## 1gtmea2023001 ## Source details **Canonical URL:** [1gtmea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf.json) --- ### Mission background - Remote technical assistance mission by the Fiscal Affairs Department (FAD) of the IMF from March 7 to 21, 2022. - Purpose: analyze international aspects of Guatemala’s tax regime focusing on: - treaties for the avoidance of double taxation and their effectiveness in attracting foreign direct investment (FDI), - transfer pricing regulations, - implications for Guatemala of the minimum standards agreed by the BEPS project. - Mission team: Roberto Schatan (FAD and head of mission), Carolina Osorio (FAD), Armando Lara and Jose Madariaga (external advisors). - Principal counterparts: Ministry of Public Finance (Vice-Minister Mr. Saul Figueroa; technical teams led by Juan Blas and Jorge Lope), Tax Administration Superintendency (SAT: Alex Gonzalez, Emilio Pacay), Vice-Minister of Economy Lisandro Bolaños, business associations (AmCham Guatemala, ADEC, Vestex), research institutions (ICEFI, FUNDESA), private sector tax specialists (EY and PwC). - Acknowledgement: assistance by the IMF representative office and Carol Cruz Alavarado. ### Treaties — findings and strategic considerations - Current status and core decision: - Guatemala does not have treaties in force. - A treaty with Mexico was signed in 2015 but has not been ratified. - Core decision: whether to ratify the Mexico treaty and open negotiations for others; decision hinges on treaty cost-benefit balance. - Advantages of treaties: - In principle, encourage FDI between contracting countries. - Foster a better business climate and can encourage FDI in sectors beyond those with special regimes. - Can promote expansion of businesses operating from Guatemala, especially export services currently subject to double taxation. - Costs and constraints: - Treaties typically reduce income source taxing powers, impacting net capital importers such as Guatemala. - Guatemala has low tax collection—“one of the lowest in Latin America”—leaving little room for additional tax sacrifices. - General tax regime for income from lucrative activities, including the simplified option based on gross income, is already competitive internationally. - Significant investment incentives exist (free-trade zones, maquila regime) whose benefits are not clearly quantified; reporting potentially understates tax expenditure. - Treaties have higher legal hierarchy than domestic law and can limit flexibility for future tax reform. - Empirical evidence and cautions: - Many empirical studies show no conclusive causal relationship between signed treaties and FDI, particularly for developing countries and for Latin America. - Preliminary estimate suggests the treaty with Mexico could have a positive effect, but results must be interpreted with caution due to: - FDI data reliability issues; - non-comparability of countries used in modeling; - short pre/post treaty periods for investment trend changes; - near-zero initial investment levels that can produce analytically irrelevant percentage increases. - Institutional context: - Institutional stability and health are key determinants of FDI; Guatemala ranks poorly on institutional measures. - Successful use of treaties may require rethinking the tax system to increase collection, improve institutions, infrastructure, and social spending. - Recommended treaty approach: - Develop a Guatemala model treaty that protects the right to tax income at source. - Sign treaties only with countries where a potential double-taxation problem might inhibit likely investment flows. - Exclude countries that have no income tax or territorial systems with reduced withholding rates. - Use the UN model as primary reference because it favors tax on the source of income. - Maintain the right to tax royalties paid to residents abroad; define royalty to include software use, specialized technical services, and equipment and machinery leasing. - Include taxation at source for “other income” paid to residents of the other contracting state that is not business profit. - Reference domestic definitions for dividend and interest in treaties; legislation must support treaties with broad definitions. - Specific recommendation on the Mexico treaty: - The treaty with Mexico largely follows the report’s guidelines and is close to a model Guatemala could adopt. - The treaty excludes an arbitration clause, consistent with the position of most developing countries. - However, it does not include anti-abuse measures agreed in BEPS Actions 6 and 7; therefore, the treaty with Mexico should not be ratified under current terms. ### Tax revenue structure, special regimes, and key statistics - Overall collection and trend: - General government’s total net collection (not including social security) was 10.6 percent of GDP in 2019. - Tax revenue fell to 10 percent of GDP in 2020 and increased to 11.7 percent in 2021. - Tax buoyancy has been below 1 in Guatemala since 2011. - The sale of a telephone company increased collection by 0.3 percent of GDP in 2021. - Comparative position and main sources: - Guatemala’s tax revenue is roughly half of the Latin American average. - VAT and income tax (Impuesto Sobre la Renta – ISR) for legal persons account for 77 percent of tax revenue. - Personal ISR in 2019 accounted for barely 0.5 percent of GDP (“barely half a percentage point of GDP”). - Corporate ISR collection in 2019 amounted to 3.2 percent of GDP. - VAT specifics: - Regional average VAT collection in 2019: just above 6 percent of GDP; Guatemala: 5 percent. - Guatemala’s statutory VAT rate: 12 percent. - VAT efficiency in Guatemala: 0.43 versus regional comparator average 0.66. - Simplified optional regime (alternative ISR arrangement): - Maximum rate: 7 percent on gross income (LISR, Art. 43–44); income up to Q 30,000 taxed at 5 percent, any income above taxed at 7 percent. - Exemption from the Solidarity Tax (Impuesto de Solidaridad – ISO). - In 2021, the simplified optional regime collected Q 6,359 million, representing a little under 50 percent of what was collected by the ISR in total. - 2015–2020 average: regime contributed 56 percent of corporate ISR collection (lucrative activities). - In 2020, 245,000 taxpayers paid tax under the optional regime, accounting for a little over 60 percent of the total (context implies total lucrative activities collection). - Informality: percentage of employment in the informal sector estimated > 70 percent for 2017. - Investment-promoting regimes and tax expenditure: - Main benefits: temporary suspension (one year) of import tax including VAT on inputs for export; exemption from import tax including VAT on machinery and equipment; full exemption from ISR for 10 years. - Purchase of domestic inputs by maquila entities and free-trade zone users is exempt from VAT. - ISR exemption for maquilas limited to textile and apparel industry and to “information” and “communication” services; Government Agreement 3-2017, Art. 5; free-trade zones admit a broader range; Government Agreement 65-22 (2022) relaxed criteria to include new activities such as hospital services. - Tax expenditure estimates for 2020 (SAT estimate): - Total tax expenditure: 2.7 percent of GDP. - Two thirds of tax expenditure came from consumption taxes (Q 10.6 billion). - Maquila, free-trade zone, and free zone regimes represented 6 percent of the total tax expenditure for 2020, equivalent to 0.16 percent of GDP. - The regimes’ direct tax exemption added a benefit of a little over Q 500 million in 2020, barely 10 percent of total tax expenditure in direct taxes. - Potential underestimation example for maquila: - Calculation: 7% X (2020 clothing category export value) US$1.2 billion X 7.72 (2020 parity) = Q 655 million. - If garment exports were all maquila and without the regime taxed under simplified optional ISR, proceeds would be around Q 650 million in 2020 — ~30 percent more tax expenditure in direct taxes than estimated for all beneficiaries of the three special regimes. - Table 4 (2020, in millions of quetzals) selected figures: - Beneficiaries D 29-89 (maquila)*: ISR 330; ISO 55; Direct 385; VAT 471; TOTAL 856; Structure (% total) 5.3; % GDP 0.1. - Beneficiaries D 65-89 (free-trade zones)*: ISR 87; ISO 33; Direct 120; VAT 0; TOTAL 120; Structure (% total) 0.7; % GDP 0.0. - Regime subtotal: ISR 417; ISO 88; Direct 505; VAT 471; TOTAL 975; Structure (% total) 6.0; % GDP 0.2. - Other: ISR 3,937; ISO 480; Direct 4,417; VAT 10,174; TOTAL 15,195; Structure (% total) 94.0; % GDP 2.5. - TOTAL: ISR 4,354; ISO 568; Direct 4,922; VAT 10,644; TOTAL 16,170; Structure (% total) 100.0; % GDP 2.7. - (Source: SAT,* includes Zolic.) - Overall assessment: - ISR general regime appears internationally competitive. - Concern: treaties could reduce collection; "in principle, there is no space for Guatemala to lose even more ground in its tax revenue." - Generous special regimes can make other FDI promotion instruments redundant and may be classified as harmful preferential regimes. ### Domestic legislation — territorial regime, source, residence, PE, and withholding - Territorial system: - Guatemala described as (almost) strictly territorial; resident persons’ income earned abroad is exempt (LISR, Articles 3 and 4 of Decree 10 of 2012). - Advantages: simpler administration; avoids crediting taxes paid abroad for many cases. - Weaknesses: smaller tax base; equity concerns; potential double non-taxation. - Definition of source: - Domestic source income includes production, sale, marketing of goods and services in Guatemala; export of goods and derivatives of capital; capital gains generated in Guatemala. - Dividends, withdrawals from PEs, interest, and royalties paid from Guatemala to a resident abroad are considered sourced in the country. - Services: peculiarity — services provided abroad are locally sourced when provided in Guatemala or provided abroad but used in Guatemala (LISR, Article 4, paragraph (f)). - Ambiguity: services paid for in Guatemala but not used in Guatemala are not locally sourced. - Residence: - Natural persons resident if they spend more than 183 days during a calendar year in national territory or when their center of economic interests is in Guatemala. - Exemption: certificate of residence/tax domicile abroad accepted. - Legal persons resident if established in country, with registered office or tax address, or center of effective management in national territory. - Recommendation: determine residence based on location of stay over the course of 12 calendar months; eliminate proof of residence abroad with a foreign certificate. - Permanent establishment (PE): - LISR definition consistent with OECD and UN Models but does not exclude activities of a preparatory or auxiliary character from PE definition. - No “force of attraction” rule in domestic law; recommendation to incorporate option. - Taxation of PEs: PEs taxed on local source income attributable to them; expenditures to parent companies are deductible under general rules. - Withholding rates on non-residents (domestic law): - Example table rates: - Dividends: 5 - Interest: 0 / 10 (1) - Royalties: 15 - Services: 15 - Capital gains: 10 - Non-residents without a PE taxed on certain Guatemala-generated income; rates range from zero (financial sector interest) to 25 percent (“other income”). - Special unilateral exemption: regulated financial sector entities full exemption from withholding on interest payments (regional uniqueness shared only with Costa Rica). ### Transfer pricing — findings and recommendations - Need for modernization: - Transfer pricing regulation needs updating and strengthening. - Role of treaties: - Treaties facilitate transfer pricing control via correlative adjustments and MAP; many countries will not accept adjustments from a country without a treaty. - Scope and application: - Obligation to comply with arm’s length principle currently limited to transnational related operations (LISR, Art. 56, A); recommendation to extend obligation to domestic related parties in a simplified way, keeping burden of proof with authority. - Include presumption and duty to apply arm’s length principle when taxpayers transact with residents in low- or no-tax jurisdictions, especially if not cooperative on information exchange. - Methods and documentation: - LISR includes five methods: comparable uncontrolled price, cost plus, resale price, transactional profit split, transactional net margin (Art. 59). - Current priority favors traditional methods; recommendation: priority to comparable uncontrolled price only for a limited set of commodities listed on organized markets (e.g., banana, coffee, fuel) and eliminate compulsory special method for imports/exports. - Introduce permitted comparability adjustments and technical working groups with exporter associations. - Documentation: require explicit taxpayer obligation to comply with arm’s length principle, place burden of proof on taxpayer, and provide transfer pricing annex to annual affidavit including country of residence of related counterparty and amount of debt with related parties. - Interest and earnings stripping: - Current interest restrictions: - (i) a thin cap rule (debt up to three times value of taxpayer’s assets), - (ii) prohibition on deduction of interest paid to residents abroad other than regulated financial entities, - (iii) limiting deductible interest rate to the Monetary Board’s maximum annual simple rate for tax purposes. - Recommendation: replace multiple rules with a single earnings stripping rule limiting interest deduction to 30 percent of EBITDA, in line with BEPS Action 4. - Eliminate deductible interest rate limit determined by Monetary Board and allow transfer-pricing-determined rate subject to the 30 percent EBITDA cap. - Royalties, intangibles, and intra-group services: - Strengthen royalty deduction rules to ensure net present value of payment flow is consistent with value at which intangible was alienated; include DEMPE components in valuation. - Introduce conditions for deduction of intra-group services tied to the “effective profit test.” - Do not include a safe harbor for low value-added services at present. - Presumptions and low-tax jurisdictions: - Presume operations with low- or no-tax jurisdictions are with related parties. - Define low- or no-tax jurisdictions as those whose statutory ISR rate represents 60 percent or less of Guatemala’s general statutory rate. - Specify the party in the low-tax jurisdiction as the tested party. - Disallow deduction of payments to low-tax jurisdictions unless documentation demonstrates arm’s length compliance. ### BEPS minimum standards, Action 5, Action 6, Action 13, and Pillars 1 & 2 - BEPS minimum standards and Inclusive Framework: - G20/OECD BEPS action plan (15 actions) with four compulsory minimum standards for participants. - Inclusive Framework membership: 140 countries; Guatemala is not a member. - Non-membership keeps Guatemala out of decision-making and from obligations to adopt BEPS minimum standards. - Action 5 (harmful tax practices): - Requires elimination or modification of regimes offering tax privileges to taxpayers lacking corporate substance that encourage profit shifting. - Two key concepts: substantial activity (nexus requirement) and transparency. - Confidential rulings (APAs, PE rulings) must be made available via spontaneous exchange of information. - Guatemala’s regimes (free-trade zones, maquila) grant full ISR exemption for 10 years; most beneficiaries appear to meet substantial activity but control and monitoring mechanisms remain deficient. - SAT issues APAs and PE rulings that are confidential; making rulings public would help meet Action 5 standards. - Action 6 (prevention of treaty abuse): - Minimum standard recommends inclusion of preamble, LOB tests, and PPT. - LOB: greater certainty and easier administration; PPT: flexible but discretionary. - Mexico treaty does not comply with Action 6 minimum standard (missing intermediary company rule and primary purpose test); must be renegotiated. - Action 13 (transfer pricing documentation and CbC reporting): - BEPS Action 13 requires local file, master file, and country-by-country (CbC) report for groups with global sales above EUR 750 million. - Guatemala’s legislation only mentions local file; does not require CbC reporting or automatic exchange arrangements. - Recommendation: adopt CbC reporting and join mechanisms for automatic exchange. - Pillar 1 (reallocation of profits): - Amount A: 25 percent of global residual profits (profits exceeding 10 percent of income) allocable to market jurisdictions; jurisdiction eligible if MNE earns > US$1 million there (threshold reduced to EUR 250,000 for jurisdictions with GDP < EUR 40 billion). - Amount B: standardized remuneration for distribution/marketing functions. - Amount C: addresses additional (non-routine) profits for marketing and distribution; dispute resolution elements remain. - Implementation will require a multilateral agreement (MLA); countries must eliminate unilateral digital services taxes and similar measures for MNEs outside scope. - Pillar 2 (global minimum tax): - Establishes a global minimum tax threshold of 15 percent for MNEs with consolidated income above EUR 750 million. - Rules: Subject to Tax Rule (STTR), Income Inclusion Rule (IIR), Undertaxed Payments Rule (UTPR). - Carve-outs for substantial activity: up to 10 percent of payroll and 8 percent of tangible assets excluded (to be reduced to 5 percent for both in ten years). - Effects on Guatemala: - Top-up tax collected by parent company jurisdiction (IIR) or by other jurisdictions (UTPR) if Guatemala’s effective rate < 15 percent. - Reduces advantages of free-trade zones and tax incentives for large MNEs. - Will not affect investors whose global income < EUR 750 million or where declared profit margins are below carve-out thresholds. - Recommendations: - Participate in the Inclusive Framework. - Adopt BEPS minimum standards. - Consider establishing a minimum tax of 15 percent on activities affected, where applicable, by Pillar 2. ### FDI evidence, empirical findings, and contextual recommendations - FDI in Guatemala: - 2019 FDI stock: US$16.6 billion, equivalent to 20 percent of GDP (regional average 50 percent; low-income countries in Latin America average 40 percent). - FDI flows (2012–2019): < 2 percent of GDP (half of region’s average). - Empirical literature: - Mixed and often inconclusive results on TADTs promoting FDI, with several studies finding no positive effect or even negative effects for developing economies. - Regional studies tend not to establish a connection between TADTs and FDI; correlation between number of treaties in Latin America and FDI amounts is close to zero. - Box 1 (Mexico treaty preliminary estimates): FUNDESA projects Mexican FDI growth from 4 to 12 percent after treaty entry, but mission cautions results due to data series discrepancies, comparability issues, and short pre/post periods. - Institutional determinants: - Institutional quality, governance, and political stability are strong determinants of FDI; treaties alone do not substitute for institutional improvements. ### Consolidated policy recommendations (explicit items from the source) - Conduct a comprehensive assessment to establish a long-term policy for strengthening tax revenue in Guatemala. - Reconsider the methodology for calculating tax expenditure associated with special regimes. - Ensure treaty decisions are preceded by cost-benefit studies; do not enter treaties with countries lacking income tax. - Use the UN Model as the primary reference to favor source taxation; develop a Guatemala model treaty that protects source taxing rights. - Include in treaties: - at-source tax on royalties and “other income”; - domestic-law definitions of “interest,” “royalties,” and “dividends”; - anti-abuse measures in line with BEPS Actions 6 and 7; - permanent establishment cases defined in legislation, excluding preparatory or auxiliary activities; - the “force of attraction” rule for PEs. - Do not include compulsory arbitration in treaties at this stage. - Modernize transfer pricing rules: - Make explicit taxpayer obligation to comply with the arm’s length principle and place burden of proof on the taxpayer; - Permit tax authority to adjust taxable income and deductions (not contract prices); - Extend arm’s length obligations to domestic related parties in a simplified manner or limit exemptions via thresholds; - Presume relatedness for transactions with low- or no-tax jurisdictions (statutory ISR ≤ 60 percent of Guatemala’s general ISR rate); - Replace import/export special valuation with comparable uncontrolled price mandatory only for listed commodities; - Replace multiple interest deduction limits with an earnings stripping rule limiting interest deductions to 30 percent of EBITDA; - Strengthen royalty and intra-group services rules incorporating DEMPE and profit tests; - Require enhanced transfer pricing documentation including CbC reporting and the country of residence of related counterparties in the annual affidavit. - Adopt BEPS minimum standards and participate in the Inclusive Framework. - Consider establishing a minimum tax of 15 percent on activities affected by Pillar 2, where applicable. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf* ### PREFACE____________________________________________________________________________________________ 6 ### 1gtmea2023001 - PREFACE ### Mission background - A remote technical assistance mission was carried out by the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF) from March 7 to 21, 2022. - Purpose: analyze certain international aspects of Guatemala’s tax regime focusing on: - treaties for the avoidance of double taxation and their effectiveness in attracting foreign direct investment (FDI), - transfer pricing regulations, - implications for Guatemala of the minimum standards agreed by the tax base erosion and profit shifting (BEPS) project. - Mission team: Roberto Schatan (FAD and head of mission), Carolina Osorio (FAD), and Armando Lara and Jose Madariaga (external advisors). - Principal counterparts and stakeholders met: - Ministry of Public Finance (MFP): Vice-Minister Mr. Saul Figueroa; technical teams led by Juan Blas and Jorge Lope, Director and Deputy Director of Tax Policy and Analysis. - Tax Administration Superintendency (SAT): Alex Gonzalez, Chief of the Inspection Unit; Emilio Pacay, Assistant to the Intendant. - Vice-Minister of Economy Lisandro Bolaños. - Business associations: AmCham Guatemala, ADEC, Vestex. - Research institutions: ICEFI, FUNDESA. - Private sector tax specialists: EY and PwC. - Acknowledgement: assistance by the IMF representative office and Carol Cruz Alavarado in preparing the mission agenda. ### Treaties — findings and strategic considerations - Current status: - Guatemala does not have treaties in force. - A treaty with Mexico was signed in 2015 but has not been ratified. - Core decision: whether to ratify the Mexico treaty and open negotiations for others; decision hinges on a treaty cost-benefit balance. - Advantages of treaties: - In principle, encourage foreign direct investment (FDI) between contracting countries. - Foster a better business climate and can encourage FDI in sectors other than those already benefiting from special regimes. - Can promote expansion of businesses operating from Guatemala, especially export services, currently subject to double taxation. - Costs and constraints: - Treaties typically reduce income source taxing powers, impacting net capital importers such as Guatemala. - Guatemala has low tax collection—“one of the lowest in Latin America”—leaving little room for additional tax sacrifices. - General tax regime for income from lucrative activities, including the simplified option based on gross income, is already competitive internationally. - Significant investment incentives exist (free-trade zones, maquila regime) whose benefits are not clearly quantified; reporting potentially understates tax expenditure. - Treaties have higher legal hierarchy than domestic law and can limit flexibility for future tax reform. - Empirical evidence and cautions: - Many empirical studies show no conclusive causal relationship between signed treaties and FDI, particularly for developing countries and for Latin America. - A preliminary estimate suggests the treaty with Mexico could have a positive effect, but results must be interpreted with caution due to: - FDI data reliability issues; - non-comparability of countries used in modeling; - short pre/post treaty periods for investment trend changes; - near-zero initial investment levels that can produce analytically irrelevant percentage increases. - Institutional context: - Institutional stability and health are key determinants of FDI; Guatemala ranks poorly on institutional measures. - Successful use of treaties may require rethinking the tax system to increase collection, improve institutions, infrastructure, and social spending. - Recommended treaty approach: - Develop a Guatemala model treaty that protects the right to tax income at source. - Sign treaties only with countries where a potential double-taxation problem might inhibit likely investment flows. - Exclude countries that have no income tax or territorial systems with reduced withholding rates. - Use the UN model as primary reference because it favors tax on the source of income. - Maintain the right to tax royalties paid to residents abroad; define royalty to include software use, specialized technical services, and equipment and machinery leasing. - Include taxation at source for “other income” paid to residents of the other contracting state that is not business profit. - Reference domestic definitions for dividend and interest in treaties; legislation must support treaties with broad definitions. - Specific recommendation on the Mexico treaty: - The treaty with Mexico largely follows the report’s guidelines and is close to a model Guatemala could adopt. - The treaty excludes an arbitration clause, consistent with the position of most developing countries. - However, it does not include anti-abuse measures agreed in BEPS Actions 6 and 7; therefore, the treaty with Mexico should not be ratified under current terms. ### Domestic legislation — key issues and policy options - Taxing borders are defined primarily by domestic legislation; key concepts include source, residence, permanent establishment. - Guatemala’s tax regime: - Described as (almost) strictly territorial; resident persons’ income earned abroad is exempt. - This reduces the tax base Guatemala can claim and may create equity issues since higher earners may access this exemption. - Personal income tax rates are very low; Guatemala has the lowest collection of this tax in the region at “less than half a percentage point of GDP.” - Potential policy options: - Extend tax to foreign passive income of resident persons and grant credit for taxes paid abroad — this approach could be reconsidered and a treaty would offer a practical solution. - Specific legislative definitions and changes to consider: - Define source for services more broadly (tax when the paying source is in the country) to avoid place-of-use interpretation issues; double taxation could be resolved with a treaty. - Exclude activities of a purely preparatory or auxiliary nature from permanent establishment assumptions. - Regulate tax on indirect disposals of assets located in Guatemala. - Eliminate full exemption on interest paid to financial sector entities abroad (even when tax incidence falls mainly to domestic debtors). ### Transfer pricing — findings and recommendations - The regulation on transfer prices needs modernization. - Role of treaties: - Treaties facilitate transfer pricing control by enabling the counterparty to change its prices in response to an adjustment by a taxpayer in Guatemala, thus avoiding double taxation. - Many countries would not accept the adjustment from a country without a treaty. - Taxpayers will be more willing to self-correct if tax is shifted from one jurisdiction to another without increasing overall corporate tax burden. - Legislation must prevent SAT from authorizing price adjustments only if favorable to the Treasury. - Scope and application: - Obligation to comply with the arm’s length principle must also apply to domestic related parties, in a simplified way, keeping the burden of proof with the authority. - Include related party presumption and duty to apply the arm’s length principle when taxpayers conduct operations with residents in low- or no-tax jurisdictions, especially if they are not cooperative on information exchange. - Specific rules needing change: - Replace the current imports/exports “sixth method” with a more functional regime: - Legislation should give priority to the comparable uncontrolled price method. - Make this method compulsory only for a few commodities listed on stock exchanges or in organized markets. - Simplify restrictions on interest deductions: - Current rules penalize interest deductions via three mechanisms: 1. a thin cap rule, which is very lax; 2. prohibition on deduction of interest paid to residents abroad other than regulated financial entities, which is very strict and discriminatory; 3. limiting the deductible interest rate to the one determined by the Monetary Board for tax purposes, which is a very lax default rate. - Recommendation: replace these with a single rule aligned with international best practices (draft BEPS Action 4), limiting interest deductions to a percentage of the taxpayer’s profit measure — for example, “30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA).” - Protect tax base by: - Establishing conditions for deduction of intra-group services tied to the “effective profit test.” - Regulating market valuation of royalties paid for use/exploitation of intangible assets with more elements. ### BEPS minimum standards and recent international tax architecture changes - Focus: BEPS minimum standards, with emphasis on Action 5 on harmful tax practices. - Action 5 requirements: - Eliminate regimes offering tax privileges to taxpayers lacking corporate substance that encourage profit shifting from other jurisdictions. - Harmful regimes typically attract financial activities, services, or registration of intangible assets in locations that are not cooperative in information exchange or are not transparent about benefits. - Recent international changes: - Introduction of a minimum global tax of “15 percent” for multinational enterprises (Pillar 2). - These changes indicate a trend toward banning full exemption regimes for non-transparent businesses. - Implication for Guatemala: - The increase in special regimes in Guatemala might eventually conflict with this international trend and risk being considered harmful under BEPS standards. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf* ### 1. The Guatemalan Ministry of Public Finance asked the IMF mission to review three ### 1gtmea2023001 - The Guatemalan Ministry of Public Finance asked the IMF mission to review three international taxation topics ### Requested review and report structure - The Ministry asked the IMF mission to review three international taxation topics: - (i) the policy and model treaties for the avoidance of double taxation appropriate for Guatemala; - (ii) the strengthening of the transfer pricing regime; and - (iii) the consequences for Guatemala of the minimum standards on base erosion and profit shifting (BEPS) adopted by the G20 and the Organisation for Economic Co-operation and Development (OECD). - Report chapter breakdown: - Chapter II: analyzes tax revenue structure in Guatemala and current preferential regimes and tax expenditure. - Chapter III: reviews domestic definitions (source, residence, permanent establishment) and double taxation risks. - Chapter IV: discusses treaty model options for a net capital importing country like Guatemala; notes FAD policy not to intervene in treaty negotiations; Guatemala has no current treaties although it signed but did not ratify a treaty with Mexico. - Chapter V: summarizes empirical literature on treaties and FDI; discusses Guatemala-specific considerations. - Chapter VI: explores strengthening the transfer pricing regime and anti-abuse measures. - Chapter VII: explains BEPS minimum standards, appropriateness for Guatemala regarding preferential regimes, and summarizes Inclusive Framework agreements on Pillars 1 and 2 with brief thoughts on impacts for Guatemala. ### Tax revenue structure — key findings and statistics - Overall collection and recent trend: - General government’s total net collection, not including social security, accounted for 10.6 percent of GDP in 2019. - Tax revenue fell to 10 percent of GDP in 2020 and increased to 11.7 percent in 2021. - Tax buoyancy (correlation between tax revenue growth and economic growth) has been below 1 in Guatemala since 2011. - Rising fuel prices and the payment of taxes for the sale of a telephone company influenced 2021 figures; the telephone company sale alone meant a collection increase of 0.3 percent of GDP. - Comparative position: - Guatemala’s tax revenue is roughly half of the Latin American average (Figure 3). - Guatemala’s tax collection in 2019 (10.6 percent of GDP) is low even among countries with lower per capita income. - Main tax sources: - VAT and income tax (Impuesto Sobre la Renta – ISR) for legal persons account for 77 percent of the country’s tax revenue (Figure 4). - Personal ISR in 2019 accounted for barely 0.5 percent of GDP (stated as "barely half a percentage point of GDP"), one of the lowest in Latin America. - Corporate ISR collection in 2019 amounted to 3.2 percent of GDP. - VAT specifics: - Average VAT collection in the region was just above 6 percent of GDP in 2019, compared to 5 percent in Guatemala. - Guatemala’s statutory VAT rate is 12 percent. - VAT efficiency in Guatemala is 0.43 versus an average of 0.66 for Latin American countries with comparable per capita income. - Interaction between VAT and personal ISR: - Up to a certain amount, the VAT paid by natural persons is deductible from (and partly creditable against) their ISR. - There is a “blind” per-person deduction of Q 48,000 (LISR, Art. 72, para. (a)). - The tax paid at a rate of 5 percent, applied to an additional amount of up to Q 12,000 (that is, Q 600), is creditable against the ISR. - ISR collection from natural persons rose from 0.40 percent of GDP in 2012 to 0.46 percent of GDP in 2019. ### Special regimes and tax expenditure — findings and figures - Simplified optional regime (alternative ISR arrangement): - Maximum rate of 7 percent on gross income (LISR, Art. 43–44); income up to Q 30,000 taxed at 5 percent, any income above taxed at 7 percent. - Exemption from the Solidarity Tax (Impuesto de Solidaridad – ISO). - In 2021, the simplified optional regime collected Q 6,359 million, representing a little under 50 percent of what was collected by the ISR in total. - In previous years (2015 to 2020), this regime contributed on average 56 percent of corporate ISR collection (lucrative activities). - In 2020, 245,000 taxpayers paid tax under the optional regime, which accounted for a little over 60 percent of the total (context implies total lucrative activities collection). - Informality: percentage of employment in the informal sector estimated to be greater than 70 percent for 2017, above the Latin American average of 50 percent. - Investment-promoting regimes (top ones: free-trade zone, free zone, maquiladora): - Main benefits include: (i) temporary suspension (for one year) of import tax, including VAT, on inputs used in manufacture of goods intended for export and goods imported for re-export; (ii) exemption from import tax, including VAT, on machinery and equipment as well as from special consumption taxes on fuel imports (benefit only for fuels used in production located in the free-trade zone or authorized under maquila program); and (iii) full exemption from ISR for 10 years. - Purchase of domestic inputs by maquila entities and free-trade zone users is exempt from VAT. - ISR exemption for maquilas limited to the textile and apparel industry and to “information” and “communication” services; admitted services include call or contact centers, software development, and digital content development when provided to non-residents (Government Agreement 3-2017, Art. 5). Free-trade zones admit a broader range of services; provision of financial, telephony, television, and radio services is prohibited. In 2022, criterion relaxed (Government Agreement 65-22) to include new activities such as hospital services. - Administrators of free-trade zones enjoy similar tax benefits to users. - Risks of preferential regimes: - (i) Loss of collection favoring investment that would have happened anyway. - (ii) Exploitation by transnational companies to conceal income derived from activities in higher-tax territories; such regimes could be classified as harmful by the Forum on Harmful Tax Practices and beneficiaries could be subject to defensive measures (e.g., increased withholding rates). - Tax expenditure estimates for 2020 (SAT estimate): - Total tax expenditure: 2.7 percent of GDP. - Two thirds of the tax expenditure came from consumption taxes (Q 10.6 billion). - Maquila, free-trade zone, and free zone regimes represented 6 percent of the total tax expenditure for 2020, equivalent to 0.16 percent of GDP. - The regimes’ direct tax exemption added a benefit of a little over Q 500 million in 2020, barely 10 percent of the total tax expenditure in direct taxes. - Potential underestimation of tax expenditure for maquila: - Simple illustrative calculation: 7% X (2020 clothing category export value) US$1.2 billion X 7.72 (2020 parity) = Q 655 million. - If garment exports were all maquila and without the regime the industry would pay the simplified optional ISR, proceeds would have totaled around Q 650 million in 2020 — approximately 30 percent more tax expenditure in direct taxes than estimated for all beneficiaries of the three special regimes. - SAT estimation method uses profit margin of comparable companies under the general regime applied to maquila cost and expense base, multiplied by 25 percent; method may undervalue estimate because maquila typically operates with inputs and assets in consignment (property of purchaser), which are not included in cost and expense base. - Table 4 summary figures (2020, in millions of quetzals): - Beneficiaries D 29-89 (maquila)*: ISR 330; ISO 55; Direct 385; VAT 471; TOTAL 856; Structure (% total) 5.3; % GDP 0.1. - Beneficiaries D 65-89 (free-trade zones)*: ISR 87; ISO 33; Direct 120; VAT 0; TOTAL 120; Structure (% total) 0.7; % GDP 0.0. - Regime subtotal: ISR 417; ISO 88; Direct 505; VAT 471; TOTAL 975; Structure (% total) 6.0; % GDP 0.2. - Other: ISR 3,937; ISO 480; Direct 4,417; VAT 10,174; TOTAL 15,195; Structure (% total) 94.0; % GDP 2.5. - TOTAL: ISR 4,354; ISO 568; Direct 4,922; VAT 10,644; TOTAL 16,170; Structure (% total) 100.0; % GDP 2.7. - (Source: SAT,* includes Zolic.) - Overall assessment: - ISR general regime appears internationally competitive with comparable collection. - Concern whether signing treaties for avoidance of double taxation might reduce collection; "in principle, there is no space for Guatemala to lose even more ground in its tax revenue." - Loss in corporate ISR collection would be unlikely to be easily replaced by higher collection of other taxes. - Guatemala’s generous special regimes can make other FDI promotion instruments redundant and can constitute harmful preferential regimes. ### Recommendations (from report) - Conduct a more comprehensive assessment to establish a long-term policy for strengthening tax revenue in Guatemala. - Reconsider the methodology for calculating the tax expenditure associated with special regimes. ### International aspects in the income tax law (LISR) — territorial regime - Guatemala has a territorial system that taxes only local source income (LISR, Articles 3 and 4 of Decree 10 of 2012). - The territorial system covers all income generated in the territory of Guatemala, including interest, royalties, services, and capital gains. - The alternative system would tax worldwide income of residents in addition to domestic source income generated by residents abroad operating in the country. - The chapter focuses on international taxation situations with potential for double taxation and double non-taxation and on conflicts with possible application of conventions for avoidance of double taxation that Guatemala might enter into. *Source: 1gtmea2023001 - The Guatemalan Ministry of Public Finance asked the IMF mission to review three (IMF PDF).* ### 23. The territorial system has various advantages, especially for developing countries. ### The territorial system has various advantages, especially for developing countries ### Overview: advantages and weaknesses of the territorial system - Advantages - Simpler administration: taxpayers are not required to report, and the Treasury to control, foreign source income. - Avoids implementation of measures to credit taxes paid abroad to prevent international double taxation (though cases can still exist, e.g., with services). - Weaknesses - Smaller tax base because resident incomes generated outside the country are not affected by the ISR (in the country of residence). - Limits information to what the tax authority can access and raises contentious interpretation issues about local source. - Equity concerns: higher earners can more easily relocate income sources and be ISR-exempt, creating conditions conducive to double non-taxation when coupled with low- or no-tax jurisdictions. - Transitional practices - Many countries that moved toward a territorial regime retained elements of a global income regime, especially for personal ISR and passive income (dividends, interest, royalties, capital gains). - Common practice: taxation of passive income earned abroad by entities controlled by a resident legal person, with credit for tax paid abroad up to the domestic tax limit (aligned with Action 3 of the BEPS project (OECD 2015a)). ### Guatemala’s choice and implications - Guatemala has preferred a territorial system, accepting associated costs, including very low personal ISR collection. - The territorial system generally eliminates double taxation for residents (one rationale for negotiating treaties to avoid double taxation). ### Definition of source (Guatemala) - Domestic source income defined as income generated by the production, sale, and marketing of goods and services in Guatemala; export of goods and derivatives of capital; capital gains generated in Guatemala. - Dividends, withdrawals from permanent establishments, interest, and royalties paid from Guatemala to a resident abroad are considered sourced in the country. - Services follow a similar rule but contain a peculiarity: services provided by a resident abroad are locally sourced when they are provided in Guatemala or provided abroad but used in Guatemala. ### Services - Services provided abroad but used in Guatemala are locally sourced (LISR, Article 4, paragraph (f)). - Ambiguity: services paid for in Guatemala but not used in Guatemala are not locally sourced, creating room for circumvention due to the debatable concept of “use in the country.” - Royalties: considered locally sourced when paid or used in the national territory; definition includes rights/licenses for computer programs and information relating to industrial, commercial or scientific knowledge or experience (know-how). - Double taxation implications: standard on services reduces likelihood of double taxation of residents abroad; absent a treaty, double taxation can occur if the source country taxes services based on payment. ### Interest - Territorial logic: interest sourced by strict territorial rules; exempting financial returns in Guatemala that were obtained abroad incentivizes capital export. - Risk: many major financial centers exempt financial investments of non-residents, creating double non-taxation. - Legal ambiguity: lack of clarity whether payments by residents for derivative financial transactions (debt instruments) are treated as interest and whether they are Guatemalan source income. - Recommendation: clarifying treatment of derivatives would broaden the tax base and facilitate application of tax conventions. ### Dividends - Domestic rule: companies distributing dividends must withhold a 5-percent tax from the shareholder (resident or non-resident). - Evasion risk: company can make a loan to an entity abroad (owned by same shareholder) to evade withholding; marking loans to shareholders as dividends is a common defense. - Guatemala lacks a specific anti-abuse rule presuming profit (dividend) withdrawals; only has an anti-abuse rule of substance over form (LISR, Art. 61). - Second-line defense difference: in a global income regime, interest on such loans could be taxed in Guatemala; under territorial regime, interest could be paid to a resident tax-free. ### Capital gains (including indirect sales) - General rule: capital gains and income from movable and immovable property in Guatemala are considered locally sourced, including gains from disposal of shares in entities whose assets include immovable property located in Guatemala (LISR, Article 4, paragraph (f)). - This taxes earnings of a resident abroad from disposal of shares of a non-resident company when related to assets in Guatemala (indirect sale). - Implementation complexities: - Determining taxable base when Guatemalan assets are only part of non-resident company assets. - Identifying entity responsible for paying the tax. - Enforcement difficulties if the selling company is non-resident; alternatives include buyer withholding or obligations enforced through the alienated company residing in Guatemala. - Local regulation does not define these mechanisms for indirect sales of immovable property. - Dividend timing effect: immediate resident recipient of foreign dividend is exempt; if intermediate entity receives dividend and later redistributes to resident ultimate shareholder, that distribution is taxed as domestic source income. BEPS Action 3 standard would tax passive income earned abroad by domestic residents and remove such anomalies. ### Definition of residence - Natural persons: resident if they spend more than 183 days during a calendar year in the national territory or when their center of economic interests is located in Guatemala. - Exemption: taxpayers who prove residence/tax domicile in another country by certificate from that country’s tax authorities are exempt. - Risks - Certificate-based exemption could cause control problems, especially when information exchange is difficult; taxpayers could obtain certificates from lower-tax countries with lax residence requirements. - Calculation of days in the calendar year can be manipulated; many countries use “any 12-month period” rules to avoid manipulation. - Legal persons: entities established in the country, with registered office or tax address in national territory, or with center of effective management in national territory are residents (international standard). ### Definition of permanent establishment (PE) - LISR definition consistent with OECD and UN Model Conventions, except it does not exclude activities of a preparatory or auxiliary character from PE definition. - Consequence: preparatory/auxiliary activities could be deemed PE, risking double taxation and attribution complexities. - Remedies: treaty could help for contracting State residents; amending law would address issue for all investors. - Taxation of PEs - PEs taxed on local source income attributable to them; no “force of attraction” rule to attribute income earned directly in the country by the non-resident person to the PE. - Expenditures of PEs with parent companies are deductible under general rules, including royalties and interest, which are difficult to oversee as intra-entity transfers. ### Withholding rates on income of non-residents - Non-residents without a PE are taxed on certain Guatemala-generated income; rates range from zero (financial sector interest) to 25 percent (“other income”), depending on income nature (Table 5). - Non-resident’s gross income is taxed; if payment represents foreign marginal income, the rate effectively taxes profit. - Rates on interest, royalties, and technical services are advantageous relative to resident tax rates on similar income. - Capital gains: equal treatment — same 10-percent (preferential) rate applies to residents and non-residents. - Table excerpt for Guatemala (as presented) - Dividends: 5 - Interest: 0 / 10 (1) - Royalties: 15 - Services: 15 - Capital gains: 10 - Comparative context - Tax withholding rates in Guatemala are relatively low compared to other countries in the region (domestic law rates normally 5 to 10 percentage points higher elsewhere). - Entering treaties without reducing domestic withholding rates should not cause revenue loss if the definition of source is protected; however, signing conventions with the same domestic rates offers limited additional investment incentive. - Special treatment - Guatemalan law unilaterally grants regulated financial sector entities full exemption from withholding on interest payments. - Regional uniqueness: only Costa Rica has similar treatment in the region. - Risk: creates incentive for back-to-back operations, difficult to control. ### Deductions - Interest paid abroad: deductible only when loans are granted by banks or financial institutions recognized in country of residence — discriminatory per Conventions (Article 24 of the Model) because same transaction with a domestic counterparty is deductible even if creditor is not a financial institution. - Recommendation: advisable to limit deduction of interest paid abroad when dealing with back-to-back arrangements intermediated by financial entities. - Payments abroad for technical services: deduction limited to 5 percent of taxpayer’s gross income (No. 23 of Article 21 of the Law). - Contradicts non-discrimination clause of Conventions. - Caps on deductions are blunt instruments: may be lenient in some cases and strict in others; arm’s length consistency is preferable. - In low administrative capacity countries, limits may be advisable; some countries protected such restrictions via grandfathering rules in conventions (example: Chile–Norway treaty). ### Key risks and avoidance schemes highlighted - Double non-taxation via capital export and exemption of foreign-source financial returns. - Loan-instead-of-dividend schemes to evade 5-percent dividend withholding. - Back-to-back financing arrangements exploiting exemptions for financial entities and interest treatment. - Manipulation of residence via 183-day and certificate rules. - PE definition that includes preparatory/auxiliary activities raising double taxation risk. - Complexity and enforcement challenges for indirect sales taxation and determining taxable base/responsible payer. ### Recommendations (as listed) - Tax financial income from abroad earned by resident companies and natural persons, including dividends, interest, royalties, and capital gains received either directly or through foreign companies controlled from Guatemala. - Expand the source of services to include all those provided abroad but paid for in Guatemala, avoiding the need for interpretation as to whether or not they are used in the country. - Define in the law the tax treatment of derivative financial operations so that they follow the fate of their underlying, that is, debt or capital. - Define in the law the applicable regime and the parties subject to tax on capital gains from indirect sales abroad of immovable assets in Guatemala. - Consider loans to partners (or relatives) as dividend distribution. - Determine residence based on location of stay over the course of 12 calendar months. - Eliminate proof of residence abroad with a certificate issued by a foreign authority. - Align the definition of permanent establishment with international practice, excluding merely preparatory or auxiliary activities. - Introduce in the law a force of attraction option for income obtained in the country directly by a non-resident that also has a permanent establishment in Guatemala. - Reclassify back-to-back operations as profit sharing, not deductible and subject to dividend withholding. - Consider maintaining deduction limits by incorporating grandfathering rules into conventions. - Reconsider the zero percent withholding rate on the payment of interest to resident financial entities abroad. *Source: 1gtmea2023001 - 23. The territorial system has various advantages, especially for developing countries.* ### Introduction ### Introduction ### Objective and context - Key objective: assign taxing powers on income generated by persons or entities operating in more than one State to avoid double taxation. - Problem statement: Double taxation results from an uncoordinated international distribution of income (or wealth) tax that impedes the movement of capital, persons, and services, affecting investment and potential economic growth. - Guatemala context: - Guatemala currently has no treaty in force and signed only one with Mexico in 2015, which has not been ratified by the Guatemalan congress. - At present, there is significant pressure on the government to negotiate new treaties based on the argument that this would help attract more foreign investment to the country. - Guatemala is a signatory to the Convention on Mutual Administrative Assistance in Tax Matters. ### Global treaty network (figures from source) - At end-2014, there were approximately 3,000 signed treaties, two thirds of which included a developing country. - The database for 2022 reports 3,500 signed treaties, with the same proportion of developing countries. ### Primary trade-offs - Benefits from treaties must be weighed against costs, notably potential tax revenue losses and administrative burdens (negotiation, oversight, MAP, litigation). - Treaties limit a State’s taxing power and might create situations of double non-taxation (example: activities exempt in free-trade zones where ISR is not charged and dividend distribution is not taxed for residents abroad). - Administrative cost: authority must employ and train experts to negotiate and maintain treaties. ### Key preparatory steps before negotiation - Conduct a precise diagnostic assessment of real needs for treaty adoption and determine acceptable collection cost versus expected benefits. - Understand interaction between the treaty and domestic laws and measure consequences and limitations imposed by a treaty. - Carefully select counterpart countries where treaties would resolve actual situations of double taxation. - Identify major payments to residents abroad, recipient countries, related-party status, origin of foreign investment, and target sectors (note: simple statistical projections can be unreliable). - Gain understanding of the counterpart’s tax system and its treaty history to strengthen negotiation position. ### General cautions - Treaties should not be negotiated with countries that have an insignificant ISR. - Poorly negotiated treaties can trigger aggressive tax planning and be difficult to reverse; terminating a treaty can have undesirable bilateral repercussions. - Prefer separate specific treaties for tools like information exchange and tax collection assistance where appropriate. --- ### Treaty benefits (enumerated) - Legal certainty: international treaties normally have a higher hierarchy than ordinary country laws, protecting tax treatment of income or gains covered by the treaty; unilateral changes in domestic law would not affect it. - Reduction of double taxation: guarantee lower withholding rates and exemptions not provided for in domestic legislation. - Administrative cooperation: lay foundations for cooperation between tax authorities via clauses on information exchange and tax collection assistance to combat tax evasion and avoidance. - Dispute resolution: provide Mutual Agreement Procedure (MAP) allowing competent authorities to discuss and resolve treaty application or interpretation matters. - Elimination of discriminatory treatment: prohibit discriminatory treatment by reason of nationality or residence (e.g., treatment of permanent establishment or subsidiaries of foreign companies). ### Treaty drawbacks (enumerated) - Potential collection loss for capital-importing countries due to lower withholding rates and ISR base limitations if not offset by higher FDI. - Preferential domestic regimes could wipe out positive collection effects from FDI. - Benefits may be claimed by a few public entities (e.g., sovereign wealth funds) not normally subject to taxation, leading to double benefit. - Administrative and supervision challenges, particularly for resource-constrained tax administrations. --- ### Model Convention for the Avoidance of Double Taxation ### Two primary models - OECD Model Tax Convention on Income and on Capital (OECD Model). - United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model). ### OECD Model (key features) - Establishes residence as the primary criterion for determining which State must tax foreign-source income earned by a resident. - As a general rule, items such as international traffic, royalties, capital gains from the alienation of shares, technical assistance, technical services, pensions, and other income can only be taxed in the State where the recipient resides, limiting source-State taxing rights. - Exceptions where source-State taxation is allowed include dividends, interest, capital gains derived from the sale of shares representing immovables, real estate income, and proceeds from the sale of real estate. - Independent personal services treated as business profits and can be taxed only if provided through a permanent establishment; assumptions for constituting a permanent establishment have limitations. - Provides dispute resolution mechanisms and includes mandatory arbitration for authorities; MAP governed by mandatory minimum standards with suggested timeframes (commentary suggests two years). - Includes tools to combat tax evasion and avoidance (information exchange, tax collection assistance). ### UN Model (key features) - Establishes source as the primary criterion for determining which State must tax income earned by a resident abroad; leans toward protecting taxing rights of countries where income is generated. - Grants source taxing rights for royalties, capital gains from alienation of shares, technical assistance, technical services, international ship traffic, and other income. - Has a regime applicable to independent services under Article 14 and allows for easier constitution of a permanent establishment in the source country. - Broad definition of royalties: includes payment for the use (or concession for use) of industrial, commercial, or scientific equipment (commentary clarifies commercial use, e.g., satellites). - Includes a specific article on income from technical services (Article 12A) granting taxing rights to the source State for specialized services; alternative provision limits taxation to cases with physical presence except for related-party payments. - Main argument for Article 12A: combat erosion of the ISR base in developing countries due to deductions for payments for technical services. --- ### Power to tax certain income under treaties (income heads emphasized in source) - The most relevant cross-border income categories: interest, royalties, dividends, capital gains, independent personal services, technical assistance and services, business profits and permanent establishment concepts. ### Interest (Article 11) - Both Models stipulate that the source State can tax interest paid by its residents abroad; treaties normally define applicable tax rate(s). - Prevailing logic for capital-importing developing countries: a relatively low rate is preferable to avoid making credit more expensive. - Tax cost is normally absorbed by the debtor country since international creditors typically have market power to raise interest rates by the withholding percentage. - Discussion point: whether withholding rate should be uniform across all types of interest or differentiated (e.g., higher rates for non-bank recipients or bondholders); differentiated rates impose supervision costs that may not be justified for administrations with scarce resources. - Definition of interest: Models have a traditional definition (credit income of any kind) but restrict interest by excluding many financial operations (financial leasing, factoring, sale of credits at a discount, income from alienation of credits, some derivative operations). - Many states include a treaty provision that interest income is to be understood as defined in accordance with domestic legislation—recommended for a net capital-importing country. - Recommendation: confirm source tax for interest in the treaty, adopt a single withholding rate (not zero), and reference the domestic-law definition of interest. ### Royalties (Article 12) - Two-step issue: define royalties and identify taxing place (only State of residence versus also source State when payer is resident or IP is used in source State). - OECD and UN definitions: traditional—income derived from use (or concession for use) of intellectual property protected by laws (trademarks, patents, trade names, copyrights). - UN Model expands royalties to include use of industrial, commercial, or scientific equipment (broad connotation; commentary treats satellite use as royalties under UN Model). - Software treatment: OECD commentary views software payments as transfer of copyright exploitation (not copyright royalties) when standardized; other countries treat payments for software use as royalties when not fully transferred, not standardized, or adapted to the user. - OECD excludes technical services from royalties (treated as business profits, taxable only if via permanent establishment); UN Model includes Article 12A granting source taxing rights for specialized technical services. - Recommendation for Guatemalan model treaty: - Maintain royalties concept as per domestic legislation. - Include payments for use of industrial, commercial, and scientific equipment (currently taxed as other income under law) to reduce rate from 25 percent to treaty-negotiated rate. - Tax software payments as royalties except when software is standardized and commercial use is limited. - Secure source taxing rights for technical assistance payments. ### Capital Gains (Article 13) - Both Models: alienation of shares that derive more than 50 percent of their value from immovable property situated in the State is taxed at source, regardless of residence of company issuing them. - UN Model (and some countries): gains from direct or indirect alienation of a certain percentage of share ownership issued by a resident company, even if alienation occurs abroad, are taxed at source. - Some countries tax at a reduced withholding rate when any percentage of shares issued by resident entities is alienated. - Discussion: whether to tax indirect sale of enterprises when more than 50 percent of value of foreign company shares is derived from shares of a resident company irrespective of real estate component; oversight is complex and requires control and reporting mechanisms. - Recommendation: tax gains derived from alienation of shares of resident enterprises at source under certain conditions (as in UN Model) and tax sale of shares when value is derived from immovable property in Guatemala—but implementation must be clearly set forth in Guatemalan legislation and include reporting obligations for resident companies. ### Dividends (Article 10) - Common practice: dividends paid by a resident company usually taxed at source. - OECD and UN Models suggest two applicable withholding rates: - A reduced rate applicable when a certain share percentage exists (usually 25 percent shareholding); both models add anti-abuse provision requiring shares to be held for 365 days before distribution (including the day of distribution) to access reduced rate. - A higher rate for smaller shareholdings where portfolio investments are situated. --- *Source: 1gtmea2023001 - Introduction* ### 76. A broad definition of dividends is necessary. Many states include in their treaties a ### A broad definition of dividends is necessary. ### Dividends and withholding - Many states include in their treaties a reference to the definition of dividends from their domestic legislation for both commercial and tax matters to: - include certain types of income reclassified as dividends for the purposes of the treaty and the agreed withholding when applying anti-abuse rules.47 - ensure the same withholding rules apply to the distribution of profits from the permanent establishment to its central office. - Note: "These types of rules could not be identified in Guatemalan legislation."47 ### Business Profits (Article 7) - Treaties assign the power to tax business profits but do not define the concept; Model Conventions indicate domestic legislation must be consulted for context, usually including commercial, industrial, agricultural, forestry, livestock, and fishery activities. The OECD Model also includes independent services. - Business profits are only taxed in the State of residence, except when attributable to a permanent establishment of another State. - The UN Model includes the possibility of attributing income to a permanent establishment if its parent company directly engages in the same activities in the State where the permanent establishment is located (force of attraction rule). ### Permanent establishment: taxable base and deductions - OECD vs UN approach to virtual payments between permanent establishment and parent company: - OECD allows deduction of virtual payments for interest, royalties, and services (approach adopted in 2010), based on treating the permanent establishment as a distinct and separate entity with corresponding tax effects (deductibility). - UN Model does not allow such deductions. - Many countries rejected the OECD approach because they were legally unable to make at-source withholdings for virtual payments; neither domestic legislation nor existing treaties allow for this in many cases. - Guatemalan practice: - The LISR does not limit permanent establishment deductions for payments to its parent company. - In absence of treaty restriction, domestic legislation provisions would apply. - Symmetry could be restored if virtual payments were subject to withholding; one mechanism is to adjust the payment by the amount of corresponding withholding if the payment were made between independent parties — but it is unclear whether the LISR formally permits this adjustment. ### Permanent establishment: constitutive criteria and duration - OECD Model constitutive criteria (two essential criteria): - (i) existence of a fixed place of business where all or some business activities are carried out; - (ii) dependent agents located in one State entering into contracts on behalf of the resident abroad or usually playing the primary role of entering into routinely concluded contracts without substantial modifications by the resident abroad for transfer of ownership of goods, rights of use, or service delivery. - UN Model includes a third assumption for constituting a permanent establishment: when an insurer collects insurance premiums in the territory of a foreign State. - Construction/installation/assembly works: - OECD: must prove business activities are conducted in a geographic location and have duration of at least 12 months. - UN: such activities are considered to meet the fixed place condition and require a duration of six months. - Guatemala incorporated the UN criterion into the negotiation of the treaty it signed. ### Independent services and source taxation - OECD Model: independent services follow same source taxation principles as business profits. - UN Committee of Experts: recommends maintaining the option of taxing at source income from independent services based simply on 183 days of physical presence, without need for a fixed place of business — position adopted by the LISR and the treaty signed by Guatemala. ### International Traffic (Article 8) - Traditional position: international traffic taxed exclusively in the State of residence of the company operating the ships or aircraft; treaties normally reflect this. - Some countries (Greece and Panama) preserve taxing rights if ships are registered in their territory. - Guatemala: pursuant to its legislation, reserves the right to partially tax income attributable to the source; signing a treaty under the traditional terms would mean a loss of the tax base.48 ### Other Income (Article 21) - Article covers items not fitting other articles: donations, raffles, lotteries, inheritance or legacies, penal or civil clauses from breach of contracts, payment of damages, some derivative financial operations that do not qualify as interest and are not part of regular business or corporate purpose. - OECD Model: grants exclusive taxing rights to the country of residence for this income. - UN Model: provides the taxing option to the source State from which the payments originate. - Domestic legislation (Guatemala) establishes a withholding rate of 25 percent on such payments; this rate would be negotiated down in a treaty, but it is important that the payments be subject to withholding. ### Arbitration (Article 25) - OECD Model: access to arbitration is compulsory. Process starts at the taxpayer's request if the MAP provided in the Convention has not been resolved in two years. - UN Model: arbitration is an alternative. Process initiated at request of any tax authority once three years have elapsed since initiation of the MAP; authorities may change the arbitration panel decision if they reach an agreement within six months of the panel’s resolution. - Many developing countries have favored protecting sovereignty by not including compulsory arbitration in their treaties; technical training deficiencies in administering arbitration is an additional concern. ### Entitlement to Treaty Benefits (Article 29) - Recent OECD and UN model updates incorporate provisions to prevent treaty misuse, reflecting BEPS Action 6 (minimum standard) which eliminates treaty benefits when one of the main purposes of the operation is to obtain a tax benefit from the convention. - The treaty with Mexico includes a benefit limitation clause defining persons residing in the other State who qualify for treaty benefits, excluding those with preferential treaties not of general application. - The Mexico clause does not comply with BEPS Action 6 minimum standard because it: - does not include a rule against intermediary companies49; and - does not include a provision on the primary purpose of the operation. - Consequently, the treaty must be renegotiated. ### Non-Discrimination (Article 24) - Principle prohibits differential treatment between residents and non-residents in key situations: - (i) permanent establishment of a resident abroad must pay taxes under same conditions as a company resident in the State where it is formed; - (ii) payments made by Guatemalans to residents of the other State must be deductible under same conditions as payments to Guatemalan residents (except where payments abroad do not meet market prices). - A treaty including these principles would make limitations on deductions in domestic legislation inapplicable to payments made to residents of the other contracting State because international treaties are hierarchically superior to domestic legislation. - Examples of implications for Guatemala: - non-deduction of interest paid to foreign residents other than financial institutions (LISR, Art. 24) could be affected; - deduction limitations for technical services paid abroad (LISR, Art. 21) could be affected. - A treaty including non-discrimination would thus carry collection costs for Guatemala. ### Recommendations (from the source) - Ensure that the decision to negotiate a treaty includes a cost-benefit study. - Do not enter into treaties with countries that do not have income tax because the risk of double taxation, the reason for such treaties, is non-existent. - When entering into treaties, minimize collection costs—especially with respect to higher withholdings—and do not accept withholding rates of zero. - Use the UN Model, which favors taxation at source, as an initial reference for building a Guatemalan model treaty. - Include at-source tax on royalties. - Agree in the treaty that the terms “interest,” “royalties,” and “dividends” are those defined in the domestic legislation, allowing, for example: - Income from financial operations derived from debt to be treated as interest. - Royalty treatment to be applied to: - Income from the use of standardized software. - Payments for specialized technical services (Art. 12A of the UN Model). - The leasing of industrial, commercial, or scientific equipment. - Confirm the at-source taxation of “other income.” - Incorporate into treaties the permanent establishment cases defined in the legislation, except for preparatory or auxiliary activities. - Include the “force of attraction” rule for permanent establishments in respect of income obtained by the parent company. - Incorporate anti-abuse rules into treaties, in accordance with BEPS Actions 6 and 7. - Do not include compulsory arbitration as a dispute resolution mechanism. - Consider the treaty with Mexico as a good example of a treaty with a high at-source tax content. *V. TREATIES AND FOREIGN DIRECT INVESTMENT* ### Foreign Direct Investment in Guatemala - FDI flows to Guatemala are modest compared to other countries in the region. - 2019 FDI stock in Guatemala: US$16.6 billion, equivalent to 20 percent of GDP, well below the regional average (50 percent) and the average of low-income countries in Latin America (40 percent). - FDI flows (2012–2019): represented less than 2 percent of GDP, half of the region’s average and two thirds of the percentage of low-income countries in Latin America. ### Key FDI Determinants - Extensive literature finds tax pressure is a relevant factor for FDI, but not the most significant. - Other prominent determinants: income level, market size, physical and human capital availability, political stability, institutional strength, and tax regime stability.50 - One factor discussed is the potential effect of treaties for the avoidance of double taxation (TADT). ### Double-Taxation Treaties and Foreign Direct Investment - Growing literature examines the impact of TADTs on FDI, recognizing treaties often provide legal certainty and reduce tax burden in host country, which could positively affect FDI.51 - Counterpoint: treaties impose collection costs for net capital importing countries and administration costs. - TADTs can directly reduce tax revenue due to concessions on rates and tax base; this is particularly significant for developing, net capital importing countries with fragile tax collection structures (like Guatemala). - Studies show TADTs reduce tax collection in developing countries (Easson 2000; Lewis 2013; ActionAid 2015 and 2016; Hearson and Kangave 2016; Beer and Loeprick 2018; Jansky and Sedivy 2018). - Indirect costs: treaties, though bilateral, can facilitate third-country investors operating through entities residing in a contracting State (Milchesen and Leduc 2021). - Proliferation and variety of TADTs have enabled inconsistent rules and opportunistic treaty shopping (Zucman 2014). - IMF 2014: caution commonly advised when considering negotiation of TADTs. ### Empirical Evidence — Literature - Early studies: treaties had positive effect on FDI, but later scrutiny diluted results. - Blonigen and Davies (2000): higher flows for countries with which a treaty was signed (1966–1992), but effect diluted in more recent years. - Blonigen and Davies (2004): no significant increase in FDI flows to developing economies with U.S. treaties; TADTs increase FDI flows to the United States. - Later studies: unclear or negative results. - Blonigen and Davies (2005): treaties between an advanced country and a developing one are irrelevant for FDI and can have negative impact. - Baker (2014): TADTs do not affect FDI flows from advanced countries to less developed economies. - Daniels and Ruhr (2015): U.S. treaties found to have negative effect on FDI flows to those economies. - Studies analyzing determinants of FDI stock (rather than flows) tend to find positive effects of TADTs (Barthel et al. 2010; Lejour 2014), but these may include FDI that occurred before treaty entry into force. - Methodological advances: - Egger et al. (2006): comparing changes in FDI two years before and after ratification against countries without treaties finds entry into force of new treaties has a negative effect on FDI. - Neumayer (2007): number of TADTs signed is associated with higher FDI levels, but effect not significant for poorer countries; developing countries that sign treaties with advanced economies also tend to grant considerable tax incentives separate from treaty, which may distort results. ### Institutional aspect and Guatemala - Institutional quality is a determining factor of FDI. - Louie and Roussland (2008): using U.S. multinational enterprise tax returns in the 1990s, good governance promotes FDI and the conclusion of TADTs, whereas treaties alone have no impact. - Relevance to Guatemala: ranks very poorly on international indexes regarding perception of corruption and political stability.52 *Italicized source attribution provided by the pipeline.* ### 97. Regional studies also generally do not establish a connection between TADT and ### 1gtmea2023001 - 97. Regional studies also generally do not establish a connection between TADT and FDI ### Regional empirical evidence on TADTs and FDI - Regional studies generally do not establish a connection between TADTs and FDI; when countries in the same region have similar development levels, institutional characteristics, and governance standards, these variables have a less significant effect in explaining FDI differences and make econometric estimates of the effect of treaties on FDI more “pure.” - Examples and findings: - Yue (2018): analyzes FDI flows to 10 ASEAN Group countries and finds that, on average, treaties have a negative effect on FDI flows. - Murthy and Bhasin (2015): for India, conclude that treaties do not have significant effects on FDI flows. - Beer and Loeprick (2018): in 41 African economies (1985–2015), treaties with countries considered to be financial centers (with low taxation) do not promote FDI, but significantly reduce tax collection in the FDI recipient country. - Empirical literature suggests caution in assuming that entering into a TADT will have considerable effects on FDI. ### Data and analysis for Latin America - Number of treaties in force in each Latin American country does not appear correlated with FDI amounts; correlation coefficient (slope of the red line in Figure 6) is very close to zero. - Figure 7 observation: FDI mostly originates from countries without current TADTs (except Bolivia); principal investor in the zone is the United States, whose policy has been reluctant to enter into treaties with Latin American countries. - Table 7. Number of Treaties for the Avoidance of Double Taxation, 2021 (Source: CIAT): - Guatemala: 0 - Honduras: 0 - Nicaragua: 0 - El Salvador: 1 - Costa Rica: 4 - Bolivia: 7 - Peru: 7 - Paraguay: 8 - Colombia: 11 - Panama: 17 - Argentina: 21 - Ecuador: 21 - Uruguay: 23 - Chile: 33 - Brazil: 35 - Mexico: 60 - Total: 467 - Shah and Qayyum (2015): study of 15 countries in Latin America and the Caribbean (1983–2013) finds that FDI flows are not affected by the number of signed TADTs or the ratification of new treaties. - Explanations offered for weak treaty–FDI link in the region: - Treaty benefits are marginal relative to unilateral tax privileges (low withholding rates, generous special regimes). - Abundant natural resources attract foreign investment regardless of tax treaties. - Existence of tax stability agreements offered to foreign investors. ### Recent studies and sectoral/network effects - More recent studies with sophisticated techniques remain inconclusive that treaties encourage FDI in developing countries. - Sectoral variation: - Davies et al. (2009): for Swedish multinationals, treaties do not increase investment by subsidiaries already established abroad but raise the likelihood new enterprises will enter the host country. - Blonigen et al. (2014): TADTs can have different effects by sector; less relevant for firms trading in homogenous products with clearer transfer prices and lower double-taxation risk. - Treaty-shopping effects: - When a country with a low tax regime stands between two countries with TADTs, FDI flows between those two economies can increase considerably due to treaty shopping (Van’t Riet and Lejour 2018; Petkova et al. 2020). ### Box 1 — Preliminary estimates of the effect of the TADT with Mexico - Overall summary of preliminary estimates: - Estimates project a relatively low tax cost in the first three to four years following entry into force, reversing thereafter owing to strong capital inflows from Mexico. - Caution is advised in interpreting projected FDI numbers. - Specific points and concerns: - Mission generally agrees costs of treaty with Mexico would be fairly low; treaty does not modify withholding rates on payments abroad. - FUNDESA preliminary study: projects average annual growth rate of FDI flows from Mexico to increase from 4 to 12 percent a few years after treaty entry into force; estimate assumes FDI in Guatemala would grow at rates similar to Panama, Costa Rica, and Uruguay following ratification of a treaty with Mexico. - Data selection issues: - IMF database has two FDI series: one reported by country of origin and another by destination country; the series differ substantially and the study uses the first (more incomplete and less reliable) series. - The FDI trajectory changes noticeably depending on the series used; Damgaard and Elkjaer 2017 cited on reliability. - Comparability and extrapolation issues: - Panama: Canal expansion may have driven FDI more than the treaty. - Uruguay: Mexican FDI prior to treaty was virtually non-existent; small investment can represent a large percentage increase that is economically irrelevant. - Sample period limitations: - Periods before/after treaty entry are often too short to establish trends (e.g., Costa Rica: only one year after ratification; Panama: only two years before treaty). - Empirical observations: - Mexico’s FDI in Panama is growing slower relative to FDI of other countries despite the treaty; Mexico’s treaty with Panama did not have an effect on FDI in Panama. - Uruguay’s Mexican FDI was actually negative for most years after TADT ratification. - Conclusion of Box 1: caution is advised in interpreting results; findings are highly dependent on methodology used. - Note in box: “The series of Mexican FDI flows to Guatemala from the Bank of Guatemala is negatively correlated with the flows reported by Mexico to the CDIS.” ### Transfer pricing — The Arm’s Length Principle - International practice: obligation for intra-group operations to be agreed at market prices to prevent profit shifting to low-tax entities (OECD 2017a; UN 2017). - Guatemala legal framework: - Income Tax Law: principle of “unimpeded competition” (libre competencia) (LISR, Art. 54) requires related-party transactions to be determined as independent parties would under comparable conditions — i.e., at market prices. - Translation note: Spanish “principio de independencia” aligns better than English “arm’s length principle” in this context. - Burden of proof: - Two legal approaches: - Empower tax authority to verify compliance and adjust returns (as in Article 55 of the LISR), which places burden of proof with the authority. - Impose explicit obligation on taxpayer to comply and require documentation, empowering authority to adjust if non-compliant (LISR, Art. 65 requires documentation). - Recommendation: preferable that obligation be explicit on taxpayer, with documentation as an additional requirement and penalties for non-compliance. - Tax authority should be empowered to adjust taxable income and deductions according to arm’s length principle (adjust ISR base) without altering contract prices (recommendation to modify Law text). - Scope of transfer pricing regime in Guatemala: - Obligation applies only to transnational related operations (LISR, Art. 56, A); does not apply to domestic related-party transactions. - Rationale: higher risk of profit shifting abroad; exempting domestic related parties reduces administrative burden but leaves potential for abuse (examples provided of export restructuring to reduce ISR base). - Considerations for applying arm’s length principle to domestic related parties: - High administrative cost; limited effect on total tax collection. - Options: revert burden of proof to tax authority for domestic operations, exempt small companies (simplified regimes), or exempt small-value operations regardless of company size. - Definition and presumption of related parties: - Guatemala’s definition follows international standard with ownership/control linkage threshold at 25-percent (LISR, Art. 56); threshold is relatively high but likely not materially consequential. - LISR (Art. 55) limits Treasury’s power to adjust transfer prices only when these mean higher taxation for the taxpayer; this restriction complicates correlative adjustments to avoid double taxation when another country makes an adjustment. - Guatemala does not have a legal presumption that counterparties resident in low-tax territories are related parties; many countries do have such a presumption as a defensive provision. - Implementation options for presumption of relatedness with low-tax jurisdictions: - Define low-tax jurisdiction by statutory ISR rate or by difference relative to Guatemala’s general regime, or by effective rate paid by the foreign company (statutory rate simpler; effective rate more precise but complex). - Alternatively countries may list jurisdictions they consider low-tax/uncooperative. - Presumption could admit proof to the contrary via documentation on effective beneficiaries of the foreign resident entity. - Illustrative thresholds and institutional references preserved exactly from source: - 25-percent share threshold (LISR, Art. 56). - Mexico example thresholds: companies with sales under MEX$13 million (and MEX$3 million for provision of independent personal services) are not required to document transfer prices (Mexico, Art. 76, Section IX, of the Mexican LISR). - International comparators: WTO (Agreement on Custom Valuation) 5-percent threshold; FDI classification 10 percent (Mesias 2015). - Convention on Mutual Administrative Assistance in Tax Matters: opened to all countries in 2010 and currently has 144 signatories. *https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf* ### 114. In Guatemala’s case, the simpler parameter is preferable. For example, a threshold ### In Guatemala’s case, the simpler parameter is preferable. For example, a threshold ### Presumption of relationship, documentation, and deduction requirements - The combination of rules on the presumption of relationship, documentation, and deduction requirements is an important tool against profit shifting to tax havens. - Multinational enterprises often use tax havens with zero taxation to locate subsidiaries that market commodities produced in developing countries; this triangulation can leave a wide profit margin in the intermediary’s country, reducing the tax base of the producing company. - Where exchange of information is difficult, multinationals can report transactions as between independent parties; presuming related-party status enables the Treasury to adjust transfer prices when the arm’s length principle is not met. - The Treasury can determine the tested party (the party required to demonstrate comparability of its profit margin) — normally the party with the simplest activities, fewer functions or assets. - Legislation can make transfer pricing documentation a requirement for the deduction of payments to related non-residents when documentation is refused or inaccessible (e.g., when country-by-country reporting is not available). ### Simpler parameter and low-tax threshold in Guatemala - A threshold could be defined for the statutory rate of a territory below which it would qualify as low-income. - Challenge: taxpayers under the simplified optional ISR regime may have a very low effective rate on profits, which can render the low-tax presumption less relevant. - Those under the optional regime have incentives to manipulate transfer prices because sales to related parties comprise the tax base in Guatemala; residence of a counterparty offering more favorable tax conditions creates an incentive to shift profits by undervaluing exports. - Guatemala signed the Convention in 2012 (in force since 2017) but is classified as “non-compliant.” - Article 56.B.1 of the LISR presumes that a resident and their exclusive agent or distributor abroad are related parties; this excludes when the foreign company is the regional or global distributor of a set of the group’s subsidiaries. - The list must be updated daily and runs the risk of lagging behind and being incomplete; the country may be subject to diplomatic pressure. - Example threshold language: “if the statutory rate is lower than the rate that would represent 60 or 50 percent of Guatemala’s general ISR regime rate on profits from lucrative activities.” ### Transfer pricing methods (LISR and international guidance) - The LISR includes the five methods for assessing transfer prices contained in the applicable international guides. - The five methods are: comparable uncontrolled price, cost plus, resale price, transactional profit split, and transactional net margin. - The LISR (Art. 59, 2) establishes precedence when more than one method is applicable and favors the first three “traditional” methods (comparable uncontrolled price, cost plus, resale price). - Since 2010 OECD guidance shifted to selecting the most appropriate method based on case circumstances; the two profit-based methods (transactional profit split and transactional net margin) are hierarchically equal to the traditional methods. - A rigid hierarchy can allow multinational enterprises to choose the most efficient method for reducing the tax base as their first option. - Guatemala could keep a hierarchy that favors the comparable uncontrolled price method limited to commodities, which is more direct for homogeneous products with transparent price formation in international markets (examples: Chicago Mercantile Exchange, London Metal Exchange, Intercontinental Coffee Exchange). ### Commodities: special valuation method, problems, and recommended adjustments - The LISR (Art. 60) establishes a special valuation method for goods imports and exports that is (seemingly) mandatory. - The method appears to apply strictly to all (intra-group) foreign trade in goods, overemphasizing its scope; not all commodities are listed on an organized stock exchange or significant in Guatemala’s trade. - In 2021, three commodities (banana, coffee, and cardamom) accounted for 17 percent of total exports in Guatemala (source: Bank of Guatemala). - The method is confusing: it imposes a maximum price on imports in line with an undefined “international parameter” and requires export prices be calculated according to an “international price investigation,” without explaining how taxpayers determine compliance price. - Government Agreement 213 – 2013, Art. 53 and 54 provide regulation details, but these seem insufficient to provide legal certainty. - For exports, the regulation allows the reference price to be a “known listing on the international market” or “on stock exchanges,” but these concepts need clearer explanation with examples for Guatemala’s top commodities (banana, coffee). - Article 60 outlines two anti-abuse measures: - Treating transactions between related intermediaries as involving an independent party that serves as cover for the non-resident related party (back-to-back operations). - Using the listing date of the good as a reference for market value. - Critiques of the anti-abuse measures: - Art. 60, fourth paragraph affects every independent intermediary without differentiating the tax regime of the intermediary’s territory or requiring substantial independent activity. - The provision excludes related intermediaries that triangulate from tax havens operations with independent third parties, which can be more common. - Price fluctuation issue: - Commodity prices fluctuate daily; the exact date the operation is agreed is important. - Some countries use the market price on the day the good is shipped as the reference; Article 60 permits a different quoted price if “...it is proven that the operation was closed on another date.” - Regulation: contract price may be considered when presented notarized to the SAT not more than three business days after the date (Government Agreement 213 – 2013, Art. 54). - The OECD allows imposing the quoted price on the shipment date when there is no evidence of the date the price was agreed (BEPS Action 8–10, p. 54). - Recommendations: - Make the comparable uncontrolled price method compulsory for some commodities only (banana, coffee, and fuel, for example) and eliminate the special method for goods exports and imports. - Introduce in the standard the types of permitted comparability adjustments reflecting price formation practices in the export/import market. - Form technical working groups with exporter associations, independent traders, and brokers to define permitted adjustments. ### Interest (thin capitalization, rate limits, and earnings stripping) - Multinational enterprises inflate interest payments abroad to shift profits via: (i) rates higher than market rates; (ii) over-indebtedness of the company. - BEPS Action 4 recommends adopting an earnings stripping rule limiting interest deduction to up to 30 percent of company profits (EBITDA) to attack both abusive rates and over-indebtedness simultaneously. - Guatemala’s rules (LISR, Art. 24): - First “thin cap” rule limits interest deductions for any debt that is three times higher than the value of the taxpayer’s assets; the rule applies to all of the taxpayer’s debt, related or not. - The rule’s basis is “net asset” in principle, which in practice would allow debt up to one time the asset amount; LISR’s definition of net asset appears to differ, referring to “book value of all assets owned by the taxpayer” (LISR, Art. 24, fourth paragraph). - The rule does not permit carryover of interest not deducted during the fiscal year. - Some countries have abandoned thin cap systems in favor of earnings stripping rules or reduced debt-to-equity ratios from 3 to 1. - Guatemala also limits the maximum deductible interest rate (LISR, Art. 24, second paragraph) to “the maximum annual simple rate determined by the Monetary Board for tax purposes.” - This limit applies to all debt operations, including between independent parties, which is excessive because it applies to market operations and may not represent market conditions. - Another restriction: interest payments abroad are deductible only if the creditor is a bank or a financial institution regulated in the creditor’s country of residence. - All interest on loans contracted with companies residing outside the country, related or not, is therefore non-deductible. - This unusual rule can affect FDI; in 2019, around 12 percent of FDI originating from Latin America was financed through debt; for Guatemala, this component represented just 5 percent (ECLAC (2021)). - Recommendation: - Replace Guatemala’s multiple interest-limiting rules with a single earnings stripping rule limiting total interest deduction to 30 percent of EBITDA, as recommended in BEPS Action 4. ### Royalties and intangibles - Valuation of intangible assets (intellectual property) is complex because intangibles are usually unique and lack market comparables; valuation is harder when transferred before development is complete. - Expectations of success can be speculative and difficult for the Treasury to verify; isolated intangibles are hard to value relative to accumulated company knowledge. - These valuation challenges enabled high-tech companies to shift many intangible assets to low-tax countries via intra-group transactions at undervalued prices; royalties then flow to those low-tax countries. - However, the document notes this issue is mainly faced by developed countries. *Source: 1gtmea2023001 - excerpt.* ### 133. Developing countries also create some intangible assets, but normally find ### 1gtmea2023001 - 133. Developing countries also create some intangible assets, but normally find ### Intangible assets, economic ownership, and DEMPE - Developing countries also create some intangible assets, but normally find themselves on the other side of the operation, as those paying the royalties. - Intangible assets developed in countries such as Guatemala are typically national brands or other elements associated with a product that set it apart and give it a competitive advantage in the market (for example, relationship with clients). - On occasion, the local subsidiary may invest its own resources in the development of a foreign brand, meaning that, for transfer pricing purposes, it would have “economic ownership” over the intangible asset, with a partial entitlement to benefits from its use, despite not being the legal owner of the intangible asset. - In accordance with the new OECD guides on this topic (OECD 2015e; OECD 2018), the benefits of using an intangible asset must not rest solely with the legal owner, but rather be distributed between the group’s entities that contributed to the development, enhancement, maintenance, protection, and exploitation (DEMPE) of that intangible asset. ### Royalty pricing, value allocation, and cross-border registration - Contributions to the development of an intangible asset registered abroad can be reflected, for example, in a lower royalty rate that a subsidiary in Guatemala must pay to its parent company. - If a multinational enterprise registers an intangible asset in Guatemala and intends to use a tax advantage without Guatemala having made an economic contribution to its development or administration, the other countries where the intangible asset’s DEMPE is verified may require income to be reallocated according to their respective contribution, denying Guatemala the intended tax base (and the multinational enterprise the intended tax planning). - Intellectual property relocation can occur through cost-sharing agreements, where the multinational enterprise financed development from a subsidiary residing in a low-tax country, and the subsidiary also shared ownership and usufruct of the intangible asset. ### Intra-group disposals of national brands and valuation concerns - A frequent situation in developing countries is the intra-group disposal of national brands: domestic capital companies with traditional brands are acquired by multinationals and their brands sold to a subsidiary abroad; the resident company then pays royalties abroad, reducing the tax base in the country of origin. - Asymmetry in Guatemala: capital gains are taxed at 10 percent (LISR, Art. 92) and profits at 25 percent (general regime), creating scope for tax planning if the brand selling price is lower than its market value while royalties are at market value. - To prevent planning, additional rules can be considered, such as favoring the financial valuation method that requires the net present value of the flow of royalties generated by the intangible asset to match the value in which the intangible asset was transferred. ### Limitation on royalty deductions under LISR - The restriction on royalty deductions is fairly lax (LISR, Art. 21, No. 25). - The standard imposes a deduction limit for this of up to 5 percent of the taxpayer’s gross income, without restricting the generation of this income to royalty payments. - Consequence: the royalty deduction can fully eliminate the tax base for businesses that earn up to 20 percent profit from sales, without considering DEMPE aspects and the possible domestic origin of the intangible asset as well as the price at which it was transferred abroad. - Recommendation: strengthen the standard with limitations that consider DEMPE and transfer price. ### Intra-group services and valuation tests - Intra-group services are typically subject to particular scrutiny by tax authorities and can be a straightforward way of shifting profits. - OECD transfer pricing guides require demonstration that the service was actually provided, that the service is a benefit for the acquiring entity, and that an independent entity would be willing to pay for it. - Article 62 of the LISR imposes the charge (or price) directly on the personalized service, as would be done by independent parties. - When services are not personalized and benefit the group as a whole, the OECD guides accept an “indirect-charge” method to apportion costs among beneficiaries; Article 62 authorizes it as long as total consideration is distributed according to reasonable distribution rules (a concept that remains undefined). - Given verification difficulties for expenses incurred abroad by non-resident entities, some countries introduced rules preventing deduction of such apportioned expenses; it is particularly important in these cases to apply the profit test as a defensive measure. ### Safe harbors for low value-added services - OECD BEPS work introduced the possibility of implementing a safe harbor for low value-added services so that such services could be considered valued according to the arm’s length principle if the stated profit margin on costs and expenses did not exceed 5 percent. - The text cautions that introducing this option is not recommended for now because expenses incurred abroad may end up being deductible in the country without a clear benefit for the domestic taxpayer. ### Documentation and BEPS Action 13 compliance - The taxpayer must document compliance with the arm’s length principle (Article 65 of the LISR). - The OECD minimum standard (BEPS Action 13) requires large multinational enterprises (with global sales above EUR 750 million) to provide: a local file, a master file, and a country-by-country report. - Guatemalan legislation only mentions the local file; it does not require country-by-country reporting. - Country-by-country information could be very useful for the SAT in analyzing the risk of tax evasion by multinational enterprises operating in the country. - Besides the technical study on transfer prices, the taxpayer must provide an annex to the annual affidavit containing details on transactions with related parties abroad, but this annex does not include the counterparty’s country of residence — information useful for risk analyses and auditors. - The affidavit must also include the amount of debt contracted with third parties and within the group, specifying the residence of the debt issuer. ### Policy recommendations (explicit list from the source) - Introduce an explicit requirement in the law for the taxpayer to comply with the arm’s length principle, clearly placing the burden of proof on the taxpayer. - Replace the tax authority’s power to adjust the prices of related operations with the power to adjust taxable income and deductions according to market prices. - Eliminate the condition whereby the SAT can adjust transfer prices only if this increases the tax, while permitting the authorization of correlative adjustments that have the opposite effect. - Extend the obligation to comply with the arm’s length principle to related operations between resident companies, but with the burden of proof resting with the authority. - Alternatively consider ensuring that the option of not documenting compliance with transfer pricing (burden of proof) is limited to small businesses and to transactions below a certain value, specified in the regulation. - Presume that operations with low- or no-tax jurisdictions are with related parties. - Define low- or no-tax jurisdictions for transfer pricing purposes as those tax jurisdictions whose statutory ISR rate represents 60 percent or less of Guatemala’s general statutory rate. - Specify that the party residing in the low-tax jurisdiction is the tested party. - Do not allow the deduction of payments to low-tax jurisdictions unless the taxpayer provides documentation to comply with transfer pricing obligations. - Introduce higher hierarchy only for the comparable uncontrolled price method and only for commodities listed on a global organized market. - Eliminate the compulsory special method for imports and exports. - Permit the use of any other method aside from the five listed, as long as its results comply with the arm’s length principle. - Reformulate anti-abuse measures regarding intermediation for exports: - Assume that the independent counterparty participates in the back-to-back operation when it resides in a low-tax jurisdiction. - Assume that it is a related party when it resides in that jurisdiction, even when intermediating with independent clients. - Specify that the quoted price of the commodity will be that in effect on the shipment date in the absence of evidence that it was agreed on a different date. - Replace the thin cap rule with a maximum interest deduction as a percentage of EBITDA (30 percent). - Eliminate the deductible interest rate limit as determined by the Monetary Board for tax purposes and establish that the deductible rate is that which is determined by transfer prices, as long as the deduction does not exceed 30 percent of EBITDA. - Limit the royalty deduction so that the net present value of the payment flow is consistent with the value at which the intangible asset was alienated, as applicable. - Include in the standard the DEMPE components carried out by the parties in order to determine the consideration for the use or exploitation of an intangible property of a subsidiary. - Do not include a safe harbor to comply with the arm’s length principle in transactions involving low value-added services. - As a condition for deducting payment for related services, introduce the profit test in the law stating that the service must be a taxpayer benefit and that, if the taxpayer were independent, it would be willing to pay for it. - Reformulate the transfer pricing annex to the annual affidavit so that it includes information on the country of residence of the related counterparty and the amount of debt with related parties (in addition to the interest paid). ### BEPS minimum standards and the Inclusive Framework - The international tax system had major loopholes allowing large-scale tax avoidance by concentrating income in low-tax jurisdictions. - The G20 endorsed an OECD action plan in September 2013 with 15 actions to curb BEPS; four actions are compulsory for countries party to the agreement (the BEPS minimum standards). - The Inclusive Framework was created to broaden participation; participation entails the obligation to adopt minimum standards and consent to prior agreements on BEPS. - At present, 140 countries belong to the OECD Inclusive Framework; Guatemala is not a member. - Non-membership means Guatemala is kept out of discussions and decision-making on international taxation and is exempt from the obligation to adopt the BEPS minimum standards, which is described as counterproductive because BEPS measures are designed to protect countries’ tax base. - October 2021 agreements added Pillar 1 and Pillar 2 to the international tax architecture. ### Action 5: Combating harmful tax practices (summary) - Action 5 addresses two situations that may be harmful: - Tax regimes that offer advantageous conditions for companies conducting high transnational mobility activities and that are an incentive for artificial profit shifting. - Special tax treaties granted through confidential tax rulings. - Purpose: establish rules for eliminating abusive tax practices encouraged by unfair tax competition; not to eliminate preferential regimes but to prevent them from incentivizing harmful tax practices. - Two key concepts: (i) substantial activity, and (ii) transparency. - Action 5 is reviewed by the Forum on Harmful Tax Practices (FHTP) via peer review for substantial activity and transparency; non-compliant regimes must be eliminated or modified. - Special tax regimes can be harmful based on five key factors: - Reduced or no effective tax on geographically mobile activities or services - Access to the regime only for residents abroad (ring-fencing) - Lack of transparency regarding regime conditions - Lack of an effective exchange of information in relation to the regime and its beneficiaries - The regime does not require substantial activity in the territory *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf* ### 150. The main concern under Action 5 is that these regimes can benefit “geographically ### 1gtmea2023001 - 150. ### Action 5: Main concern and nexus requirement - The main concern under Action 5 is that these regimes can benefit “geographically mobile” activities, such as service or financial businesses. - The tax benefit is available for activities that can be formally shifted from one territory to another at a low cost and that do not need an extensive business structure to operate. - The mere registration of the legal ownership of an intangible asset would also qualify as such. - Risk identified: an entity from a multinational group with little physical presence in a country will record disproportionate income there, violating the principle that income is reported aligned with business activities that generate that income. - To rule out harmful effects, the “nexus” condition must be met: substantial economic activity must exist in the territory in which the multinational enterprise reports its income so that tax bases cannot be artificially shifted from countries where the value is created to other countries with lower tax pressure. ### Characterization of activities and examples of potentially harmful preferential regimes - Tax benefits for manufacturing activities would normally not be referred to as harmful because they involve moving fixed assets and production capacity and therefore meet the substantial activity condition. - The OECD does not intend for countries to abandon preferential regimes, but to apply them only when entities conduct a substantial economic activity that justifies the income they report there. Box 2. Preferential Regimes That Could Be Harmful - Headquarters regimes: main activity is managerial control or coordination of group enterprises; substance test must indicate key actions in income generation and decision-making on management of expenses and investments. - Distribution regimes for group enterprises: centralized distribution of finished products to end customers. - Service center regimes: provision of support and administrative services; substance test must consider product transportation and storage activities and management of stocks and orders. - Financing or leasing regimes: substantial activity must demonstrate negotiation of financing terms, identification and acquisition of assets to be financed, determination of financing terms, agreement monitoring and review, and risk management. ### Confidential tax rulings and transparency (Action 5) - Concern: countries grant tax benefits individually in a confidential manner via tax rulings that are binding on the beneficiary taxpayer (or group). - Lack of transparency in granting such benefits is considered harmful and must be eliminated via spontaneous exchange of information on relevant tax rulings. - Relevant rulings to be exchanged include: - Advance pricing arrangements (APAs): establish criteria to apply the arm’s length principle to valuate related transactions over a period of time. - Rulings on permanent establishments: whether activities of a non-resident meet (or do not meet) assumptions for consideration as a permanent establishment. ### Guatemala: preferential regimes and rulings - Guatemala has significant preferential regimes including the free-trade zone, free zone, and maquiladora regimes. - All grant a full ISR exemption for 10 years, among other tax benefits. - Most beneficiaries are commercial companies or manufacturers operating with employees, assets, and inventories, fulfilling substantial activity and the nexus principle. - Regulation enables benefits to cover a wide range of services, which are not always strictly defined, and control and monitoring mechanisms, although improved, are still deficient. - Guatemala’s SAT is empowered to issue both APAs and permanent-establishment rulings; these rulings are confidential and binding on the authority and should be made known through spontaneous exchange of information with authorities in the residence place of related parties. - If Guatemala fails to meet Action 5 standards, it could be subject to defensive measures by the community of countries; one way to meet the standard is to make the rulings public. ### BEPS Minimum Standards — Action 6 (Prevention of Treaty Abuse) - Concern: bilateral treaty benefits can be extended to residents of third countries via investments in one contracting country (typical in low-tax countries) to route benefits to an ultimate beneficiary residing elsewhere. - The BEPS minimum standard recommends a three-pronged strategy: - Inclusion of text in the preamble of treaties stating the contracting countries’ intention to prevent tax avoidance or evasion opportunities. - Use of the limitation on benefits (LOB) test to ensure treaty privileges are limited to residents of contracting countries that meet requirements. - Use of the principal purpose test (PPT) which denies treaty benefits if one of the principal purposes of the arrangement is to obtain those benefits. - Comparative strengths: - LOB: greater certainty, easier to administer, appropriate for developing countries with few administrative resources; specific criteria (legal nature, activities) determine qualification. - PPT: greater flexibility but discretionary interpretation and risk of inconsistencies across countries; burden of proof rests with the authority in PPT cases. - LOB advantages: tax authority generally needs only information from the payor to determine whether non-resident qualifies as treaty beneficiary and can confirm with the other contracting State. ### BEPS Minimum Standards — Action 14 (Dispute Resolution) - Mutual Agreement Procedure (MAP): minimum standard requires inclusion of Article 25(1)–(3) of the OECD Model to enable competent authorities to resolve treaty interpretation or application differences; objective is to ensure taxpayers entitled to treaty benefits are not taxed inconsistently. - Reviews: minimum standard is reviewed by panels comprising representatives from Inclusive Framework members (peer reviews). - Arbitration: Action 14 proposes compulsory arbitration as an option for expeditious dispute resolution but there is no consensus among OECD and G20 countries; arbitration may limit national sovereignty, arbitral rulings are confidential and do not set precedent. - For a country without experience, such as Guatemala, options include strengthening SAT’s international taxation unit and deferring adoption of an arbitration clause until future treaties. ### Transfer Pricing Documentation: Country-by-Country Reporting (Action 13) - New documentation requires multinationals to report some accounting figures country by country. - Participation yields worldwide information from multinationals operating in the country with global sales of more than EUR 750 million annually. - CbC reports include details such as income, earnings before taxes, income tax payable and paid, number of employees, declared capital, retained earnings, and tangible assets. - Parent company requirement: parent must provide CbC information in its jurisdiction of residence; package of measures developed for automatic exchange of CbC information subject to confidentiality requirements. - Surrogate parent company: parent can designate a group entity resident in another country as responsible for submitting CbC documentation (the “surrogate parent entity”). - Implementation and monitoring: - Countries must legislate to require taxpayers who are parent companies of global operations with sales greater than the threshold to provide CbC reports, even if no taxpayers in jurisdiction meet that condition. - Countries must sign the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports. - Inclusive Framework countries are subject to an annual peer review covering regulations and administrative systems, mechanics of exchanging CbC reports, and report confidentiality and appropriate use. ### New changes to the international tax system: Pillars 1 and 2 - Inclusive Framework identified challenges from digitalization and agreed a two-pillar reform strategy with a timeline between 2023 and 2024. Pillar 1 - Objective: assign some income earned by large multinationals to jurisdictions where they have significant market presence, even if remote. - Initial targets: multinational enterprises with global turnover greater than EUR 20 billion annually and profitability above 10 percent. - Agreement: first threshold to be reduced to EUR 10 billion eight years after the entry into force of the regime. - Initial phase estimated to affect around 100 international companies, many in the high-tech sector. - Reallocation of the ISR base projected to benefit mainly high-income countries where the largest markets are located, though developing countries could see tax base expansion insofar as they are final destination markets for remote digital services. Pillar 2 - Focus: put a floor on the ISR rate that countries could allow their taxpayers. - Pillar 2 would ensure that multinational enterprises with income above EUR 750 million pay at least a minimum level of tax in each country in which they operate, even when the domestic regime does not impose them. *Source: 1gtmea2023001 - 150.* ### 173. Pillar 1 establishes three types of income (amounts) that can be reallocated for ### Pillar 1 establishes three types of income (amounts) that can be reallocated for taxation in market jurisdictions ### Pillar 1 — Amounts and allocation rules - Amount A: - Amount A is the amount of operating profit that would be allocated to market jurisdictions, even if the multinational enterprise has no physical presence. - A jurisdiction is eligible (qualified) to receive an allocation of Amount A if the multinational enterprise earns income there above US$1 million. - This threshold is reduced to EUR 250,000 for jurisdictions whose GDP is below EUR 40 billion. - Amount A subject to redistribution between all group entities (and countries in which it operates) will be 25 percent of the multinational enterprise’s global “residual” profits, that is, profits exceeding 10 percent of income. - Amount A allocated to each country will be determined in accordance with a formula (still under discussion) likely based largely on the value of sales in each jurisdiction. - Amount B: - Amount B is remuneration to the qualified market jurisdiction for marketing and distribution by multinational enterprises in that jurisdiction. - In some cases, Amount B would provide remuneration to distributors (subsidiaries or permanent establishments) when dealers purchase merchandise from related parties for resale. - How Amount A and B allocations will interact has not been finalized yet. - This allocation (as well as from Amount C) will follow current transfer pricing rules under the traditional principles of source according to physical presence. - Amount C: - Amount C recognizes the possibility of windfall profits (those additional to routine profits) for marketing and distribution activities carried out in a qualified market jurisdiction. - These additional profits are identified as amounts that would arise in the context of dispute resolution between the jurisdiction of residence of a multinational enterprise and a qualified market jurisdiction. ### Implementation issues for Pillar 1 - Implementation will require changes to domestic legislation and international treaties. - A multilateral agreement (MLA) is proposed to: - implement Amount A in treaties simultaneously and avoid countless bilateral negotiations; - introduce new rules for the identification of qualified market jurisdictions; - eliminate double taxation with respect to Amount A; and - facilitate the exchange of information and coordinate the resolution of disputes related to Pillar 1. - The MLA would require signatory jurisdictions to eliminate all income taxes (on gross income or equivalent) on digital services and similar unilateral measures (which is not the case for Guatemala). - Failing this (and if no commitment is made to adopt this type of tax in the future), the multinational enterprises would be outside the scope of Amount A in the country in question. ### Pillar 2 — Global minimum tax overview - General parameters: - Pillar 2 establishes a global minimum tax threshold of 15 percent, applicable to multinational enterprises with consolidated income above EUR 750 million (according to consolidated financial statements). - The global minimum tax rules (Global Anti-Base Erosion Proposal – GLoBE) would also provide a de minimis exclusion in jurisdictions where the multinational enterprise has income of less than EUR 10 million and profits of less than a million. - Three types of rules and order of application: - (i) Subject to tax rule (STTR): would allow developing countries (World Bank definition) to eliminate benefits granted under a treaty (reduction of withholding rates) to non-residents if they tax income paid to their residents at a rate below 9 percent. - (ii) Income inclusion rule (IIR): allows the jurisdiction of residence of the parent entity of the multinational enterprise to impose an additional tax on the income of a constituent entity (subsidiary or permanent establishment) when they are subject to an effective ISR rate below 15 percent in the country in which they operate. - This additional tax applies in the fiscal year in which the profit is generated, regardless of when it is repatriated to the parent company. - The tax would follow the individual country-by-country rate and not be based on the rate the multinational enterprise pays on average. - (iii) Undertaxed payments rule (UTPR): would make it possible to deny deductions in a jurisdiction in which resides a constituent entity of a multinational enterprise that makes a payment to another subject to low taxes (less than the minimum), provided that its parent company (or intermediate holding company) does not charge an additional tax (top-up tax) under the IIR because the jurisdiction of the parent company (or intermediate holding company) has not adopted Pillar 2 in its legislation. ### GLoBE exclusions and transitional margins - Carve-outs for substantial economic activity: - Subsidiary profits representing up to 10 percent of the payroll and 8 percent of the tangible assets of the subsidiaries are excluded from the minimum tax base. - These percentages will be reduced annually to a margin of 5 percent for both in ten years. - The exclusion is intended to protect the flexibility of tax policy in countries that host investments representing substantial economic activity, demonstrated by the use of tangible assets and the employee payroll. - Interaction of top-up taxation: - Taxes on income in excess of those margins (and taxed at a rate below 15 percent) interact as follows: the jurisdiction of the parent company would collect first (IIR), followed by the jurisdiction that hosts the related entities with which it does business if the country were to waive its claim to the difference between the minimum and the current tax in the entity of the affected subsidiary (UTPR). ### Effects on Guatemala of the Entry into Force of Pillar 2 - Collection of top-up tax: - If the subsidiaries of the multinational enterprise with income above EUR 750 million do not pay 15 percent effective ISR, the difference would be collected by the jurisdictions in which the parent company resides or, in second place, the countries in which the group’s other subsidiaries reside if they had regional control over the subsidiary in Guatemala. - In other words, if Guatemala does not charge multinational enterprises 15 percent ISR, other countries will for income generated (and declared) in the country. - Impact on tax incentives and FDI strategy: - This reduces the advantages of Guatemalan free-trade zones and other tax incentives designed to attract investment from multinational enterprises with income above EUR 750 million. - These advantages would be reduced or even eliminated if the country where the parent company resides had to pay that difference. - This would affect not only companies benefiting from exemptions, but possibly also companies opting for the simplified optional regime. - The FDI promotion strategy used by Guatemala would therefore have to be rethought. - However, the global minimum tax applies from a certain profit margin onward: - If the profit margin declared by foreign investors in Guatemala is usually less than 5 percent on payroll and tangible assets, the rule will not affect it. - It will also not affect international investors whose global income is below EUR 750 million. - Additional note: - If Guatemala establishes a “differential tax” between the tax charged and the 15-percent minimum tax, the IIR and UTPR will not be applicable. ### Recommendations - Participate in the Inclusive Framework. - Adopt BEPS minimum standards. - Consider establishing a minimum tax of 15 percent on activities affected, where applicable, by the implementation of Pillar 2 agreed under the Inclusive Framework. *From: 1gtmea2023001 - 173.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023001.pdf_