The impact of the base erosion and profit shifting (BEPS) guidelines has been manifold in Latin America. Despite the certainty these guidelines have generated in some tax markets, their implementation has seen an increase in court litigation in Brazil, Mexico and Argentina.
In 2015, the Organisation for Economic Co-operation and Development (OECD) recommended new guidelines to tackle base erosion and profit shifting. The OECD’s BEPS rules sought to address the frequency of multi-national enterprises’ (MNEs) tax avoidance practices, by seeking to increase and strengthen demands for greater transparency in all industries worldwide.
Brazil’s economic and social conditions have played a significant role in the draconian use of the BEPS guidelines. With public revenue low, the Brazilian authorities have become even more eager to collect taxes from MNEs. Georgios Anastassiadis, tax partner at Gaia Silva Gaede & Associados stated that Brazil’s tax authorities have, at times, interpreted legislations and issued rules that sometimes "cross the limits of legality, and even constitutionality". As such, it has become common for tax authorities to intensify tax inspections and audits, which has caused more tax controversies and litigations.
Similarly, Mexico’s economic climate has played a significant role in the use of the BEPS guidelines. The "ever-increasing need of revenue" in Mexico has seen a rise in litigation, said Jorge Correa, tax partner at Creel Garcia-Cuellar Aiza y Enriquez. Although not all tax disputes are resolved in the courtroom, this trend highlights the impact that the BEPS guidelines are having on MNEs. Moreover, they show how the authorities can use these rules to their advantage.
Correa added that the BEPS guidelines have also contributed to an air of uncertainty in Mexico. Although the main source of the uncertainty has not been the development of the BEPS package, the way in which it has been implemented has been problematic. Jurisdictions are applying the BEPS rules at their own pace which has resulted in inconsistency and tax uncertainty.
In Argentina however, the impact has been twofold. For tax practitioners, the BEPS guidelines have provided an element of certainty in a number of tax markets like transfer pricing and double tax conventions. Moreover, the BEPS rules have fostered clarity in case law in respect to when the transfer pricing directives should be used. However, tax litigation has also seen an increase as MNEs adjusts to these rules.
The Argentine tax authorities have been active in auditing and assessing MNEs to stop tax avoidance. Cristian Rosso Alba, tax partner at Rosso Alba & Francia said that in Argentina, the authorities are aware that MNEs may fake foreign exchange losses and interest deductions on transactions to avoid paying taxes. As a result, the tax environment in Argentina is "hectic".
The BEPS guidelines have been helpful when it comes to overcome some the tax problems within Latin America. However, this has often been at the expense of more litigation, which is a cause for concern for multinationals.
Key recommendations: How MNEs can benefit
Due to the increase in tax disputes within these regions, a multifaceted solution is required to resolve the issues at hand.
- Politicians should observe legal and constitutional limitations before creating or increasing taxes. This should decrease litigation and contribute to a healthier business environment for MNEs.
- There needs to be greater tax certainty. Tax authorities need to ensure a timely issuance of regulations. This will allow MNEs to be aware of the rules that are applicable to them.
- Mandatory arbitrations would decrease the amount of courtroom litigations. Arbitration is a more cost-effective and time-effective solution to resolve tax disputes.
- A better alignment of tax laws with OECD standards would help both to provide more certainty and improve foreign investment. In situations where local statutes differs from the BEPS rules, tax controversies are likely to show up. Countries can overcome these issues by amending the discrepancies within the law in order to minimise the effect this has on MNEs.
The above article was first published on www.internationaltaxreview.com on 26 May 2017 and has been republished with the approval of the Publisher. Further copying and distribution are prohibited without permission of the publisher.