ARGENTINA said in September that it will no longer require Argentine borrowers to get prior approval from the central bank before making principal and interest payments on certain

ARGENTINA said in September that it will no longer require Argentine borrowers to get prior approval from the central bank before making principal and interest payments on certain

October 01, 2002
ARGENTINA said in September that it will no longer require Argentine borrowers to get prior approval from the central bank before making principal and interest payments on certain loans from foreign lenders.

The new policy applies to existing debts that have been restructured as follows. The lender must have agreed to write down the principal amount of the debt by at least 40% of its nominal value on the restructuring date. The interest rate cannot exceed the 6-month LIBOR rate plus 3%. Interest payments cannot be required more frequently than quarterly. The average life of the debt must be at least four years from the restructuring date. The lender must allow a grace period on principal repayments of at least two years.

Getting approval to repay other foreign debts will be more difficult, in view of the shortage of foreign reserves in Argentina, according to Diego Serrano Redonnet of the law firm Perez Alati, Grondona, Benites, Arntsen & Martinez de Hoz in Buenos Aires. “It is yet to be seen whether this new regulation will enhance the ability of companies to negotiate favorable restructuring deals with foreign creditors,” Serrano Redonnet said.

BRAZIL increased the PIS tax rate from 0.65% to 1.65% effective on December 1, but also allowed a crediting mechanism that will reduce the taxes owed in some cases.

The PIS tax is a monthly tax on gross income of Brazilian companies. The receipts are used to fund a federal social integration program. The government announced the rate increase in provisional measure 66/02 on August 29. However, it said, at the same time, that companies will be allowed in the future a credit for PIS taxes already paid earlier in the production chain. Credit will be allowed for taxes already paid on certain goods acquired for resale and on depreciation of machinery and equipment used in manufacturing.

The government plans to create a similar, noncumulative system for the 3% COFINS tax by December next year, according to José Roberto Pisani and Yoon Chung Kim with Pinheiro Neto Advogados in São Paulo. The COFINS tax is a social security levy. It works the same way as the PIS tax in that it is collected on monthly gross income.

Brazil has also created a special PIS and COFINS tax regime for electric generating companies that opt to use it. The special regime allows receipts from certain power sales to be excluded from the tax base.

PERU threatened to renegotiate tax stability contracts with foreign investors, but then backed away.

A tax stability contract is a promise by the government not to change the tax rules that apply to an investment. Such contracts are often signed to induce foreigners to make long-term investments in the local economy.

The finance minister made the threat in early August after the government lost arbitrations with two electric generating companies over whether each can claim full tax depreciation on assets acquired in a merger with another company that already depreciated them. The arbitrator said the double depreciation benefit was available by law when the government privatized the companies, and tax stability contracts signed with the foreign owners bar the government from changing the rules. A third electricity generator owned by Duke Energy paid an undisclosed amount in December to settle its dispute.

However in September, the finance minister declared that the contracts are “sacred” and will not be amended unilaterally by the government, reports Rafael Rossello, a tax lawyer with the firm Hernandez Rossello in Lima.

The head of the tax agency, Sunat, had said contracts with 570 companies were under review. Peru reopened such contracts with foreign oil companies once before in the 1970’s. The government is facing a budget shortfall after it had to cancel plans this summer to privatize state electricity assets in southeastern Peru in the face of violent public protests.

CALIFORNIA said that out-of-state generators who sell electricity into California earn their income outside the state.

At issue is whether franchise taxes must be paid on the income. The ruling — by the State Board of Equalization in a case involving PacifiCorp — helps generators and power marketers who sell electricity into California.

PacifiCorp protested franchise taxes that California said it owed for the period 1984 through 1989. The company sold excess power during those years into California from power plants in Oregon, Washington, Wyoming and Utah. Corporations are subject to franchise taxes in California on income from California sources. A company’s California income is determined by taking all of its income and then allocating a portion to California based on a three-factor formula that looks at the percentage of its total workforce, property and sales that is in California. Sales of “tangible personal property” are considered to occur where the customer is located. However, sales of services occur where the physical work is done to create the service. The State Board of Equalization said electricity is a service. Therefore, the sales in this case occurred outside California where the electricity was generated. The board released its formal opinion in the case in late September.

There is no consistency among states on how they view electricity. The inconsistency opens the door to tax planning since it is theoretically possible to allocate sales to no state by selling into states like California from states that allocate the sales to the place where the customer is located. The issue also comes up frequently in “tolling” transactions: states are often confused about how to apply sales taxes, which are collected on retail sales of “tangible personal property,” but may or may not be collected on sales of services. In a “tolling” transaction, a gas supplier pays the owner of the power plant fees to convert its gas into electricity.

Keith Martin