In Latin America, meanwhile, the threat of US tax reforms are not the biggest concerns of taxpayers.
“In the past year, we have noticed a considerable reduction of transactions in view of the country’s political instability and economic crisis,” say Luís Rogério Farinelli and Stephanie Makin, partner and lawyer, respectively, at Machado Associados in São Paulo. “The fact that administrative courts have consistently confirmed the tax authorities’ position in certain disputes has not helped.”
Reforms in 2016 to Brazil’s administrative tax court (CARF) and political instability in the country badly affected M&A deals and there is unlikely to be much growth in transactions the coming year, but there is a silver lining.
“Potential foreign buyers are very concerned about the stability of the country and compliance matters (potential risks to inherit liabilities from the past),” adds Clarissa Machado, partner at Baker McKenzie in São Paulo. “On the other hand, several Brazilian companies (infra-structure/construction groups) have been required to sell some of their businesses in order to ‘survive’ (to pay debt or to return back money from corruption), so it is expected that very good transactional opportunities will be on the table during 2017.”
From the taxpayer’s perspective, companies are dealing with increasingly complex tax legislation, creating more uncertainty and compliance.
Compared to a year ago, it is harder to do deals because of the complex tax legislation and the adverse political and economic scenario. Moreover, future deals may be affected by progressive rates for income tax on capital gains accrued by individuals as of January 1 2017.
“Taxpayers will continue to face the issues arising from the complexity of the tax legislation and the increase in the tax burden levied on the company’s activities and on import operations, especially in what refers to indirect taxes, such as contributions,” says Rogerio and Makin of Machado Associados. “On the other hand, it is expected that a tax reform may be implemented in order to make the Brazilian tax system simpler, which may result in new market opportunities.”
“On future transactions, especially those related to investment acquisitions, group companies should be careful to not get involved in operations performed by the seller intended to decrease taxes levied on the acquisition transaction, as such measures are frequently challenged by tax authorities and may implicate the buyer,” say Farinelli and Makin.
Baker McKenzie’s Machado adds that taxpayers “should be very careful about the potential tax liabilities and capital gains on the deals”.
“Transfer pricing is also a point of concern because Brazil does not follow the OECD, and it is likely to trigger double taxation. The challenge for treaty countries will be how to deal with the ‘mutual agreement procedure’ just enacted by Brazil to solve double taxation and to motivate new M&A deals,” says Machado.
The US tax reforms plans could also affect Brazil, potentially reducing investments, but the impact may be felt much less than in Canada or Mexico. “Considering that Brazil is strongly focused in the agricultural sector and that the exports are mainly based on such activity, the political changes in other countries may not cause huge effects on the Brazilian exports,” say Farinelli and Makin.
Matéria original: https://www.internationaltaxreview.com/Article/3665353/Inside-M-A-Welcome-to-the?ArticleId=3665353