Encouraged by new laws, tax authorities around the world are stepping up efforts to require tax advisors and taxpayers to provide improved information on tax systems. With additional information, the authorities are better informed about the risk of abuse in tax homes and transactions with which taxes are to be minimized or possibly avoided. This global trend was picked up in Latin America.
Just as the US American Jobs Creation Act of 2004 amended the Internal Revenue Code to include expanded reporting requirements for tax authorities, new laws in Mexico and Argentina should provide similar information that is likely to affect national and international tax planning.
These legislative initiatives must be considered in the context of developing financial and estate plans that include financial products, including life insurance and annuities, issued by foreign insurance companies to residents of Argentina and Mexico using foreign (offshore) LLCs or trusts will.
According to Mexican tax laws (as amended in December 2019), Mexican taxpayers and their advisors are required to report to the Mexican Tax Authority (SAT) tax structures that are designed or implemented to allow income tax payment by foreign transparent companies such as LLCs, partnerships and Trusts.
The Mexican Tax Code does not describe the types of tax structures that are subject to reporting. Therefore, there may be confusion about what constitutes a taxable tax structure. However, reporting is most likely required if one of the objectives of the transaction is to avoid paying taxes through the use of transparent units. Reporting must be made within 30 days of the introduction of the tax structure.
Argentina’s recently passed tax resolution, which introduces a reporting system that covers national and international tax planning, is broader than Mexican legislation. The new Argentine regulations contain a comprehensive definition of reportable national and international agreements as well as examples of situations that are considered to be international agreements per se and therefore reportable.
International arrangements are defined in the Argentine Tax Resolution as “any agreement, system, plan, or other measure that provides a taxpayer with tax or other tax benefits involving Argentina and any other jurisdiction.” International tax planning arrangements that are reported must submit to the Argentine Tax Administration (AFIP) transactions involving legal entities in such “other jurisdictions”: (i) to receive benefits under double tax avoidance contracts, (ii) which involve a low tax jurisdiction, or (iii) when a taxpayer has rights as a beneficiary, benefactor or trustee of a foreign trust.
Argentine taxpayers, tax advisors or persons who assist in the implementation of these tax planning structures are subject to this reporting requirement. International tax planning agreements must be reported within 10 days of implementation. The Argentine Tax Resolution will retrospectively affect tax planning agreements implemented after January 1, 2019 and disclosure to AFIP must be made before January 29, 2021.
Reporting an international agreement does not automatically trigger an AFIP determination in relation to the tax treatment or legitimacy of the transaction. However, in accordance with the tax information treaty exchange, AFIP may choose to transfer the information to the foreign jurisdiction involved in the international agreement.
Estate and financial plans that include offshore financial products such as offshore life and annuities sometimes use overseas transparent companies that are based in low-income tax jurisdictions. In light of these recent regulatory reporting systems, estate planning solutions for residents of these countries must take into account the impact of the new reporting requirements on the sale of offshore investment products.