INCOME TAXATION IN DISTRIBUTION
OF GOODS TO CUSTOMERS
IN LATIN AMERICAN COUNTRIES
By:
Ricardo J. Diez
Houston
Most Latin American countries have enacted legislation (or are in the process of developing legislation) characterizing what is called "permanent establishments" or "fixed bases." A permanent establishment or a fixed base is created whenever a foreign company, entity, or individual has a place of business or is regarded as "doing business" in the Latin American country in question. For a foreign company, entity or individual to be regarded as doing business in a Latin American country, such company, entity or individual must either: (i) have an agent or representative who performs or closes commercial transactions on its behalf within the territory of the country in question, or (ii) finalizes the sale of the goods within the territory of the country in question. If a permanent establishment or a fixed base of a foreign principal exists in a Latin American country, such country may tax the foreign company, entity or individual for any income related to that permanent establishment.
A foreign company, entity or individual can structure its relationships with its Latin American-based distributors in ways that will avoid the creation of a permanent establishment or a fixed base. The local distributor should not be an agent of the principal by having the authority to act on behalf of or to represent the foreign company, entity or individual. Instead the local distributor should be merely an independent contractor, who acts on its own behalf and for its own account. In addition, the sales of goods within the territory of any Latin American country should be structured as sales concluded independently between the local distributors as "sellers" and the third parties in the country in question as "purchasers." However, the local distributors should assume all risks of nonpayment by the third party purchasers. Otherwise, the distributors could be characterized as an agent or representative of the foreign company, entity or individual.
Additional steps relating to the passage of title should also be taken. Title to the goods should be transferred to the local distributor outside of Latin America, and the contracts between the foreign principals and the local distributors should be entered into and concluded within the foreign company's, entity's or individual's country. Furthermore, the purchase orders for the goods sold to the local distributors should be accepted by the foreign principals within their countries and payment for the sales should also be made within the countries of the foreign principals.
If these steps are taken, in our view, the creation of a permanent establishment or a fixed base is not created in a Latin American country. Therefore, no income taxation in any of these countries should be assessed on the foreign company, entity or individual.
Two examples should demonstrate how these rules work in practice. Under Bolivian legislation, for instance, it is clear that sales made under the above pattern are not taxable. Article 43 paragraph b) of Ley No. 843 reads as follows:
"b) the profits obtained by exporters from abroad for the simple introduction of their products and services into the Republic, are regarded [as deriving] from a foreign source [and, thus, are not taxable]." Foreign source income is not taxable in Bolivia.
In Mexico, Article 7 of the United States-Mexico Income Tax Treaty, effective since January 1994, states that only the sales of goods sold through permanent establishments are taxable in Mexico. "Article 7 - The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on or has carried on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as are attributable to
a) that permanent establishment;
b) sales in that other State of goods or merchandise of the same or similar kind as the goods or merchandise sold through that permanent establishment. However, the profits derived from the sales described in subparagraph (b) shall not be taxable in the other State if the enterprise demonstrates that such sales have been carried out for reasons other than obtaining a benefit under this Convention."
Foreign companies, entities and individuals exporting goods to Latin America should carefully structure their legal relationships with local distributors in order to avoid the creation of a permanent establishment or fixed base. If the steps outlined in this article are followed, the foreign company, entity or individual should not face taxation on its Latin American business.
