Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1) Is the Guatemalan tax on gross revenue an "income or profits tax"?
2) Would the earnings of an FA paying Guatemalan tax on gross revenues and that carries on its active business only in Guatemala be computed under subparagraph (a)(i) or (a)(iii) of the definition of "earnings" in subsection 5907(1) of the Regulations?
3) Would the tax that non-resident shareholders without a PE pay on Guatemalan source dividends after January 1, 2013, be considered an "income or profits tax"?
Position: 1) Yes.
2) Subparagraph (a)(iii).
Reasons: 1) After a review of the applicable legislation, it was determined that the Guatemalan tax on gross revenue is part of a comprehensive income tax regime and is tightly linked and subordinate to what would otherwise be accepted as an income or profits tax. More specifically, the tax on gross revenue is levied under the same statute as an otherwise tax on net income which itself is not of such an unreasonably high rate as to remove the elective nature of a taxpayer's choice between the two options. Moreover, given that a taxpayer has an opportunity to elect annually to choose whether to be taxed on gross revenue or net income, the tax paid will generally be limited to a maximum amount computed by reference to net income.
2) There is no requirement to compute income or profit (i.e. net income) in a taxation year in which the taxpayer has elected to pay tax by reference to gross revenue.
3) Decree No. 10-2012 institutes a tax on non-resident shareholders receiving Guatemalan dividends in a manner similar to Part XIII withholding taxes on dividends.
L. Carruthers CPA, CA
September 5, 2013
Re: Guatemala Taxation of Foreign Affiliates
We are responding to your electronic message regarding your request for the Canada Revenue Agency's views regarding the treatment of Guatemala's tax on gross revenue since July 1, 1997 and its tax on dividends paid to non-resident shareholders since January 1, 2013.
Specifically, you asked if each of these taxes would be considered to be an "income or profits tax" paid by a Guatemalan-resident foreign affiliate of a Canadian corporation for the purposes of the Income Tax Act (the "Act"). You also asked if the "earnings" of a foreign affiliate that opts to pay Guatemalan tax based on its gross revenue and that carries on its active business only in Guatemala would be calculated under subparagraph (a)(i) or (iii) of that term's definition in subsection 5907(1) of the Income Tax Regulations (the "Regulations") and whether an adjustment would be made under subsection 5907(2) of the Regulations.
Guatemalan Tax on Gross Revenue Option
Our understanding of the Guatemalan law as it relates to tax on gross revenue is as follows:
- From July 1, 1997 to June 30, 2004, Decree No. 26-92 Ley del Impuesto Sobre la Renta (the "Guatemalan Income Tax Law") imposed a tax on net income (originally at 25% then increased to 31%) with an optional tax on gross revenue (originally at 4% then increased to 5%) which a taxpayer could elect into in lieu of the default tax on net income.
- From July 1, 2004 to December 31, 2012, the Guatemalan Income Tax Law imposed a 5% tax on gross revenue with an optional 31% tax on net income which a taxpayer could elect into in lieu of the default tax on gross revenue.
- As of January 1, 2013, Decree No. 10-2012 Ley de Actualización Tributaria (the "Guatemalan Tax Law Update") imposes a default tax on net income at the rate of 31% for 2013, 28% for 2014, and 25% for 2015 and future years. Moreover, a tax on gross revenue became the optional regime again with a rate in 2013 of 5% on the first Q30,000 (appx. CAD$3,925) and 6% on the amount above Q30,000. For 2014 and future years, 7% applies to the excess.
- Under the Guatemalan Tax Law Update, corporations had until December of 2012 to elect between the net and gross regimes for 2013 otherwise they would be grandfathered into the regime they were taxed under in 2012.
- At all times from 1997 to present, a corporation could elect to change its taxation regime on an annual basis. Originally, a corporation was required to obtain prior authorization from the tax authorities and then this was changed such that a corporation was merely required to submit a notice to the tax authorities.
- The tax on gross revenue does not require a corporation to calculate its net income in any way because the tax is calculated on a receipt-by-receipt basis and, under certain circumstances, is withheld and remitted by the payor.
Whether the tax of a foreign country will be considered an "income or profits tax" for all purposes of the Act is discussed in paragraphs 1.5 to 1.13 of Income Tax Folio S5-F2-C1, Foreign Tax Credit (the "Folio"). As set out in the Folio, in order to qualify as an "income or profits tax" the tax in question must generally be determined by reference to net income or be similar in nature to tax imposed under Part XIII of the Act.
While the Guatemalan tax on gross revenue is explicitly computed by reference to the gross revenue of a taxpayer, it is part of a comprehensive income tax regime and is tightly linked and subordinate to what would otherwise be accepted as an "income or profits tax". As a result, provided our understanding of the Guatemalan tax law as set out above is correct, it is our view that the Guatemalan tax on gross revenue is indirectly determined by reference to a taxpayer's income or profits and, therefore, qualifies as an "income or profits tax" for the purposes of the Act.
More specifically, since a single statute (whether it be the Guatemalan Income Tax Law or the Guatemalan Tax Law Update) allows the taxpayer to annually choose whether to pay tax on its gross revenue or to pay tax on its net income or profits, it would be anticipated that taxpayers would rarely pay taxes in excess of the amount of tax that would have been payable had they chosen to pay tax on their net income or profits. In this way the amount of tax that would be paid on net income or profits acts as the maximum amount of tax that would be payable in a particular year. In other words, only if a taxpayer anticipates that the tax on gross revenue will be less than the amount the taxpayer would otherwise pay, if it chose to pay tax on its net income for the year, would the taxpayer choose to pay the tax on gross revenue. In this way, the total amount of tax on gross revenue that will be paid in a given taxation year is effectively capped by, and will generally be less than, the amount of tax the taxpayer would otherwise pay on its income or profits.
Guatemalan Non-resident Tax on Dividends
It is our understanding that, as of January 1, 2013, non-resident recipients of Guatemalan-source dividends are taxed under the Guatemalan Tax Law Update. The non-resident recipient of the dividends is the taxable person and the tax levied is a percentage of the dividend paid or credited. The payor or creditor of the dividends must withhold and remit the tax on the recipient's behalf.
The basis and operation of the Guatemalan non-resident tax on dividends pursuant to the Guatemalan Tax Law Update is similar to that imposed under Part XIII of the Act on a non-resident's receipt of dividends. Therefore, in our view, this withholding tax on dividends is an "income or profits tax" for the purposes of Act.
Definition of "earnings" in Subsection 5907(1) of the Regulations
The "earnings" of a foreign affiliate of a taxpayer resident in Canada are calculated using one of the methods contained in the definition of "earnings" in subsection 5907(1) of the Regulations. Subparagraph (a)(i) of the definition states that the earnings are computed in accordance with the income tax law of the foreign country where the affiliate is resident if "the affiliate is required by that law to compute that income or profit". Since neither the Guatemalan tax on gross revenue nor the withholding tax on dividends pursuant to the Guatemalan Tax Law Update require the affiliate to compute its income or profit, it is our view that in a taxation year where a foreign affiliate that carries on its active business only in Guatemala has chosen to pay the Guatemalan tax on gross revenue, the "earnings" of the foreign affiliate will not be determined under subparagraph (a)(i) of the definition but, rather, will be determined under subparagraph (a)(iii). Furthermore, no adjustment will be available under subsection 5907(2) of the Regulations as that subsection only applies to "earnings" as determined under paragraphs (a)(i) or (a)(ii) of the definition of "earnings" in subsection 5907(1) of the Regulations.
We trust that the above is of assistance to you.
Olli Laurikainen CPA, CA
International Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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