Mexican subsidiaries
By Maria Eugenia Rios and Abelardo Acosta
Based on recent modifications to Articles 73 and 129 of the Mexican Corporate Law (Ley General de Sociedades Mercantiles, LGSM) published on June 14, 2018 and effective as of December 15, 2018, transfers in ownership of a Sociedad de Responsabilidad Limitada (SRL) or a Sociedad Anonima (SA) must be reported with the Ministry of Economy through an online notice. Article 50 Bis of the Commerce Code (Codigo de Comercio, CC) regulates this obligation.
From a Mexican corporate perspective, an SA is treated as a per se corporation, and an SRL has similarities with a US limited liability company (LLC).
As of now, the LGSM sets out obligations to register changes in ownership of a Mexican entity in its corporate books; however, these new online reporting features tend to have a broader scope, and continue the trend on electronic reporting and compliance obligations with federal authorities in Mexico.
In case of an SRL, the information that must be reported to the Ministry of Economy is not public; nevertheless, an interested party with a rightful claim may have access to the shareholders registry. For an SA, the name, nationality and domicile of the shareholder provided under the reporting notice must be kept as confidential unless the information is requested by a judicial or administrative authority.
Apart from tax-related consequences and reporting obligations in case of a group restructuring, this new disclosure requirement should also be considered, because the change in ownership of a Mexican subsidiary must be reported to the Ministry of Economy on top of existing tax-related notifications.
For more details or information, contact authors Maria Eugenia Rios maria.rios@dlapiper.com or Abelardo Acosta abelardo.acosta@dlapiper.com.
Upcoming Crimes: Bribery Between Individuals and Unfair Administration
By: Diego Noguera, Matías Zegers and Mauricio Halpern
On November 20, 2018, Law No. 21,121 was published in the Official Gazette, modifying the Criminal Code regarding bribery, and Law No. 20,393 about criminal liability of legal entities.
In addition to increasing the penalties for bribery crimes, the aforementioned amendment of the Criminal Code criminalizes bribery between individuals and unfair administration, setting forth penalties of deprivation of liberty, fines and seizure of the profits that would have been unlawfully obtained by individuals.
Specifically, bribery between individuals is typified as a crime committed by those who, exercising a position or function in the private sector, request or accept money or other benefit, for themselves or for a third party, or offer, give or consent to give money or other benefit, as compensation for violating their duties or for refraining from acting in accordance with their duties, in favoring a contract with one offeror over another.
On the other hand, unfair administration is typified as a crime committed by those who, being in charge of the custody or management of all or part of the assets of another person, cause harm to that person, either by abusively exercising powers to dispose of those assets or forcing the disposition of assets, or by acting inappropriately or abstaining from acting in a way manifestly contrary to the interests of the owner of the assets.
In conclusion, in both cases it is possible to perceive that the legislature sought to prevent illicit situations that could trigger, among others, acts of unfair competition or abuse of trust, by punishing those who request or offer a bribe.
In our opinion, this amendment should contribute to greater care and thoroughness in the structuring of prevention and risk control models, as well as in resolving potential conflicts of interest and in defining policies to eradicate influence peddling and any type of corruption.
Brazil clarifies how reinsurance companies are taxed
By: Alex Jorge, Leonardo Rzezinski, Rosana Gonzaga Jayme, Humberto Lucas Marini, Renato Lopes da Rocha and Marcella Hill
The Brazilian Tax Revenue has published Private Letter Ruling No. 91/2018, as a response by the General Coordination of Taxation (COSIT), which revokes Private Letter Ruling No. 62/2017.
The Response to Consultation No. 91/2018, issued in August, clarifies the way in which reinsurance companies are taxed, according to their different ways of operation in Brazil.
I – REINSURANCE OPERATIONS IN BRAZIL
COSIT has issued in this Private Letter Ruling the tax treatment to be applied to reinsurance activities in Brazil.
According to Section 4 of Supplementary Law No. 126/2007, reinsurers can be identified as legal entities, national or foreign, as follows:
- local reinsurer: reinsurer headquartered in Brazil incorporated as a corporation (sociedade anônima – “S.A.”), with sole purpose of carrying out reinsurance and retrocession;
- admitted reinsurer: a foreign reinsurer, with a representative office in Brazil, which has been registered by the insurance supervisory authority as such upon compliance with the requirements established in the Supplementary Law and with the applicable rules to carry-out reinsurance and retrocession activities in Brazil, and
- occasional reinsurer: a foreign reinsurer headquartered abroad, without a representative office in Brazil, which has been registered by the insurance supervisory authority as such upon compliance with the requirements established in the Supplementary Law and with the rules applicable to reinsurance and retrocession activities in Brazil.
II – TAXATION OF REINSURERS
Last year, COSIT said, in Private Letter Ruling No. 62/2017, that admitted reinsurers should be taxed similarly to local reinsurers. However, according to new Private Letter Ruling No. 91/2018, an admitted reinsurer will only be taxed as a local reinsurer when the activities are carried out by a legal representative who is in fact exercising the full binding authority granted by the admitted reinsurer. Please note that, pursuant to Resolution CNSP No. 168/2007, the legal representative of the representative office is given the authority to represent the admitted in Brazil, which may or may not be exercised in practice.
On the other hand, Private Letter Ruling No. 62/2017 provided that only payments to an occasional reinsurer would be taxed as importation of services, subject to withholding income tax (imposto de renda retido na fonte − IRRF) and taxes on revenue and imported services (PIS-importation and COFINS-Importation). However, according to new Private Letter Ruling No. 91/2018, IRRF and taxes on revenue and imported services are applicable to both an occasional reinsurer and to an admitted reinsurer that carries out limited activities through the representative office.
The changes brought by Private Letter ruling No. 91/2018 arise from an official letter sent by SUSEP to the Brazilian Tax Revenue, inforing the tax authorities that even though the applicable regulation gives the legal representative of the representative office powers to bind the admitted reinsurer in Brazil, in practice there are representative offices of admitted reinsurers that only carry out commercial representation for the admitted reinsurer, being used solely for the relationship with SUSEP, sorting out regulatory issues or providing technical and commercial support to the reinsurer based abroad. Therefore, such legal representatives do not, in fact, have any commercial or operational autonomy to underwrite business, execute agreements, or receive or pay premiums or claims. Such core activities are carried out only by the admitted reinsurer abroad and not in Brazil.
Upon receiving this information on the way admitted reinsurers in fact operate in Brazil, the Brazilian Tax Revenue distinguished the legal representatives of the admitted reinsurers that use their binding authority in Brazil from those that carry out limited activities in support of the admitted reinsurer’s business.
In cases where legal representatives use their binding authority to bind the admitted reinsurer, the admitted reinsurer will be taxed as a local reinsurer. This means that, if a reinsurance agreement is executed by the legal representative of the admitted reinsurer’s representative office in Brazil, the premium payable to the admitted reinsurer will attract the same taxation due as in cases where the placement was made to a local reinsurer. On the other hand, if the representative office is not being used for such core activities (ie, final underwriting decisions and executions of reinsurance agreements), then taxation on premium payable to the admitted reinsurer will follow the rules applicable to occasional reinsurers.
The taxation of reinsurers is summarized in the table below, which compares the differences between Consultation No. 62/2017 and the new Consultation No. 91/2018.
| Private Letter Ruling No. 62/2017 | Private Letter Ruling No. 91/2018 | |
| IRPJ – Corporate Income Tax | The local reinsurer and the admitted reinsurer are subject to the IRPJ, calculated by the taxable profit. | The local reinsurer and the admitted reinsurer that has binding authority carried out by a legal representative with full powers in Brazil are subject to IRPJ, calculated by the taxable profit. |
| CSLL – Social Contribution on Net Profits | The local reinsurer and the admitted reinsurer are subject to CSLL applicable to the insurance companies. | The local reinsurer and the admitted reinsurer that has the binding authority carried out by a legal representative with full powers in Brazil are subject to CSLL applicable to insurance companies. |
| PIS – Social Integration Program | The local reinsurer and the admitted reinsurer are excluded from the PIS non-cumulative bookkeeping method. The revenue related to rendering of services in reinsurance to a cedent based in Brazil are subject to the Social Integration Program with a tax rate of 0.65%. | The local reinsurer and the admitted reinsurer that has the binding authority carried out by a legal representative with full powers in Brazil are excluded from the PIS non-cumulative bookkeeping method. The revenue related to rendering of services in reinsurance to a cedent based in Brazil are subject to the Social Integration Program with a tax rate of 0.65%. |
| COFINS – Tax for Financing Social Security | The local reinsurer and the admitted reinsurer are excluded from the non-cumulative bookkeeping method for COFINS, applying a tax rate of 4%. | The local reinsurer and the admitted reinsurer that has the binding authority carried out by a legal representative with full powers in Brazil are excluded from the non-cumulative bookkeeping method for COFINS. The revenue related to rendering of services in reinsurance to a cedent based in Brazil are subject to the tax rate of 4%. |
| IRRF – Withholding Income Tax | The earnings relating to the operation of the occasional reinsurer, when paid, credited, delivered, used or sent abroad, are subject to IRRF, at a tax rate of 25%.
The basis for calculation of IRRF is over 8% of the paid reinsurance premiums ceded abroad. |
The earnings relating to the operation of the occasional reinsurer and the admitted reinsurer with a representative office that works only in accessory activities in Brazil when paid, credited, delivered, used or sent abroad are subject to IRRF, at a tax rate of 25%.
The basis for calculation of IRRF is over 8% of the paid reinsurance premiums ceded abroad. |
| PIS-Importation | The importation of reinsurance service by a cedent based in Brazil is a PIS-Importation taxable event, with a tax rate of 1.65%. The taxpayer is the cedent that contracts the reinsurance service from the occasional reinsurer. The calculation basis for PIS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad. | The importation of reinsurance service by a cedent based in Brazil is a PIS-Importation taxable event, with a tax rate of 1.65%. The taxpayer is the cedent that contracts the reinsurance service from the occasional reinsurer or the admitted reinsurer with a representative office that works only in accessory activities in Brazil.
The calculation basis for PIS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad. |
| COFINS-Importation | The importation of reinsurance service by a cedent based in Brazil is a COFINS-Importation taxable event, with a tax rate of 7.6%. The taxpayer is the cedent that contracts the reinsurance service from the occasional reinsurer.
The calculation basis for COFINS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad. |
The import of reinsurance service by an assigner based in Brazil is a COFINS-Importation taxable event, with a tax rate of 7.6%. The taxpayer is the assigner that hires a reinsurance service from the eventual reinsurer or the admitted reinsurer with a representative office that works only in accessory activities in Brazil.
The calculation basis for COFINS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad. |
$1.2B order entered against Petroleos de Venezuela: Q&As for PDVSA and Citgo commodity commercial and trading counterparties
By:
Robert J. Gruendel, Mark A. Waite, Deanna R. Reitman
The United States District Court for the District of Delaware has issued an order and supporting lengthy opinion allowing a judgment creditor holding a $1.2 billion judgment against the Bolivarian Republic of Venezuela to attach common stock owned by Petróleos de Venezuela, S.A. (PDVSA), the national oil company of Venezuela. The stock attached by the order is the common stock of PDV Holdings, Inc., which in turn is the parent company of Citgo. The case is Crystallex International Corporation v. Bolivarian Republic of Venezuela, C.A. No. 17-mc-151-LPS.
The order arises from a 2016 arbitration award in favor of the creditor which claimed that Venezuela wrongfully expropriated gold mines in or about 2011. PDVSA was not a party to that arbitration and was not accused of any involvement in the underlying matters giving rise to it. The arbitration award against Venezuela was confirmed by the United States District Court for the District of Columbia, and Venezuela filed an appeal of that judgment, which remains pending. Venezuela was not successful in its efforts to stop post-judgment collection efforts while it appeals that judgment. This new attachment proceeding and the order now entered against the PDVSA shares are part of the creditor’s post-judgment collection efforts.
PDVSA filed a notice of appeal to the United States Third Circuit Court of Appeals on August 10, 2018, which remains pending.
After PDVSA filed its notice of appeal, CITGO Holding, Inc. and CITGO Petroleum Corporation jointly urged the district court to stay execution of the writ of attachment to allow them to propose how to best accomplish the execution of the attached shares. Soon thereafter, the court issued an order temporarily staying execution of the writ of attachment and invited parties and non-parties alike to submit motions within seven days of the service of the writ of attachment on how to best effectuate the execution of the writ of attachment. Moreover, the court specifically invited PDVSA to file a motion under Rule 62(d) of the Federal Rules of Civil Procedure and post a supersedeas bond to stay execution of the writ of attachment pending the outcome of PDVSA’s appeal, which PDVSA has not done to date.
Read more here.
