U.S.-Latin America Tax Planning Strategies June 6, 2014

2. Treaties: A New Balance? Have Governments Become More Focused on Preventing Fiscal Evasion than Avoiding Double Taxation? U.S.-Latin America Tax Planning Strategies June 6, 2014 Sonia Velasco Menal, Co-Chair, Cuatrecasas, Gonçalves Pereira (Spain) Emin Toro, Co-Chair, Covington & Burling LLP (USA) Juan Carlos Garantón, Torres Plaz & Araujo (Venezuela) Gianni Gutierrez, Ferrere (Uruguay) Adrián Rodríguez, Lewin & Wills (Colombia) Guillermo O. Teijeiro, Teijeiro & Ballone, Abogados (Argentina) Richard Winston, Richard L. Winston P.A. (USA)

3. Overview • Recent OECD Comments on Treaty Abuse • Exchange of Information Developments • GAARs – Case Law Developments on Treaty Limitations • Resolving Conflicts Between Domestic Laws and Treaties

4. Recent OECD Comments on Treaty Abuse

5. Recent OECD Comments on Treaty Abuse • July 2013 – at request of G20, OECD publishes Action Plan on Base Erosion and Profit Shifting • Action 6 (Prevent Treaty Abuse) “Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.”

6. Recent OECD Comments on Treaty Abuse • March 2014 – OECD publishes Public Discussion Draft – “BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” • Proposes adoption of Limitation on Benefits provisions similar to those found in US (and some Japan and India) treaties • Proposes general anti-abuse provision (discussed below) • Proposes change to preamble to clarify intent not to result in double non-taxation

7. Recent OECD Comments on Treaty Abuse • Proposed general anti-abuse provision • “Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the main purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.” (Emphasis added) • Illustrations included in discussion draft

8. Recent OECD Comments on Treaty Abuse • Proposed change in preamble “(State A) and (State B), Desiring to further develop their economic relationship and to enhance their cooperation in tax matters, Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States) Have agreed as follows:” (Emphasis added)

9. Exchange of Information Developments

10. Informationexchange Council Directive 77/799/EEC of 19 December concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation. • Council Directive 2003/48/EC of 3 June 2003 (“Savings Directive”) on savings income. • Bilateral tax treaties. All treaties signed by Spain include an exchange of information clause based on the wording of Article 26 of the OECD Model Convention on Income and on Capital. Spain has signed over 100 treaties. • Tax information exchange agreements Once a tax information exchange agreements enters into force, the country or territory is automatically excluded from the “black list” of tax havens. CountrieslikePanama, Barbados, Bahamas haveceasedtobetreated as taxhavenjurisdictionsforSpanishtaxpurposes. #6722232

11. INFORMATION EXCHANGE FATCA On May 14, 2013, Spain and the United States signed an agreement to improve tax cooperation and to implement FATCA (IGA MODEL 1). AUTOMATIC INFORMATION EXCHANGE Spainhavereached a compromisewithother 44 countriestoimplementanautomaticexchange of information. Argentina, Belgium, Bulgaria, Colombia, Croatia, Cyprus, CzechRepublic, Denmark, Estonia, Finland, France, Germany, Greek, Hungary, India, Iceland, Irland, Letonia, Liechtenstein, Lithuania, Malta, Mexico, TheNetherlands, Norway, Poland, Portugal, Romania, SlovackRepublic, Slovenia, Sudafrica, Spain, Sweden, UK, Isle of Man, Guernsey, Jersey, Unido de Anguila, Islas Bermudas, BVI, Cayman, Gibraltar, Montserrat and Turcks and Caicos. #6722232

12. Recent experiences TaxinformationrequirementS Interest expenses were tax deductible in Spain. The Dutch tax authorities were asked if the interest paid by SPAINCO was taxed in the Netherlands. The answer was affirmative. However, the Dutch authorities did not indicate that the interest income paid by SPAINCO was “eroded” through the interest expense derived from the loan with a Cayman company. TREATYCO Loan DUTCHCO CAYMAN Ints. 0% WHT Loan Ints. 0% WHT SPAINCO #6722232

13. EXCHANGE OF TAX INFORMATION

14. EXCHANGE OF TAX INFORMATION In the last 5 years Uruguay has signed 13 TIEAs and 12 DTCs. Why? Uruguay had been in the black, in the grey and finally in white list. Because the OCDE pressures and… Argentina Was looking for taxpayers with: • Real estate in Punta del Este • Agribusiness • Trading activities • Banks deposit The blame and shame policy had a great success

15. Are there any advantages related to the DTCs for a country like Uruguay? • Just a few. • Did it foster investments? • No. • Did it eliminate double taxation situations? • For a developing country - with source income principle - there are not so many advantages in signing DTCs. • Same situation in Paraguay and Bolivia… • The main target of DTCs was to reach the OECD standard and avoid being in the “bad boys’ list”. Section 26 of the MODEL and TIEAs Global Forum report made several observation to Uruguay.

16. To reach the OECD standards great changes had to be done to Uruguayan tax and legal system: • Until 2010, this were the main facts regarding exchange of information: • Uruguay did not exchange information even regarding international criminal prosecution. • Bank secrecy could only be lifted for local criminal prosecution. • Uruguay only taxes income generated in Uruguay. • The signature of TIEAs with Argentina depended on Argentina’s fulfillment of MERCOSUR agreements. • To accomplish the OECD standards a series of changes had to be done: • Lifting of bank secrecy. • Identification of shareholder of corporations with bearer shares. • Signature of TIEAs with Argentina and Brazil.

17. Challenges for Uruguay In the last 5 years Uruguay has signed 13 TIEAS and 12 DTC. • Main requirements for information exchange: • It requires a petition, it does not work automatically. • Prior to any information exchange, the taxpayer has an opportunity to oppose. • To lift bank secrecy a judicial process, where the taxpayer is heard, is necessary. • All the agreements protects lawyers secrecy. But Uruguay’s concept of “professional secrecy” includes CPAs. • Argentina is being requiring some information; however, in some cases the requirement has involved situations that were not included in the agreement’s scope.

18. Challenges for Uruguay • Overcome phase II of the Peers review: difficult task • The exchange of information standards are still changing: • Automatic exchange of information. • Constitutional obstacles. • Treaties are under constitutional level and have the same level as the laws. • There is a constitutional principle which establishes that before taking any administrative resolution the citizen should be heard; this would be violated if the agreements operated automatically.

19. Exchange of Information – Colombia • TIEA COL – US (Reviewed Constitutional Court) • IGA. • OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Reviewed by the Constitutional Court).

20. Exchange of Information – Colombia • Tax Haven List was finally issued (September 2013 / Applicable 2014). • 33% withholding. • Deductibility limitation. • Transfer-pricing. • Certain countries were gray listed (Subject to a TIEA) (e.g. Panamá).

21. Exchange of Information – Venezuela • Covered in all Tax Treaties in place (29) Untested / No intent from the Tax Authorities to advance on the same • Just 5 treaties cover Assistance in Collection NL, Norway, Belgium, Denmark and Indonesia • Under domestic law (Master Tax Code) both EI and AC are allowed / solve et repete

22. Exchange of Information – Venezuela • Currently there are no TIEAs in place (none are under negotiation) • Not a party to the Global Forum on Tax Transparency and Exchange of Information for Tax Purposes • FATCA / Little chance of negotiation of an IGA

23. GAARs – Case Law Developments on Treaty Limitations

24. APPLICATION OF GAARs IN A TREATY SETTING – OECD MC • A Copernican twist from 1977 to 2003 version of the OECD MC text of commentaries • 1977 Model: GAARs may not be applied in a treaty setting unless the DTC expressly allows so, i.e., to resort to domestic GAARs for recharacterization or reassignment of income (redetermination of the taxpayer) • 2003 Model: GAARs apply unless the DTC text expressly prohibits it (commentaries on article 1, par. 22, subpar. 22,1-2) • Current Model (2010): same position

25. GAARs IN SELECTED LATAM COUNTRIES

26. GAARs IN SELECTED LATAM COUNTRIES

27. ARGENTINA • LOBs and GAARs • Argentine DTTs lack limitation of benefits (LOB) rules, but in recent years the tax authorities have resorted aggressively to domestic GAARs to recharacterize income or redetermine the beneficiary in a treaty setting, particularly in case of outbound (round trip) investment • GAARs are applied regardless of express treaty authorization

28. ARGENTINA • Best scenario (inbound or outbound) would be a holding jurisdiction that combines a DTT in force with Argentina with a suitable holding regime in the treaty-partner jurisdiction. For this purpose Dutch BVs, UK LLPs, and Spanish ETVs are worth considering. • Foreign treaty-partner holding must have legal as well as economic substance • The Netherlands recently issued substance regulations particularly addressed to the sublicensing of IP rights, including to residents in tax treaty foreign countries

29. GAARs APPLICATION ABSENT EXPRESS TREATY AUTHORIZATION / DEBATED ISSUE • Fully applicable if Argentina is country of residence of a taxpayer whose abusive behavior is to be challenged. That means that income might be recharacterized or beneficiary redefined • If Argentina is source country (1) unrestricted income recharacterization (accord. Art. 3,2), but (2) limited power to redefine beneficiary is benefit recipient is recognized as resident by treaty-partner country Query whether outcome is different is express: treaty authorization is provided for GAARs application (e.g., MOU new Spanish treaty)

30. PRECEDENTS ON INBOUND STRUCTURES • Ruling AFIP 57/94 (January 30, 1996) recharacterization of insurance premium paid to foreign insurers under loan agreement as additional interest (higher borrowing cost); DTTs Spain and Italy

31. PRECEDENTS ON INBOUND STRUCTURESPARTICIPATED LOANS (DNI MEMORANDUM 3/06) DEG exemption/DTT with Germany - Although interest paid to DEG, DEG acts as collecting agent of principal and interest corresponding to participated financial entities so that exemption does not apply on said interest; DEG is not the beneficial owner of the interest income Participant Participant Participant DEG Argentine borrower

32. PRECEDENTS ON OUTBOUND STRUCTURES • Memorandum DNI 64/09: Facts and Findings • According to the Austrian DTT (no longer in force), the Argentine resident´s holding in AH and dividends received from AH were no taxable in Argentina by personal assets tax and income tax. Only 15% WHT on dividends applied on actual distribution in Austria • FIF (domestic fiscal transparency rules) were avoided by interposition of AH • Fact findings showed that AH was a phantom (shell) company without any economic substance B.V.I. Corp. Austrian Holding Argentina Resident 99% 100%

33. PRECEDENTS ON OUTBOUND STRUCTURES • Memorandum DNI 64/09: Decision • The decision qualified the situation as an abuse of the treaty and made reference to the possibility of applying GAARs in that context, in accordance with • Opinion of U.N. Expert Committee on International Tax Cooperation, Subcommittee on Improper Use of Treaties, and • Commentaries to Article 1, OECD MC, 2008 (reproduced in OECD MC, 2010)

34. By applying GAARs, the Argentine competent authority disregarded the interposed company in the treaty country jurisdiction and treated the holding of the shares in and income obtained by B.V.I. Corp. as if the interposed company did not exist

35. Memorandum DNI 799/10: Fact Pattern • Operating Subs (third countries) were domiciled in LATAM jurisdictions having no DTT with Argentina. Participation in operating subs help trough Chilean holding which enjoyed a special (no-tax) holding regime in Chile. The Chilean DTT did not expressly exclude privileged holding companies from the concept of residents. • By interposing the Chilean Holding the Argentine taxpayer avoided taxation on dividends in Argentina; dividends that were made up with profits coming from the second-tier operating subs, otherwise fully taxable in Argentina (i.e., if paid directly by operating subs to Parent Co)

36. Memorandum DNI 799/10: Opinion • The Argentine DNI sustained that: • DTTs should not be utilized by taxpayers to ameliorate or eliminate the tax burden through legal forms that would not be adopted but for the tax advantages deriving therefrom • Domestic GAARs (economic reality principle as contemplated in Section 2, law 11,683) may and should be applied to avoid abusive schemes even in a treaty setting

37. Memorandum DNI 799/10: Opinion • Considering the Chilean Platform company regime and the DTT rules attributing tax jurisdiction to the parties thereto, the reason to interpose the holding was to deviate dividend income coming from Uruguay and Peru (where the operating subs were domiciled), that would otherwise have been taxed in Argentina, with the end result of benefiting from a double non-taxation • Double non-taxation, obtained by interposing a Chilean Platform company between the Peruvian and Uruguayan subs, on one hand, and the Argentine Parent on the other, contradicts the DTT and implied an abusive conduct which might be challenged under domestic GAARs

38. Memorandum DNI 799/10: Opinion • From a different perspective, DTT are aimed at avoiding double taxation and to that end, treaty-partners should maintain an income tax of general application. The Chilean Platform company regime was strange to the income system of general application in Chile • The Platform company was beyond the scope of the Chilean DTT. It does not qualify under Article 1 of the DTT (taxes covered) as that article refers to subsequent amendments and replacing taxes using an analogous tax basis and not to promotional regimes resulting in double non-taxation

39. MOLINOS RIO DE LA PLATATAX COURT (TFN) August 14, 2013 ARGENTINA CHILE Dividends MOLINOS RIO DE LA PLATA S.A. PLATFORM CO (HOLDING) Dividends Dividends URUGUAYAN SUB. PERUVIAN SUBS.

40. LEGAL HOMEWORK AND FACT PATTERN • DTT Argentine / Chile patterned after Andean Pact: income solely taxed at source; dividends paid by Chilean company taxed in Chile exclusively • Platform Co. only taxed on Chilean source income. Foreign source income (profit distributions from operating foreign) non taxable • Dividends received by Platform Co. from op. subs. were immediately distributed to Molinos • Dividends were received by Molinos free of tax; if distributed directly by Peruvian and Uruguayan subs would have been taxed in Argentina

41. DISCUSSION AND HOLDING • There was an abuse of the treaty; AFIP’s tax assessment taxing dividends in Argentina affirmed • To find the existence of an abuse, tax court applied domestic GAARs and considered that Platform Co was not the effective beneficiary of the dividend paid out by the operating subs • Deemed “effective beneficiary” concept built in GAARs (DTT did not contemplate that concept) • A DTT may be used to mitigate or reduce the tax burden but not to eliminate the tax burden in its entirety (double non-taxation)

42. Critical Assessment of Molinos Rio de la Plata – Findings and Conclusions • Application of Argentine GAARs should not have resulted in a successful challenge of the Platform Company under the fact and circumstances of the case • Argentine GAARs/economic reality principle) consist of a sham-type provision according to which whenever a manifest discrepancy exists between the legal forms used and the economic substance of the transaction, the latter prevails to recharacterize the transaction or redefine the parties thereto for tax purposes • If that discrepancy exists, the legal forms are to be discarded regardless of the intention of the taxpayer, i.e., regardless of whether the intention was to avoid taxes or to pursue a legitimate business purpose. On the contrary, if such discrepancy does not exist, the legal transaction may not be challenged, whatever its purpose, unless it is evidenced that the taxpayer acted in fraud legis

43. Pursuing a tax advantage or benefit under the DTT (e.g., double non-taxation) is not, per se, enough to ignore the intermediate holding, as argued in connection with the Chilean Platform company • To legitimately challenge the structure under GAARs, the Tax Court should have either evidence that the Chilean holding was not the actual owner of the dividends received from the Peruvian and Uruguayan subs, and/or lacked economic substance (i.e., it was a paper company which exercises no effective management or administration of the holdings). None of that was undoubtedly evidenced in the case

44. Moreover, if the preceding conditions are met (the Chilean Platform company used and enjoyed the dividend income, and managed the equity participations held) the Chilean holding might not be deemed to be interposed in fraud legis nor would fail meeting the substance test. It was not evidenced that dividends received by Chilean Platform were not its own (i.e., that holding was constrained to pass the dividends on to parent) • In that context, Argentine GAARs could not be resorted to legitimately ignore the Chilean company as a treaty beneficiary, even if, as it appears to be the case, the structure was designed to save taxes (it was a tax-geared structure)

45. Developments on GAARs - Colombia • Colombia adopted a GAAR in 2012: • Tax abuse: Entering into transactions orusing entities with the sole purpose of obtaining tax advantages. • Tax Ruling: “treaty shopping,” dividends paid to non-residents in the Andean Community / Context (Andean Community Decision 578). • Constitutional Court: C-51977 /2005. • Application of Domestic GAAR in a tax treaty context / OECD MC commentaries – BEPS (active role).

46. Venezuela / GAAR and Treaties • GAAR rule covered in domestic tax law (MTC and ITLinter alia) • Intent is critical / main purpose of transaction is to reduce tax burden and instrument used is openly inadequate to the economic reality pursued. • Piercing Corporate/contractual veil recognized by Tax Courts (when substance is clearly inconsistent with form)

47. Venezuela / GAAR and Treaties • Tax treaties rank higher than tax laws • Economic substance should be followed when reviewing and characterizing a transaction for tax treaty purposes. • Should it be followed to justify countering treaty shopping? • Treaty shopping does not necessarily entail lack of substance.

48. Venezuela / GAAR and Treaties • Choice of jurisdiction (holding vehicle inter alia), even when the same is accompanied by an intent to reduce or defer taxation, would not meet the test. • So far no authority with regards to application of GAAR to disallow tax treaty benefits • OECD CFA Commentaries may be a guide, not authoritative. Which Commentaries?

49. Venezuela / GAAR and Treaties • Certainty and predictability should be chief. • The use of tax treaty SAARs such as Beneficial Owner and L.O.B. provisions seems a more reasonable approach even when much harder to implement.

50. Resolving Conflicts Between Domestic Laws and Treaties