The After-Effect of Brazil’s Increase in IOF Taxes

The Brazilian government’s latest increase in tax on Financial Transactions (IOF) could affects transfer pricing audit several transactions in the financial and capital markets, including investments in fixed income, investment funds and derivatives transactions.Brazil raised taxes on foreign inflows for the second time in a month this October to halt the appreciations of the local currency and protect exports from what local officials have termed as a “global currency war”.While this increase will boost Brazil’s economy, the change will adversely affect the US.

In a international expansion of an emerging market, investors needed to know about the risks involved in investing in their market segment of choice. The decree (Decree 7,330/10) issued on October 18, 2010further raised the IOF tax to six percent, barely a week after the government first increased the rate from two percent to four percent. Inbound investment in several kinds of financial transactions in Brazil will be impacted. Investors will need to structure their investments differently if they want to minimize their IOF costs. Investors may also look for different forms of investment as they want to minimize the impact of the IOF on their transactions.

The IOF is levied on foreign exchange transactions related to the foreign investment in fixed income transactions, investment funds, including Private Equity Funds (FIP), and the attendance of initial or additional margin requirements in connection with futures transactions carried out within the Brazilian Stock, Commodities and Future Exchange. The new rate is effective from October 19, 2010.

There are exceptions to the IOF rate increase and the below will continue to have a two percent IOF rate:

1. Investments in variable income investments traded on the Brazilian capital markets; and
2. Acquisition of stock or stocks subscriptions in public offerings registered with the Brazilian Securities and Exchange Commission (CVM), or where registration is not mandatory under the CVM regulations, if the issuing companies are still registered with the CVM.  

The subsequent repatriation of a foreign investor’s initial investment (i.e. the exchange of Brazilian currency into foreign currency) remains exempt from the IOF.  

IOF on the below foreign investments remain unchanged:

1. Foreign exchange transactions related to direct investment in Brazilian companies remains subject to a rate of 0.38 percent on the inflow and outflow of cash (e.g., capital increase, capital gains and dividend payments); and
2. Foreign exchange transactions related to international loans which are subject to a zero rate on the inflow and outflow of cash, continues.

Although the IOF tax obviously affects domestic and foreign investors differently, it does maintain a level playing field among foreign investors. The recent developments in the IOF tax should be seen as part of a natural evolution of an emerging market. For those foreign investors who are positioning themselves to profit from this development, the real impact will be in the operations functions supporting the trading, allowing for new competitive advantage to be grasped by those providers able to master the service delivery of these new aspects. Incomplete knowledge about foreign markets can be a real impediment to your company’s international expansion plans. Employing the help of a partner can your organization scale all difficulties and ensure success in your endeavors in any international business expansion

Know more - regulatory filings, eu vat rules

Impact of the UK Budget on your Business

While most businesses are largely supportive of the government's plans to reduce the UK Budget deficit, they are divided on whether the government is doing enough to stimulate enterprise. Almost 64 percent of companies feel that the measures outlined in the UK Budget will have a positive effect on their business, with nearly 28 percent stating that the Budget will have a positive effect on their staffing levels. Reducing corporation tax is a smart move, as an encouraging environment for business is precisely what’s needed to stimulate growth. Here is a snapshot of the UK budget of 2011

Corporation Tax Rates

Effective April 1, 2011, the main rate of Corporation Tax will be reduced to 26% (from 28%) with further yearly reductions of 1% for the next two years till the Corporation Tax rate reaches 23% in 2014 making the U.K. rate the lowest in the G7. Apart from U.K. businesses, the move affects all foreign companies operating in the U.K. via a permanent establishment and boosts U.K.’s appeal as a business destination. The new corporation tax rates also affect international accounting for deferred tax assets and liabilities.

Research and Development (R&D) Tax Credit for Small and Medium Enterprises (SMEs)

The rate of additional deduction for expenditure on R&D for SMEs will be raised from 75% to 100% effective April 1, 2011. This will give an overall deduction of 200% in 2011 and the total deduction will be further increased to 225% in April 2012.The move is particularly beneficial for SMEs with less than 500 employees and either turnover not exceeding € 100 million or total assets not exceeding € 86 million. Additional benefits like abolishing the minimum expenditure limit of £10,000, removal of rule limiting a SME company’s payable R&D tax credit to the amount of PAYE and the National Insurance Contributions (NICs) it pays are also expected to come into effect April 2012.

Taxation of Foreign Branches

U.K. companies can make an irrevocable election for all its foreign branches to be exempt from the U.K. corporation tax on their profits. Any capital gains tax attributable to the foreign branch will also be exempt. However, no relief will be available for foreign branch losses. Thus, a company having losses in the foreign branch may elect to opt out of this option. The exemption is available to companies from accounting periods beginning on or after the date Finance Bill 2011 receives Royal Assent. Companies will need to consider the anti-diversion rules in the legislation to determine if the exemption is attractive to them.

Small Corporation Profits

Effective April 1, 2011, the rate of tax on small corporation profits will be down to 20 per cent from the current 21%.

Entrepreneurs Relief

The lifetime limit for Entrepreneur's Relief from capital gains tax, mainly benefiting serial entrepreneurs, will be doubled to £10 million. Qualifying gains are taxed at reduced rate of capital gains tax of 10%. Any gains in excess of this lifetime limit will be subject to the standard tax of 28%. The measure takes effect April 6, 2011 and is the third consecutive increase to lifetime limit by the government indicating their intentions to encourage investments in the U.K. The limit was set at £2 million in the last budget and increased to £5 million in June 2010.

In a company international expansion, it is best to employ the services of a professional whether it’s surviving an audit, capitalizing on business deductions, or finding tax-friendly ways to run your business, to help reduce your tax obligations. To cut red tape on small businesses, the government announced that the number of small businesses subject to audit would be reduced. The change will allow more U.K. companies to take advantage of the exemption leading to a significant reduction in administrative burden for authorities and cost savings.

As incomplete knowledge about foreign markets can be a real impediment in your international expansion, it is advantageous to have a trusted service provider to assist you in creating an appropriate tax and legal structure to optimize your new operating configuration.

You can have unlimited assistance in your international business expansion, for aligning your tax profile and a good service provider would be focused on providing exceptional assistance.


Know more - international financial accounting, doing business overseas

Simplifying Australia's Transfer Pricing Rules for business reconstruction

Tax authorities around the globe have become more aggressive in the transfer pricing arena. It is important to be informed regarding the introduction of stricter penalties, increased information exchange, increased audit and inspection activity to ensure that expensive penalties can be avoided later. The Australian Taxation Office (ATO) has states there will be a significant increase in the spotlight on transfer pricing over the next four years starting with 2010 in the large taxpayer market (revenue greater than A$250 million). There have been new rules on transfer pricing that has been set by the ATO for business restructuring by multinational enterprises. The ruling defines ‘business restructuring’ as arrangements of multinational enterprises by which functions, assets and /or risks of a business are transferred between jurisdictions.

The rules addressed both simple and complex cases including:

* A  simple transfer of ownership of an intangible asset,

* A  multi-faceted product supply chain restructure, etc.

The ATO requires a documented business case for the restructure explaining its commercial rationale, both from a group perspective and also showing how it affects the Australian entity and to ensure its benefits. Proper documentation evidencing the arrival of an arm’s length price for the restructure and post-restructure arrangements must also be maintained.

The ruling focuses on three main types of dealings:

*  a transfer of property

*  a supply of benefit and

* Whether a tax payer, viewed as an independent party, would have a right to  compensation for termination of its existing arrangements

Permanent Establishment issues arising from business restructuring are however not addressed in this ruling. It only applies to the application of the transfer pricing provisions and does not address the application of other provisions in the Australian tax law that may be relevant in the facts and circumstances of a particular business restructuring arrangement.

The rules permit adjustment to a taxpayer’s profits where the conditions of the taxpayer’s commercial or financial relations with an associated enterprise in respect of a business restructuring differ from those which would be made between independent enterprises dealing wholly independently with each other and results in profits not accruing to the taxpayer that would otherwise have accrued.

This Ruling considers situations where such transfers occur between MNE members to implement changes in the MNE’s existing business arrangements or operations. Business restructurings also commonly involve the transfer of the ownership and management of intangibles such as patents, trademarks and brand names.

When doing business overseas, it is advantageous to have a trusted service provider who can provide unlimited assistance in aligning your tax profile and keep you updated with changing transfer pricing regulations and other areas of significance like sas compliance or international financial reporting and other legalities.                            

Know more: International expansion, International accounting

Overcoming the Challenges of Funding a Foreign Operation

According to trading economics, the real GDP growth rate of the US expanded 2.8% in the 4th quarter of 2010, over the previous quarter.  Needless to say, there exists a strong case to pursue opportunities in these markets.  However, as foreign entrepreneurs and investors based outside of these emerging markets look to participate in the rapid expansion, they are faced with the challenging task of pursuing entrepreneurial investments in an unfamiliar environment. The entrepreneur and investor now have the additional complexity of ensuring business models are successfully executed in a completely new context.
Funding foreign operations are never simple. When you set up a corporation, you begin funding operations through paid-up capital. Thereafter, many parent companies fund foreign operations by remitting funds as required. These are recorded as loans in the subsidiary’s books. In a company international expansion, as large investments are involved, good management skills and favorable economic conditions are required to make the endeavor a successful one. It isn’t a problem in most countries but let’s look at some of the different regulations around the globe to give you a sample of the challenges you may face.
China’s Challenges
In China, the subsidiary will not be able to repatriate funds to repay the loan, if u send funds and book them as a loan. The loan needs to be formally registered in time with the Foreign Exchange Bureau, for it to be repatriable. Proper loan documentation between the parties is also strongly advisable as additional support to repatriate funds.
Barriers in Denmark
Denmark is a much easier location than China. However, when you loan funds to your Danish subsidiary, as in most jurisdictions, thin capitalization rules will restrict the deduction of interest charges on loans from foreign group companies. What is special about Denmark is that thin capitalization rules also apply to a branch. Thin capitalization is deemed to exist if the debt-to-equity ratio exceeds 4:1. Thin capitalization rules do not apply if arm’s length terms are substantiated. A properly constructed intercompany agreement and a benchmarking exercise would certainly help the situation.
Navigating Argentina’s Drawbacks
What happens if your subsidiary makes losses? The law requires shareholders to make a further capital contribution, frequently covering the entire loss and a proportion of the original share capital. If the funds are not correctly transmitted, Argentine Central Bank regulations will prevent the funds being allocated to your company. When a cash contribution comes from abroad, a 30% withholding will be made until the relevant local regulator (IGJ) approves the Capital change and registers it. If you fail to complete the formalities with IGJ within a certain timeframe, you must again deposit the amount that they had withheld. In addition, funds sent by a foreign parent to the Argentine Subsidiary without complying with the arm’s length standard, are treated as capital contributions.
Difficulties in Brazil
Capital contributions must be registered in the Central Bank of Brazil (Bacen). Foreign loans must also be registered at Bacen who monitor interest payments. Failure to register the loan would result in Bacen prohibiting repayment in foreign currency and could also trigger issues relating to compliance with Brazilian transfer pricing control rules.
An integrated solution is the only real security, if you are looking at an international expansion. With the professional expertise of a reliable partner, your company can be funded through capital or through loans in the right proportions. Expanding abroad would give your business access to a much bigger, global market. If you want to make your international financial accounting a reality, there’s no better way to do it with the company of experts .You can minimize the risks and maximize your chances of success this way!
Know more - expanding business overseas, sas 70 compliance