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©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. 3 WHEN APPLYING SAFE HARBOR; INTERCOMPANY BALANCE < 60 DAYS Intercompany account is denominated in US Dollars Account ReceivableAccount Payable − Exchange gains/losses Taxable/deductible −Creates an inflationary adjustment − Exchange gains/losses Taxable/deductible * −Creates an inflationary adjustment * Exchange losses are deemed interests and subject to the 3/1 thin capitalization rules. Any exchange and/or inflationary adjustments is transferred through out the service fee under the Safer Harbor option.
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©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.
MANAGING THE INTERCOMPANY BALANCES FOR TAX PURPOSES
Héctor Silva
Meeting - BreakfastApril 21, 2010
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.
•Up to 45-60 days of balance – reasonable as compared with unrelated transactions
•Yearly expenses = $12,000,000
A R
= 1.5 – 2.0 MillionA P
2
INTERCOMPANY BALANCES
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.3
WHEN APPLYING SAFE HARBOR;INTERCOMPANY BALANCE < 60 DAYS
Intercompany account is denominated in US Dollars
Account Receivable Account Payable
− Exchange gains/losses Taxable/deductible
− Creates an inflationary adjustment
− Exchange gains/losses Taxable/deductible *
− Creates an inflationary adjustment
* Exchange losses are deemed interests and subject to the 3/1 thin capitalization rules.
Any exchange and/or inflationary adjustments is transferred through out the service fee under the Safer Harbor option.
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.4
WHEN APPLYING SAFE HARBOR; INTERCOMPANY BALANCE< 60 DAYS
Intercompany account is denominated in MX Pesos
Account Receivable Account Payable
− No exchange differences
−No inflation adjustment is allowed
− No exchange differences
−Creates an inflationary adjustment
Exchange differences are recognized directly by the parent company in the US books.
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.5
WHEN APPLYING SAFE HARBOR; INTERCOMPANY BALANCE > 60 DAYS
Intercompany account is denominated in US Dollars
Account Receivable Account Payable
− Could be considered as a deemed dividend for US tax purposes under section 956 tax code (US advise is recommended)
• Exchange differences taxable/deductible
• Inflationary adjustment
− Exchange losses deductible (deemed interest for 3/1 this capitalization rules)
• Inflationary adjustment
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.6
WHEN APPLYING SAFE HARBOR; INTERCOMPANY BALANCE > 60 DAYS
Intercompany account is denominated in MX Pesos
Account Receivable Account Payable
• Deemed dividend
• No Exchange differences
• No inflationary adjustments
• No exchange differences
• Inflationary adjustment
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.7
WHEN APPLYING TRANSFER PRICING STUDY;INTERCOMPANY BALANCE < 60 DAYS
Intercompany account is denominated in US Dollars
Account Receivable Account Payable
• Exchange differences are taxable/deductible
• Inflationary effects
• Exchange differences are taxable/deductible (deemed interest for 3/1 thin capitalization rule)
• Inflationary effects
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.7
WHEN APPLYING TRANSFER PRICING STUDY;INTERCOMPANY BALANCE < 60 DAYS
Intercompany account is denominated in MX Pesos
Account Receivable Account Payable
• No exchange differences
• No Inflationary adjustment is allowed
• No Exchange differences
• Inflationary adjustment
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.8
WHEN APPLYING TRANSFER PRICING STUDY; INTERCOMPANY BALANCE > 60 DAYS
Intercompany account is denominated in US Dollars
Account Receivable Account Payable
• Mark –up need to be adjusted to eliminate non-arm’s length aging
• Exchange differences and inflationary effects are reimbursed
• Deemed dividend for US tax purposes
• Mark-up need to be adjusted to eliminate non-arm’s length aging
• Exchange differences and inflationary effects are reimbursed
• See 3/1 thin capitalization effect
Be ware of the adjustment not to create a taxable income with a possible disallowed deduction
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.8
WHEN APPLYING TRANSFER PRICING STUDY; INTERCOMPANY BALANCE > 60 DAYS
Intercompany account is denominated in MX Pesos
Account Receivable Account Payable
• Mark –up need to be adjusted to eliminate non-arm’s length aging
• Inflationary effects are reimbursed
• Deemed dividend for US tax purposes
• Mark-up need to be adjusted to eliminate non-arm’s length aging
• Inflationary effects are reimbursed
©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.
INTERCOMPANY BALANCES
Reducing intercompany balances
Accounts Receivable – Distribute a dividend - Measure US tax implications- Identify Flat Tax impact
Accounts Payable – Capitalization of liabilities
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