Changes to reporting requirements for severance payments in Puerto Rico

By DLA Piper on December 20, 2018

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),¹as 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.

PPP projects in Latin America: resolving disputes through investor-state arbitration

By DLA Piper on December 18, 2018

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.

Posted in Mexico

Corporate reporting obligations in changes of shareholders of Mexican subsidiaries

By DLA Piper on December 12, 2018

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.

Posted in chile

Upcoming Crimes: Bribery Between Individuals and Unfair Administration

By DLA Piper on December 6, 2018

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.

Posted in Brazil COSIT Reinsurance Tax

Brazil clarifies how reinsurance companies are taxed

By DLA Piper on October 18, 2018

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.

Posted in Venezuela

$1.2B order entered against Petroleos de Venezuela: Q&As for PDVSA and Citgo commodity commercial and trading counterparties

By DLA Piper on October 15, 2018

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.

Posted in Brazil Tax VAT

Brazil: Rio de Janeiro state – new Tax Amnesty Program

By DLA Piper on October 1, 2018

By: Renato Lopes da Rocha

On September, 21, 2018, the State of Rio de Janeiro published Supplementary Law n° 182, by means of which the state has granted reductions of amounts due as penalties and interest related to debts of ICMS (Brazilian VAT), motor vehicle taxes (IPVA) owed by individuals, and penalties applied by the State Court of Auditors, assessed or not, enrolled or not as overdue tax liability debts, whose expiration dates occurred up to June 30, 2018.

Read more here.

Posted in Argentina Tax VAT

Argentina introduces VAT on digital services

By DLA Piper on September 24, 2018

By: Augusto Nicolás Mancinelli

Argentina’s new Law 27,430 introduces a new taxable event: a Value Added Tax (hereinafter VAT) applicable to the importation of “digital services” rendered by a non-resident to a resident individual or entity when the effective use or exploitation of the service is carried out inside Argentina.

An earlier regulation, Decree 354/2018 of April 23, 2018, a deficient attempt to regulate the VAT applicable on digital services, was recently repealed.

According to the current wording of the VAT Law and its Regulatory Decree, VAT applicable to the importation of digital services has the characteristics that are detailed below.

Posted in Argentina International Trade Tax

Argentina: new export duties in force; peso devaluation may impact inflation

By DLA Piper on September 17, 2018

By: Augusto Nicolás Mancinelli

The Argentine executive branch has established new export duties applicable to goods and services. These new export duties were established by a Decree of the Executive Power (Decree No. 793/2018) issued on September 3, 2018 and published at the official Gazette on September 4, 2018, with immediate effect for the export of goods.

The effective date for the application of export duties on services is expected to be January 1, 2019, as the government would need Congress to enact a law providing for such export duties.

The new export duties on goods and services are among the measures being applied by the Macri Administration with the goal of reducing Argentina’s fiscal deficit.

The new export duties, which amount to 12 percent of the value of the exported goods and/or services, include a cap of AR$3 or AR$4 for each US dollar of exports, depending on the kind of exported good or service. These new export duties apply in addition to any other export duties already in force.

The authority of the executive branch to create or impose taxes or import/export duties without Congressional approval is questionable. Although the Argentine Customs Code provides the executive branch with wide power to establish import/export duties, such delegation has been challenged before the federal courts on constitutional grounds.

The Argentine Federal Supreme Court, in its ruling in Camaronera Patagónica, dated April 15, 2014, established that the executive branch is not entitled to create or impose taxes or export duties, even when reasons of urgency, crisis or financial needs are invoked, claiming that, pursuant to the Argentine Constitution, taxes fall under the scope of the legislative branch’s authority, not the executive’s.

DLA Piper Argentina’s tax team has initiated a protective action (amparo) and requested an injunction before the federal courts, in order to challenge the constitutionality of Decree No. 793/2018.

Posted in Argentina

Positive signs for issuers and the marketplace: Argentina economic briefing

By DLA Piper on September 10, 2018

By: Marcelo Etchebarne

The financial press continues to portray Argentina as another emerging-market casualty. But, to the contrary, there are a number of positive financial signs, for investors, the country and the marketplace, in today’s Argentine economy.

In fact, President Mauricio Macri’s Administration has put in place a number of fiscal policies and governmental reforms that will have a positive long-term impact, and the country is already beginning to reap benefits from these changes.

In this economic briefing, we review the most notable of these developments

Under President Mauricio Macri’s Administration, Argentina completely opened the FX and financial markets in December 2015 without creating any disruption in the economy. Although this was perceived as a very positive and well implemented measure, it significantly appreciated the value of the peso. This was unprecedented in Argentina and allowed a significant amount of dollar inflows over the last 38 months (US$116 billion), but was not mirrored by a proportional Central Bank reserves increase (US$35 billion). The measure also augmented the current account deficit (estimated at more than US$30 billion earlier this year, or approximately 50 percent of Central Bank reserves).
While most emerging markets suffered pressure over their local currencies during Q2 2018, Argentina had a higher exposure to a currency devaluation, in part due to the gradual elimination of the deficit (which is projected to be fully eliminated in 2019) and in part due to the complete elimination of limits or controls to foreign currency outflows (many emerging markets still have many restrictions regarding foreign currency outflows).
Approximately US$11 billion in Central Bank notes denominated in pesos are due on September 19, 2018 (LEBACS). The market expects that around US$7 billion will be refinanced by local financial institutions. Dollar-denominated treasury notes (LETES) for around US$15 billion are also due within the next six months. Under the prior financial program of the Republic, the Secretary of Finance had assumed a 100 percent rollover of these instruments. Under the current scenario, however, the most conservative approach for the government is to be ready to refinance a significant portion of these notes. We imagine that part of the ongoing negotiations with the IMF includes a financing package to cover those payments.
Dollar outflows may or may not continue, but local economists estimate that the Central Bank has sufficient reserves at this peso value. Many local analysts consider that the peso at current levels (40-45 per US dollar) makes the Argentine economy competitive again and should help to materially reduce the commercial deficit. The peso should probably continue to devalue to match inflation. For the first time since 2002, Argentines traveled more within Argentina that overseas.
The Macri Administration acted decisively against corruption. This is perceived as a key element of Argentina’s new transparency policies, but will have a material impact on short-term growth (a 2 percent to 3 percent contraction is expected for 2018) and explains to a large extent the peso crisis of last week. On the positive side, this creates a unique opportunity for foreign construction companies, which will face much lower local competition.
Many hedge funds with whom we talk believe that Argentina had an FX crisis but not a solvency crisis. Argentina will not have material pressure to make debt service payments until 2023. Argentina needs very little funding to complete the financial program for 2018 and 2019; thus, higher interest rates won’t have a material impact on meeting debt service payments in a timely fashion. (DLA Piper Argentina represented UBS during the 2002-2005 debt restructuring and Barclays Capital as Global Coordinator during the 2008-2010 reopening, and Puente Hnos. in the amicus briefs filed in favor of Argentina before the US Second Circuit and the United States Supreme Court).
Almost all Argentine provinces enjoy surpluses and do not need access to foreign capital, which at yields between 12 percent and 15 percent would be unwise. High yields will have an impact on the financing of new projects (such as pending renewable energy projects that are associated with Argentine risk, as most PPAs are in dollars and payable by the administration in addition to facing completion risk). (DLA Piper Argentina has advised most Argentine provinces that have been tapping the markets since the late 1990s.)
As a result, it is not expected that Argentine issuers will be tapping the market (the sovereign was placing massive amounts of debt over the last two years) and most appetite for Argentine credit will be satisfied in the secondary market, which is expected to help materially compress spreads by year end.
Argentine banks are very solvent. Unlike in similar crises over the last three decades, the 2018 FX crisis, there was no bank run on deposits. High local interest rates (60 percent to 65 percent in pesos) will have an impact on local credit and consumption, but the Argentine economy has not relied on credit to grow over the last 12 years in which bank lending over GDP has fluctuated between 11 percent and 15 percent. Monetary policy was also significantly tightened over the last few months by imposing higher reserves on local banks plus a material reduction in money printing (M2 was reduced from an annual increase of around 40 percent to 15 percent).
Argentina may still face some turmoil and volatility that continues to impact global markets, in addition to effects associated with a material devaluation, and political pressure related to the 2019 presidential election, but we remain optimistic regarding the medium to long term.
Last, but not least, the Macri Administration initiated a number of reforms that will have long-term impact, among them a 3P program for the six largest road corridors (DLA Piper is involved in three of these projects, two as sponsor counsel and one representing the equity investor); overhauling the railroad system to reduce the cost to export grain; material reductions on energy production which would make Argentina a net exporter of oil and gas in the near future; material investments in renewable energy (DLA Piper is highly experienced in this field in Argentina); an open skies program that will quadruple internal flights to boast tourism; as well as efforts to build closer relations with OECD countries, improve transparency, reduce red tape, put in place more effective sanctions against corruption and materially improve the fight against organize crime, particularly related to drug dealing.

Find out more about the current state of the marketplace in Argentina and the implications of these developments by contacting the author.