Foreign Exchange Controls and Efficient Cash Management · Management 2016 Latin America Tax Summit, ... Foreign Exchange Controls and Efficient ... rate risk) Non-Tax Considerations

© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services.

Foreign Exchange Controls and Efficient Cash Management

2016 Latin America Tax Summit, Rio de Janeiro29 February to 2 March

A view from the Tax Department


Foreign Exchange Controls and Efficient Cash Management: A View from the Tax Department.

Howard A. Wiener— Washington National Tax, KPMG in

the United States

Juan Martín Jovanovich— Partner, Tax & Legal, KPMG in

Argentina

PanelistsCarlos Rojas — Partner, Tax, KPMG in Venezuela,

Rodríguez Velázquez & Asociados

David Escalante— Partner, Tax, KPMG in Mexico,

Cardenas Dosal, S.C.

Carlos Toro— Director, tax, KPMG in Brazil.

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Agenda1. Overview of Treasury Goals

2. Non-Tax Considerations

3. Tax Considerations

4. Case Studies

5. Non-tax issues impacting cash movements

6. Cash pooling

7. Appendix - Specific Country Considerations


Overview of Treasury Goals

While taking all considerations above into account, the overall aim is to ensure that tax does no harm.

Tax ConsiderationsLocal Taxes (income and

withholding)Other costs (stamp

duties, new worth taxes) CFC Issues Hedging (FX & interest rate risk)

Non-Tax Considerations

Location Structure Operational Guidelines Tax Accounting &

Regulatory

Treasury Goals

Reduced Costs Cash Management Liquidity


Overview of Treasury GoalsGeneral Considerations— Liquidity.— Centralized / Regional Treasury operations.— Consolidate cash in central location or region (e.g., via pooling and netting). — Use leverage to reduce bank fees and increase returns (i.e., excess cash to pay down debt or

invest).— Implementation of common policy, procedures and controls.— Coordinated centralized foreign exchange hedging program. — Centralized accounting (e.g., inter-company loans replace bank accounts).— Leverage treasury technology to gain cash visibility (e.g., workstation, banking and netting

websites)— Infrastructure for future acquisitions.— Consistent positive tax implications via revised organizational structure (e.g., interest and inter-

company loan treatment).


Non-Tax ConsiderationsTreasury Functions— Act as in-house bank (e.g., borrows and lends).

— FX risk.

— Interest rate risk.

— Commodity risk.

— Credit risk – management.

— Investment management.

— Separation of cash management staff duties from other finance operations.

— Factor receivables.

— Automated bank reconciliation system and processes.

— Cash monitoring and forecasting.


Tax Considerations— Income Tax.

— Withholding Tax.

— Financial Transactions Tax.

— Stamp Duty.

— Home Country “Controlled Foreign Corporation” (“CFC”) or similar regime considerations.

— Treaty considerations – requirements (i.e., limitation on benefits, beneficial ownership, etc.).

— Will the jurisdiction respect the form of the Notional Pooling arrangement?


Case Studies Panellists David EscalantePartner, TaxKPMG in Mexico, Cardenas Dosal, S.C.

Carlos RojasPartner, TaxKPMG in Venezuela, Rodríguez Velázquez & Asociados.

Carlos ToroDirector, TaxKPMG in Brazil

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Case Studies 1 – Treasury CenterScenario before a Treasury Center

Home CountryPARENT

Subsidiary IISubsidiary I Subsidiary III

Loan

Loan

Loan

BANK

Loan


Case Studies 1 – Treasury CenterScenario after a Treasury Center

Home CountryPARENT

Treasury Center

Borrower Lender

Loan

Loan


Case Studies 1 – Treasury CenterAssume Treasury Center is in your jurisdiction

Home CountryPARENT

Treasury Center

Borrower Lender

Loan

Loan

Will taxes be imposed on the interests paid by the Borrower to the Treasury Center?

Will taxes be imposed on the potential FX gains obtained by the Treasury Center?

If the Treasury Center qualifies as a Financial Institution for purposes of the local law, is it subject to a different / special tax regime? Is this regime more beneficial?


Case Studies 1 – Treasury CenterTREASURY

CENTERWill taxes be imposed on the interests paid

by the Borrower to the Treasury Center?Will taxes be imposed on the potential FX gains

obtained by the Treasury Center?

If the Treasury Center qualifies as a Financial Institution for purposes of the local law, is it subject to a different / special tax regime? Is

this regime more beneficial?

Argentina Yes. Yes. N/A

Brazil Yes. Yes. Yes, but unlikely that the Treasury Center will qualify.

Mexico Yes. Yes. Yes. Benefits granted.

Venezuela Yes. Yes. N/A.


Case Studies 1 – Treasury CenterAssume Borrower is in your jurisdiction

Home CountryPARENT

Treasury Center

Borrower Lender

Loan

Loan

What is the general withholding tax levied on interests paid to foreign lender? Any specific regimes for interest paid to Treasury Center or to Financial Institutions?

Any tax treaties that will reduce the general withholding tax levied on said interests below the local rate?

Any specific ruled for interests paid to “tax havens” or “blacklisted countries”?

Are the interests paid deductible for tax purposes? Are there any limitations in the case of interests paid to related parties?

Any other specific taxes applicable?


Borrower

What is the general withholding tax levied on interests paid to foreign

lender? Any specific regimes for interests paid to

a Treasury Center or Financial Institution?

Any tax treaties that will reduce the general withholding tax

levied on said interests below the local rate?

Any specific ruled for interests paid to “tax havens” or “blacklisted countries”?

Are the interests paid deductible for tax purposes? Are there any

limitations in the case of interests paid to related parties?


Argentina 35%/15.05% Yes. Yes. 35% rate.

Yes. Thin capitalization applies if interest is not subject to

35%WHT and paid to related party. Transfer pricing.

VAT

Brazil 15%. Only Japan. Additional credit granted. Yes. 25% rate. Yes. Thin capitalization applies,

transfer pricing. Financial Transactions Tax.

Mexico 4.9% to 40%. Yes. Yes. 40% rate. Yes. Thin capitalization applies, transfer pricing. Back to back test.

Venezuela 34% / 4.95%. Yes. Yes. Additional limitations apply.

Yes. Thin capitalization applies, transfer pricing. Financial Transactions Tax

Case Studies 1 – Treasury Center


Assume Lender is in your jurisdictionHome

CountryPARENT

Treasury Center

Borrower Lender

Loan

Loan

Are the interests received from the Treasury Center subject to taxation?

How would any FX gain/losses resulting from the transactions with the Treasury Center be treated?

Are there any special rules for FX transactions for hedging?




LENDERAre the interests received from the Treasury Center subject to

taxation?

How would any FX gain/losses resulting from the transactions with

the Treasury Center be treated?

Are there any special rules for FX transactions for hedging? Any other specific taxes applicable?

Argentina Yes Taxable / deductible No. No.

Brazil Yes. 34%. Taxable / deductible. No. Financial Transactions Tax.

Mexico Yes. Taxable / deductible. Transfer pricing. Back to back.

Venezuela Yes. Taxable / deductible on realisation basis No.

Municipal Tax. 1% to 5% rate on gross revenue.

Financial Transactions Tax.



Non Tax Issues Impacting Cash Movements.

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Restrictions on Movement of Funds• Foreign Exchange Controls in Argentina

• Foreign Exchange Controls in Venezuela

• Foreign Exchange Controls in Brazil

• Mexican Money Laundering


Foreign Exchange Controls in Argentina• AFIP’s FX Validation Program no longer required for FX Transactions

• Foreign Investments Regime was reestablished by the Central Bank• Argentine residents may buy up to USD 2M per month

• Foreign direct investment; foreign real estate investment; Portfolio investment; Purchase of foreign currency in Argentina; Travelers checks

• Funds transferred abroad may be freely disposed of

• Repatriation of foreign investments permits purchase of FX over the USD 2M limit.

Under the New Regs, Argentine residents may transfer up to USD 2M per month without specific purpose


• Access to the FX Market to pay service and license fees

• Elimination of the Central Bank’s prior authorization on intercompany payments of services, license fees, commercial commissions and non-financial non-produced assets (e.g. outright sale of intangibles).

• Other requirements have not been modified• Bank may request documentation to prove the existence of the services• Bank may request accounting certification• Registrations required by federal law are a prerequisite to have acces to the FX market

• Services rendered as of December 17, 2015 may be paid with access to the FX Market without limitation

• Services rendered prior to December 17, 2015 may be paid with Access to the FX Market subject to thefollowing limits:

• During February 2016: maximum of USD 2M• From March 1 through May 30, 2016: maximum of USD 4M per month• From June 1, 2016: no limitation

• Services may also be paid through other legal mechanisms (e.g. blue chip swap, etc.)

Foreign Exchange Controls in Argentina

Under the New Regs, services and licenses rendered as of December 17, 2015 may be paid with access to the FX Market without limitation.


• Access to the FX Market to pay interest• No access if the principal has already been paid• No access if the the principal cannot be paid under FX Regulations.• No access if the funds disbursed under the loan are not previously sold in the FX Market.

• Access is only available for interest accrued as from the date on which the funds were sold in theFX Market.

• Access to the FX Market is available as from the contractual due date (or with a máximum anticipation of 5 working days), or at any time for an amount equal to the actual accrued interest.

• Information regimes of Com. “A” 3602 and 4237 must be complied with• Bank may evaluate if interest rate and terms and conditions of the loan are reasonable.



• Access to the FX Market to pay dividends• Must correspond to closed and audited financial statements• Information regimes of Com. “A” 3602 and 4237 must be complied with• De facto restricions no longer applicable

• Access to the FX Market to pay re-insurance premiums.• Pre-December 17, 2016 premiums are not subject to payment Schedule

• Payment of re-insurance premiums still require certification from the National Superintencyof Insurance


Dividends may now be transferred without limitations


• New portfolio investments

• Non-residents have access to the FX Market to repatriate new portfolio investment• The funds previously settled in the FX Market• Minimum holding period of 120 days

• Domestic deposits in USD

• Argentine residents may transfer funds into Argentina and keep them deposited in bankaccounts in USD.

• Except funds subject to mandatory settlement

• Funds may transferred out of Argentina, subject to the limitations prescribed to each applicabletransfer concept.

• Funds deposited in domestic bank accounts in USD may be transferred out of Argentina if theyoriginate in foreign indebtedness or direct or portfolio investment of non-resident persons and

• The funds were previously transferred to domestic bank accounts in USD after December16, 2015

• Minimum holding period elapsed


Under the New Regs, new portfolio investment in Argentina may be repatriated without limitations, after minimum holding period (120 days)


• Financial indebtedness with non-resident persons• Settlement in the FX Market no longer mandatory

• Settlement required only if the borrower wants to repay the principal or pay interestwith acces to the FX market

• 365-day 30% mandatory deposited eliminated

• Minimum holding period reduced to 120 days• Applicable to new indebtedness and renewals

• Prepayment of principal with access to the FX Market• Without limitation after the mínimum holding period• Applicable to funds settled in the FX Market after December 16, 2015


Under New Regs, funds disbursed on loans granted by foreign persons to Argentine residents may be kept in USD in foreign or domestic bank accounts.


• New imports of goods (post December 16, 2015)

• May be paid with access to the FX Market without limitations

• Old imports of goods (pre December 16, 2015)

• Covered by letter of credit: no limitation

• Not covered by letter of credit are subject to the following limits

• From January 1 through May 30, 2016: maximum of USD 4.5M per month

• From June 1, 2016: no limitation


Under New Regs, there is no limitation to pay new imports of goods or services


Foreign Exchange Controls in Venezuela• Foreign Exchange Control since 2003

• 2016 new system to be in placed (expecting publication of new Exchange Agreements): reduction from 3 official Fx regulated markets to 2 FX markets as follows:

• CENCOEX: Moved from VEF6,30 to VEF 10/US$ ( Access limited to importationof medicines, foods, others essentials)

• New FX Floating System (NFS replaced old SIMADI): Former SICAD was mergedinto NFS. Fx rate starting from VEF 200/US$ (floating market)

• Change in the Illicit Law (Ley del Regimen Cambiario y sus Ilicitos- December 2015) increasing sanctions


Foreign Exchange Controls in Venezuela— Issues to deal with the Fx Control:— Implicit rate over legal rates: potentially loss non deductible — Potential Fx loss in Venezuela (Venezuelan functional currency) could expose the

entity to a 2/3 capital loss: liquidation or capital reposition— Some Alternatives to manage Trapped Cash in Venezuela:1. Encouraging customer to pay in foreign currency (US$) if possible.2. Use of the New Fx Floating System3. Naturally “hedging” your Fx by accelaring investments in Bolivars: Real Estates

properties, equipment, shares4. Prepayment purchasing strategies in Bs (inventory, services)5. Using Bs to pay income taxes optimizing the use of FTC in the parent company

home country6. Exportation strategy for 60% foreign currency no forced to be sold and transfer

pricing optimization. Foreign currency to be sold at New Floating System Fx.7. Fx currency flow in Venezuela is limited to essentials goods importations


Foreign Exchange Controls in Brazil■ No foreign exchange controls

■ Registration with Central Bank is required (straightforward procedure)

RDE-IED for Foreign Direct Investments RDE-ROF for cross-border loans DCBE for Brazilian direct investments abroad

■ IOF tax on most foreign exchange transactions:

Standard IOF rate (0.38%); and IOF exemption on cross-border loans with minimum maturity date (180 days).


Mexican money laundering• Law in full force since July 2013.

• Relevant objectives include:

• Protection of the Financial System and the economy in Mexico;

• Establishment of requirements for recordkeeping and reporting by private companies and individuals, banks and other financial institutions;

• Setting up of procedures to identify activities that involve illegally-earned money; and

• Increase of administrative and criminal penalties for money laundering.

• Prohibits the use of cash (both Mexican pesos or foreign currencies) as payment for several activities and up to certain amount (approximately US$11,000).


Mexican money laundering• List of activities defined as “vulnerable” which are commonly utilized by

crime and terrorism in money laundering activities in Mexico.

• “Vulnerable activities” include, but are not limited to:• Customary or professional offering of loans by entities different from Financial

Institutions; and

• Rendering independent professional services, in which the service provider (Treasury Center) carries out on behalf of the client, amongst other operations: “the administration and handling of resources, securities and other assets of their clients”.


Mexican money laundering• Main obligations for Treasury Centers and/or Lenders located in Mexico

include:• Identification of their clients (related companies) and users and verify their

identity based on official documentation, as well as keep records of such documents;

• Registration before the Tax Authorities (electronic webpage);

• File monthly reports before the Ministry of Finance (through the Tax Authorities) related to “vulnerable activities” in which the transaction exceeds certain amounts (approximately US$8,000) (first reports were filed on December 17, 2013 or January 17, 2014);

• Appoint a legal representative before the authorities;

• Prepare a file for each of their clients in accordance with certain rules; and

• Draft an internal “Identification Policy” to ensure compliance with the statute.


Mexican money laundering• Private and public companies from different business sectors have

requested official rulings from the Financial Intelligence Agency (“UIF” for its acronym in Spanish) to confirm that treasury operations do not qualify as “vulnerable activities.”

• Arguments supporting this position include:• Treasury Centers or Lenders do not “offer” loans to the general public;

• treasury transactions are part of the regular transactions carried out among companies that considered part of a “corporate group;” and

• the services provided by Treasury Centers are amongst related parties, thus the independent character is not met.


Cash Pooling.

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Non-Tax ConsiderationsCash Pooling Overview— Allows for efficient cash management without incurring outside

borrowing costs.— Provide a holistic view of a group’s working capital requirements,

short-term investments, and cash position.— Two common pooling types:

— Physical Cash Pools; and— Notional Cash Pools.


Non-Tax ConsiderationsPhysical Cash Pooling Arrangement— Allows for efficient cash management without incurring outside

borrowing costs.— All participants have an account linked with Treasury Center’s account (the “Central

Account”).

— Excess cash in a participant’s account transferred to Central Account periodically.

— Treasury Center lends to a participant with an account deficit.

— Treasury Center earns interest from bank on net cash in Central Account.


Non-Tax ConsiderationsPhysical Cash Pooling Arrangement

Central Account

+ 50

Account 2+350

Account 1-100

Account 3-200

200

350

100

Interest on 200

Interest on 100

Interest on 350

Bank pays interest to Treasury Center on 50 deposit


Non-Tax ConsiderationsNotional Cash Pooling Arrangement— All notional pooling participants have an account (a “Sub Account”) with their local

bank.

— Treasury Center opens notional pooling header account (a “Reference Account”) with a bank (e.g., “Bank A”).

— Participants grant Bank A access to determine balance in Sub Accounts.

— Bank A notionally sweeps cash on deposit in Sub Accounts and reduces aggregate amount by Sub Account deficits.

— Bank A pays Treasury Center interest on Reference Account’s notionally netted balance.


Non-Tax ConsiderationsNotional Cash Pooling Arrangement

Reference Account

+ 50

Sub Account 2+350

Sub Account 1-100

Sub Account 3-200

Interest on 50


Appendix.

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Specific Country Considerations

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Argentina Look-Through Rules

— Sec. 133 and 148 ITA– Resident shareholders of corporations organized in Non-Cooperating Countries.

List of non-cooperating countries published by the Federal Tax Administration (AFIP).– Passive income

Sec 165.VI.2 - ITA Regulations: Interest, dividends, royalties, rent derived from the lease of real property (except entrepreneurial activities), capital gains from the sale of shares or interests in corporations, partnerships or investment funds, income derived from derivatives except hedging.

– Exception if 50% of the income derives from commercial, industrial, agricultural, mining or forestry activities, or from the provision of services (included banking and insurance) or, in general, activities other than those producing passive income.

— Branches – Sec 133(a) ITA— Partnerships – Sec 133(d) and 149 ITA

Transfer pricing rules



Argentina Withholding tax

— ITA Sec. 93(c)(2) – 35% WHT— If Borrower is Argentine banking or financial entity: 15.05% WHT— If Lender is foreign banking or financial entity: 15.05% WHT – ITA Sec 93(c)(1)

– Not applicable if lender is domiciled in non-cooperating country – List published by AFIP.— Tax treaties – Reduction of WHT

Thin Cap Rules— Interest on financial debt

– Commercial debt exception– Interest subject to 35%WHT exception

— Debt with related parties— Interest not deductible in the proportion exceeding 2:1 debt/equity ratio— Interest treated as dividend



Specific Country ConsiderationsVenezuela Withholding tax on interest

— Tax Decree 1808 (3(a)) – 34% on 95% of payment (32,3%) WHT for foreign beneficiaries. Final tax 34%.

— If Lender is foreign financial entity: 4.95% WHT – ITL (52)— If borrower is a Venezuelan Bank : 40% Flat rate— Tax treaties – Reduction of WHT

Thin Cap Rules— Interest on financial debt

– Commercial debt exception— Debt with related parties— Interest not deductible in the proportion exceeding 1:1 debt/equity ratio or falling out

of the arm length principle— Interest is not treated as dividend


Specific Country ConsiderationsVenezuela— Look-Through Rules

ITL (Article 100-110)– Low tax Jurisdictions

Black List Published (Administrative Providence SNAT/2004/0232)Principle based on low tax rate up to 20%

– ExceptionArt 101- ITL : Income Test: Interest, dividends, royalties, rent derived from the lease of real property (except entrepreneurial activities), capital gains from the sale of shares or interests in corporations, partnerships or investment funds can not exceed 20% of total incomeAsset Test: 50%% of the assets should be engaged in commercial, industrial, agricultural, mining or forestry activities, or from the provision of services (included banking and insurance) or, in general, activities other than those producing passive income.Control test

Branches Partnerships


Specific Country ConsiderationsMexico— Thin Cap rules

3:1 ratio Debts with foreign related parties

— Back to back provisions Deemed dividend Non deductible

— Withholding tax Treaty Benefits Requirements


Specific Country ConsiderationsMexico— Transfer Pricing rules

OECD guidelines CUP method

— Foreign Exchange Controls or Taxes Not applicable

— Interest and FX income/deduction On accrual basis


Specific Country ConsiderationsBrazil— Physical cash pooling and Notional Cash Pooling.

No specific tax regulations

— Use of cash poling instruments may not avoid Brazilian tax rules. Important to understand effective role of the Financial Institution (or Treasury

Center) and associated risks.

Transfer pricing rules could be an issue.

Thin capitalization rules could be an issue.

Financial Institutions (or Treasury Center) could be deemed as “related parties” if there are very limited functions.


Specific Country ConsiderationsBrazil – Interest on Net Equity (INE)

• In addition to dividends, Brazilian subsidiaries may also pay INE to their shareholders

• Tax deductible interest expense calculated based on the long-term interest rate (“TJLP”) over the Brazilian entity’s adjusted net equity

• INE deduction is limited to the highest of 50% of the payer’s retained earnings and 50% of the payer’s current profits

• Interest tax deductible at 34%

• 15% WHT (25% for payments made to tax havens)

• Home country: Participation exemption? BEPS effects (deduction/no inclusion)

• Potential change in Brazil: increase of WHT to 18% and cap the calculation to TJLP or 5%, whichever is the lower


Specific Country ConsiderationsBrazil— Physical cash pooling and Notional Cash Pooling.

No specific tax regulations

— Use of cash poling instruments may not avoid Brazilian tax rules. Important to understand effective role of the Financial Institution (or Treasury

Center) and associated risks.

Transfer pricing rules could be an issue.

Thin capitalization rules could be an issue.

Financial Institutions (or Treasury Center) could be deemed as “related parties” if there are very limited functions.


Specific Country ConsiderationsU.S.— Entity Type.

— CFC:– Look-Through Rules of Sec. 954(c)(6);– Sec. 956; and– Earning and Profits Limitation.

— Disregarded Entity:– Sec. 987 considerations; and– Split Hedge.

— Functions.— Hedging;— Cash Pooling; and— Financing.


Specific Country ConsiderationsU.S.— Subpart F (General Rule).

— Net Sec. 988 gain is Foreign Personal Holding Company Income (“FPHCI”).

— Net Sec. 988 losses cannot offset other FPHCI.— Subpart F Exceptions

— Business Needs exception.— Bona Fide Hedging Transaction.— Special Rule for Interest Bearing Debt.

— Subpart F Elections.— Subpart F Matching Election – “(g)(3)” election.— Net FPHCI Inclusion Election – “(g)(4)” election.


Specific Country ConsiderationsU.S.— Sec. 475 Dealer.

— Dealers in securities must mark-to-market non-investments in securities.

— Sec. 1256 contracts must generally be market-to-market.— Straddle Rules.

— Losses realized from the disposition of a straddle position are deferred if there is unrealized gain in an offseting position.

— Hedging and Identification.— Hedging can prevent the application of subpart F, straddle rules and

timing mismatches.— Hedges generally must be identified on the day hedge transaction is

entered into.


Specific Country ConsiderationsU.S.— Currency Integration.

— “Qualifying Debt Instrument” and a related hedge as a single synthetic instrument.– Related hedge cannot be transacted with a related party.– Must be able to compute a yield to maturity for the single synthetic

instrument.

— Reporting Rules.— FX losses and gains are considered Sec. 165 losses for purposes of

the reportable transactions disclosure requirement.— Losses incurred as part of a hedging transaction are not subject to the

reportable transaction regime.


Specific Country ConsiderationsU.S. General Tax Issues Related To Treasury Functions

Timing

• Mark-to-Market v. Realization

• Capitalization

Source

• Foreign Source

• Subpart F v. Non-Subpart F

Character

• Ordinary v. Capital


Thank you

Presentation by

Howard A. WienerJuan Martín Jovanovich

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© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Foreign Exchange Controls and Efficient Cash Management · Management 2016 Latin America Tax Summit, ... Foreign Exchange Controls and Efficient ... rate risk) Non-Tax Considerations