As most all treasurers know, taxes have a great influence on treasury operations, especially in terms of reducing treasurers’ ability to move cash. And while there has been much focus on Europe and the Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting plan, other parts of the world are catching the tax revenue bug. This is very true in Latin America.
At a January meeting of The NeuGroup’s Latin American Treasury Managers’ Peer Group, members discussed the ins and outs of taxes in the region.
One priority for treasurers is to partner with the company’s tax department to understand recently enacted tax reforms that may affect your treasury operations in LatAm. This may already be happening in some companies, as taxes have been changing globally for a few years. But this discussion highlighted the need for tax and treasury to partner early on, even if it seems treasury is not yet affected by tax changes in the beginning. Also, treasurers were encouraged to keep in mind long-term implications of any decisions. For example, members discussed debt forgiveness as a tax-effective way to capitalize an Argentine entity, but if debt is forgiven based on inability to pay, how would that affect any other outstanding or future loans? Facts and circumstances are important, as is consistency of approach.
The group, with the help from PwC, went on to go country by country to get an update on the tax changes in each.
Chile – Beware of changes in the corporate income tax regime. Chile has announced a change by which companies need to pick one of two calculation methods for corporate income tax in advance. Although one seems cheaper from the get-go, the best choice could be different if a Chilean entity pays dividends to a non-Chilean entity that resides on a non-tax -treaty country. Since the effect would not be evident until it is time to pay dividends, it is critical to discuss entity relationships and cash flows with tax before choosing one methodology over another so as not to impair the ability to pay dividends in the future.
Colombia – New wealth tax and CREE extension. The new wealth tax is calculated over equity. Although it is too late for 2015, consider looking at your debt/equity ratio going forward. Also, the government extended the CREE tax and kept the rate at 9 percent; keep in mind that it is questionable whether this tax is creditable for US tax purposes.
Mexico – dividend withholding tax. Mexico enacted a new dividend withholding tax that applies to 2014 earnings. This means that any dividends paid will need to be monitored and attributed to a specific year. A recommendation was to dilute minority shareholder holdings as much as possible to avoid issues.
Because treasury can often be the one that ends up “holding the bag” from a financial standpoint when it comes to taxes, the need to partner with tax proactively cannot be stressed enough. There are more tax-related changes ahead and the more involved treasury managers are up front, the better the chances to maximize value for shareholders when complying with these changes.