Category: Interviews

Sanitary and economic crises are challenging Chile’s modernization. Great leadership to guide Chile in combining the right experiences from the past and adapting the country to new demands and reality will be needed to overcome social and economic difficulties Chile is currently facing.

Chile is generally regarded as South America’s most stable and prosperous country, renowned for competitiveness, political stability, economic freedom, and low perception of corruption. Its market-oriented economy, based on a neo-liberal model implemented in the 70’s, is characterized by a high level of foreign trade, open market policy and sound financial institutions and policy. Chile is member of the OECD, being the only South American member (together with Brazil) with a GDP worth USD$282.3bn, and a GNI of USD$15,010, similar to countries like Poland or Croatia. It has the second-lowest tax burden in the OECD and the government maintains a tight rein on fiscal spending, ensuring the highest credit rating among the major economies of Latin America. It is an active member of the Pacific Alliance, the principal regional multilateral trade platforms, and has bilateral free trade agreements with basically all of the major economies in the world.

Being primarily a mining-based economy, Chile enjoyed for several years high economic growth figures of about 5%. Growth rates were, pre-COVID-19 , between a more modest 2% and 4% and similar rates are expected for 2021.

Chilean economic policies favor foreign investments. FDI increased by 63% from USD$7bn to USD$11bn in 2019, sustained by investment in utilities, mining and services. FDI stocks reached USD$268bn, a rise of more than USD$100bn if compared to 2010. Investments are mainly oriented towards mining, finance and assurance, transportation, energy and manufacturing.

The coronavirus crisis and simmering discontent over inequality in a neo-liberal economic model have forced the conservative government under President Sebastian Pinera to adopt measures that both allow for political reforms and stimulate the economy. It announced a constitutional referendum which will be held in October, which may lead to a new model that minimizes social disparities and equalizes the distribution of wealth, and is in the process of implementing a fiscal stimulus package worth USD$11.8bn (4.7% of GDP) to increase productivity and innovation in key sectors.

The stimulus package covers, among other things, increased investment in infrastructure, implementing protective measures to protect workers against a loss of income, providing support through tax measures and the creation of social funds and state backed credits. In parallel, the parliament just adopted a controversial reform, not backed by the government, allowing citizens to have 10% of their pensions savings paid out as emergency coronavirus aid and is discussing legislation prohibiting utilities companies to cut basic services (water, gas, electricity and internet) in case of non-payment by their clients. The Central Bank of Chile, for its part, reduced the fiscal policy interest rate to 0.5% and announced an increase of its bond purchase program of USD$4bn as well as measures loosening regulatory credit requirements.

An injection of over USD$8bn is projected into water and other infrastructure, including short-term projects worth USD$150m starting in 2020. The projects include road maintenance, the building of irrigation systems, drinking water facilities, hospitals, ports, airports, and inland water management systems. Most of these projects will be carried out through private or public concessions and the Ministry of Public Works has already initiated the first tenders in the public health care sector worth USD$2.5bn.

The temporary tax measures, loosened credit requirements and government reliefs include, amongst others: 0% stamp tax rate for credit, financial and refinancing transactions (until October 2020); expenses incurred in Covid-19 related measures will be deductible for income tax purposes; deferral of VAT payable with 0% interest; deferral of annual income tax payment for small and medium sized companies; early return on income tax; deferral of payment of real estate tax; deferral of mortgage backed loans; flexibilization of loan maturities for small and medium-sized companies; increase of the credit capacity of the National Bank to mainly support citizens and micro businesses; creation of a social fund for micro businesses; state support to finance credits for micro businesses; and subsidies and socials fund for citizens without formal employment and unemployment insurance.

In addition, and in order to generate additional resources to the State, opposition deputies of the opposition presented a draft constitutional reform that would allow to establish a capital tax, a project currently under discussion in Congress and which has received strong criticism from experts, taking into account the lack of clarity of the tax to be established, lack of clarity in the determination of the associated tax base and the effects that taxes of this kind have generated in legislation, and that are associated with wealth and capital flight.

Employment and security related measures adopted or underway include: temporary unemployment insurance; the possibility for an employer and employee to agree on a suspension of the labor relationship or reduction of the work hours with a proportional reduction of the salary, cases in which the affected employees access to the benefits of their unemployment insurance; suspension of working contracts in case of a mandate by the competent authority with access to the same benefits; safety obligations to assure the health and wellbeing of the employees. New regulation on ‘teleworking’ (Law N° 21.220) was adopted regulating remote work and work by technological means, establishing rights and duties for workers and employers. The adopted measures have been a relief for employers and employees, as they intend to prevent the termination of the labor contracts and the increase of unemployment, and numerous companies has applied those measures. However, projections show that the companies will not be able to reintegrate all the suspended employees, and will have to dismiss them, in which case their unemployment insurances will be depleted, as they already make use of them during the suspensions.     

On the other hand, aid to large corporations has been difficult. Latam Airlines Group, Latin America’s largest air carrier, sought bankruptcy court protection in New York after the COVID-19 pandemic grounded flights across the region. The government has been reluctant to come to the rescue, very much like other governments in the region, although discussions are ongoing. These discussions seem to stall government support to other large corporations as well.

The implementation of these measures and the direct effects of the economic slowdown on businesses are providing legal practices with a vast stream of advisory work. Additional work comes from significant legislation or legal modifications. Most noteworthy, on a fiscal level, is the adoption in February of law N° 21.210, modernizing the tax legislation. It is aimed to grant certainty to taxpayers regarding audit processes, the possibility of conducting out-of-court transactions in respect of ongoing litigation, and the digitization of processes, among other things. Moreover, it introduced a new tax on digital services provided by suppliers residing abroad, so that depending on the tax quality of the local beneficiary of the service, these will be affected by either VAT (at a rate of 19%) or withholding tax. At the income tax level, a number of amendments are being made, the most relevant being the following: corporate tax of 27% for large companies and 25% for small and medium-sized companies under a simplified income determination system;  the is the possibility for small companies of opting for a ‘pass-through’ system, so that the rents generated by the company are taxed directly at the level of its owners. Other modifications relate to changes to the concept of accepted expenditure for tax purposes; incorporation of legal definitions for the determination of the possible establishment of a permanent establishment in Chile; the establishment of a new entity to support and guide taxpayers; and incorporation of a new tax or contribution applicable at the regional level for certain investment projects.

Other recent or upcoming modifications include a recent update of banking regulations, modernization of the criminal code, and strengthening of anti-trust and anti-corruption regulation, amongst others. In parallel, there is a growing emphasis on compliance, corporate governance, data protection and data privacy, stimulating companies and the business community to adopt higher standards of corporate governance and business ethics. 

See more from Schwencke & Cia at: www.schwenckecia.com

It is not news that the role of in-house counsel has become increasingly demanding and complex. The flip side to that is that the in-house counsel role has become even more strategic, challenging and stimulating than it was 5 or 10 years ago.

We live in a world which is much more regulated than it was a few years ago, which moves and reacts at a much faster pace than before, in a world where the risks (legal, reputational and others) that general counsel has to help manage, mitigate and protect from are several and diverse in nature.

Below, in summarized form, is an attempt to describe some of the most relevant themes sitting atop of the agenda of general counsel across the country.

Data privacy and cybersecurity issues

The Brazilian GDPR, or LGPD, will soon come into force. At the time of writing, the Brazilian Congress is still debating whether to bring LGPD into force on August 2020 or postpone its enactment to May 2021.

In any event this is a concrete fact in the horizon of all businesses and their legal departments. To the extent these businesses are subsidiaries of companies subject to European or US data protection laws less adaption to comply with local regulations will be required, but at the very least some compliance effort will be necessary.

Beyond LGPD, cybersecurity and electronic fraud in general are increasingly seen as by in-house legal teams, which are called upon to deal with all aspects and repercussions of security breaches of companies’ electronic systems, from a data privacy, consumer and/or criminal law perspective.

Fake news

When we hear the expression ‘fake news’ we usually think of it purely in the political context. The truth is that a number of professionals and business are attacked by producers of fake news everyday with an aim to harm their reputation and gain undue market advantage for competing businesses. In Brazil this huge new problem is compounded by the additional difficulty that the crimes of slander, libel etc and their penalties were designed for a time when fake news would spread by analog means, and thus the potential of harm was smaller. Currently there is a bill of law dealing specifically with the issue of fake news being analyzed by Brazilian Congress and the Brazilian Supreme Court is conducting an investigation on the subject.

Tax Reform

With the Brazilian Federal Government and Congress refocusing on the legislative reform after being sidetracked by COVID-19, the first item on the agenda is the Tax Reform. Each of the Federal Government and Congress have proposed and are supporting different bills of law addressing the tax reform. Until this situation is resolved and a common project negotiated it is unclear if, when and how the reform will shape up.

The new tax rules will be a challenge for everyone until fully understood by market agents and interpreted by the administrative and judicial courts. Some of the changes being potentially contemplated are substantial and can have a significant impact on businesses. The legal and business community are paying close attention to the matter and lobbying for the positions they advocate. The Tax Reform will keep both in-house and external counsel busy for quite a while, before and after the approval of the new rules.

Restructuring

Another challenge/opportunity for in-house counsel is the current situation of financial distress for many businesses provoked by the COVID-19 pandemic. This should allow for exposure on the renegotiation of the company’s debts, and sometimes in the Brazilian processes of Recuperação Extra-Judicial and Recuperação Judicial (respectfully pre-packaged reorganization and court-supervised reorganization), hopefully negotiating with the creditors and approving it with the court, as the case may be, the restructuring plan for the company. Conversely, when in-house counsel is employed by a business that is capitalized and seeking acquisitions/consolidation or debt acquisition opportunities, in-house counsel can exercise their legal creativity to the maximum.

We expect the next couple of years to present plenty of these opportunities, which we know come at a heavy cost for many in-house counsel because it generates the pressure to lay-off part of the team, the fear to lose one’s job and all the mental distress that comes with these situations.

Anticorruption

Since the enactment of the Brazilian anticorruption law in 2013 and the beginning of Operation Car Wash, anticorruption compliance and prevention has been at the forefront of the agenda of most businesses and legal departments in Brazil. This is a trend which came to stay and became part of the day to day of in-house counsel, sometimes adding people to the general counsel’s team and more often simply adding regulatory complexity and responsibility in cases where organizational structures do not provide for a separate integrity/anticorruption function lead by another professional.

The state of ESG (environment, sustainability, governance) in Brazil

The discussion around ESG is still in its very early stages in Brazil, certainly less advanced than in the US or Europe. Nevertheless, after the latest annual letter to investors from the CEO of BlackRock and the endorsements that ESG policies have received by a representative group of CEOs of a number of S&P 500 companies, the finance and business world may be coming to realize the size of the environmental threat not only to our health and planet but also to the economy.

When one recognizes the pressure being exercised on the Brazilian Government in light of the illegal burning and deforestation that is taking place in the Amazon, and the strong reaction of world leaders and private investors – both foreign and domestic – it becomes clear that the environment and sustainable practices, together with good governance, are a much bigger concern than ever before for businesses, their customers and, consequently, the general counsel and her team.

Privatizations, concessions and the new role of the BNDES

Another interesting development we are observing stems from the new role attributed to the National Economic and Social Development Bank – BNDES by finance minister Paulo Guedes.

BNDES in the past would finance, through debt and equity instruments, a huge portion of all infrastructure build-out in Brazil plus virtually all its large corporates. This has changed and BNDES is rapidly divesting of various equity stakes it held in publicly-held companies, state owned or not. The most recent example was a block trade of Vale’s shares for R$8.1bn (approximately US$1.5bn) on 4 August 2020, arguably the largest block trade in Latin America’s history.

Additionally, BNDES is in charge of executing the Federal Government’s privatization program and assists, whenever called upon, Brazilian States and Municipalities with their own privatization, concession and PPPs programs. This is an interesting development which provides in-house and outside counsel alike with ample opportunities.

Similarly, PETROBRAS continues to divest from a number of assets, providing for opportunities both on the acquisition and potential buyers’ finance sides.

New and not so new preoccupations of general counsel

Given the increased pressure to deliver more with less resources, general counsel in Brazil have embraced innovation in general, and technology in particular, from within their own company and also from their vendors, be it a law firm, a legal service provider, a Big Four or a lawtech. Competition has never been so intense, but at the same time there are more opportunities to innovate and create new needs that clients did not know they had.

Diversity is another big item on most general counsel’s agenda. Nothing new, obviously, but relevant, especially in an environment where not only women face challenges, but where the LGBTI+, the black and mulato and purely economically disadvantaged populations are given much less opportunity. It is important to acknowledge that the largest companies and law firms have made good progress in the last few years, which is encouraging. However, there is still a lot to be done.

Two other topics frequently mentioned by general counsels are (i) mental wellness related issues in their companies, in their teams and in the profession, and (ii) pro bono legal work. General counsel are trying a number of measures to keep their people happy and healthy at work and this seems to be a fairly high priority for many of them.

Pro bono became more widespread in Brazil in the last decade and many of the more sophisticated firms run more or less structured pro bono programs. Interestingly, very few general counsel based in Brazil seem to take this into consideration in their hiring decisions compared to their foreign counterparts. We expect this to change and to become more important to them going forward. We certainly hope so as it would be a movement in the right direction.

The changing needs of in-house counsel and the challenges they face inside the company

This article would be incomplete without mentioning the current needs of general counsel and their teams in the challenges they face daily in delivering to their internal clients and other stakeholders of their businesses.

We continue to hear that law firms still tend to think more about what is good for them instead of for their clients. We continue to hear that law firms do not listen, do not innovate and do not engage in true dialogue with their clients as to what their needs are and how they can collaborate together. Conversely and to be fair, we sometimes hear the same speech from managing partners of other firms: that the majority of general counsel do not engage in true dialogue with their firms as to what their needs are and how they can collaborate together.

It seems that someone ought to take the initiative of this conversation. Considering that law firms are the service providers in this relationship and usually well paid to deliver solutions, we are of the opinion that law firms should overcome their old ways and their fear to get in front of the client somewhat vulnerably because they will not have all the answers, venture out of their comfort zone and take the first step. Whoever does that earnestly, consistently and diligently has a much higher chance of success at developing a closer and more meaningful relationship with its clients.  

*The author would like to acknowledge the contributions made to this article by his partners, for which he is very grateful.

See more from Veirano Advogados at: www.veirano.com.br/midia

According to official figures, Nicaragua has maintained a growth rate of 4.7% and 4.5% in 2016 and 2017 respectively. However, due to the social and political unrest that the country has experienced since April 2018, the economy has slowed down. According to the Central Bank of Nicaragua, for 2018 the economy contracted by 5.016%.

Despite this, Nicaragua offers significant tax incentives in many industries, including import duty exemptions, property tax incentives and income tax relief. The country has a well-established free trade zone regime with significant foreign investments in textiles, car harnesses, medical equipment, call centers and back-office services. The construction sector has also attracted significant investments, driven by large infrastructure and housing projects, as well as by the telecoms sector, resulting in increased coverage of mobile telephony and broadband.

In reference to the current crisis derived from the arrival of COVID-19, the State of Nicaragua has not issued pronouncements or decreed the application of labor measures. For this reason, the employment sector has been implementing the tools or measures established by the Labor Code for events of force majeure and that affect the survival of workplaces. The main measures are:

1. Collective suspension of employment contracts.
2. Individual suspension by mutual agreement for a specified period.
3. Cancellation of employment contracts as a result of the company’s request for definitive cease.
4. Partial hiring to continue operations with a minimum of workers.
5. Bilateral vacation enjoyment agreement between employer and worker.
6. Reduction of shifts. The employer may decide on a shorter working day without a salary reduction.

Additionally, telecommuting is largely being applied despite the fact that it is not regulated by current labor legislation. Telecommuting can be implemented taking into consideration the same minimum rules and rights and guarantees for the benefit of workers established in local laws.

When it comes to the post-pandemic job market opportunities, it is very difficult to be able to predetermine Nicaragua’s short-term future. Many companies have been reducing operations. Despite this, the Government of Nicaragua has not decreed any special regulation, nor has it been made known if there is a plan to alleviate the situation in the short or medium term.

There are companies that, having access to information technologies, have been able to adapt and face new challenges. E-commerce platforms are in high growth due to their legal possibilities to operate in the local market.

In the financial sphere, the board of directors of the Superintendency of Banks and other Financial Institutions (SIBOIF), issued a statement in June establishing temporary conditions that financial Institutions can grant to debtors of all types of credits in all sectors of the economy.

The temporary conditions range from:

• The deferral of payments.
• Extending the original payment term.
• Granting grace periods of up to 6 months for principal and interest.
• Conducting an assessment of an individual case based on the institution’s internal policies.

This is subject to certain classification criteria of the portfolio or debt. All requests for temporary conditions have to be made before 31 December 2020.

Additionally, the crisis has forced the business sector to adopt e-commerce modalities and measures, which are not particularly regulated in local legislation. However, the legal basis of e-commerce is found in the political constitution on the principles of the right to protection and respect for privacy and freedom of business, that serve as a basis for contractual parties to freely agree on their contracts, provided that they do not contravene express law, morality or good customs.

In this sense, despite the fact that Nicaragua does not have legislation related to e-commerce, anyone who wishes to undertake contracting and activities related to e-commerce will have this possibility with public limitations, such as those related to consumer rights and data privacy.

The rights of consumers are regulated in Law No. 842 ‘Law for the Protection of the Rights of Consumers and Users’ and its regulations, contained in Executive Decree No. 36-2013. The protection of personal data is regulated in Law No. 787 ‘Law on Protection of Personal Data’ and its regulations, contained in Executive Decree No. 36-2012.

In the current circumstances, from the contractual standpoint, it is favorable to incorporate and apply the ‘rebus sic stantibus’ principle within the clause of the contracts in force and those that will be formalized in the future, since the crisis has had a direct impact on economic stability and compliance of contractual obligations. This leads to reviews of the repercussions and effects that the pandemic may cause to each of the contractual parties, with the objective of avoiding breach of contracts and finding healthy alternatives to face contractual obligations, particularly in service and lease contracts.

At EY LAW Nicaragua, we are currently advising all those companies and investors to adjust to changes in the current times and providing our support in advising and accompanying them in all legal and regulatory processes related to the above aspects.

See more from EY at: www.ey.com

This article contains an overview of the impact that COVID-19 has had around various sectors of the Dominican legal market, as well as some of the legal solutions that have emerged to tackle the crisis that the pandemic has brought with it.

Firstly, it should be recalled that the Dominican Republic has traditionally been characterized at the international level by its strengths in trade, the service sector, the tourism industry and agricultural production, but it has also positioned itself in recent years as the fastest growing economy in Latin America – being at the same time one of the most important economies in all of Central America and the Caribbean according to various indicators. This has been achieved on the back of its industries and the Free Trade Zone sector, which generate about 60% of the country’s exports and have a great impact on local employment.

However, the impact of COVID-19 in the Dominican Republic has been felt in a very negative way in several of the industries that have traditionally served as a pillar for the national economy, especially the tourism sector, which has been the worst hit by the pandemic.

The Central Bank, through the Monthly Indicator of Economic Activity (IMAE for its initials in Spanish) indicated the reality of the various industries in terms of their economic performance for the period January-May 2020 compared to the same period of the previous year, noting that the industries most affected were: hotels, bars and restaurants (-42.6%), construction (-23.2%), mining (-16.3%), transport and storage (-11.0%), free zones (-9.8%) and local manufacturing (-7.8%). On the other hand, the sectors that have established positive markers according to this indicator are the following: health (12.4%), financial services (10.5%), agriculture (5.2%), real estate activities (5.0%), communications (4.1%) and energy and water (2.0%).

In this sense, the Dominican legal community has had several challenges in terms of how to face the crisis and provide the different markets with the relevant legal solutions to mitigate the impact that COVID-19 may have in the various productive sectors of the country.

Labor advisory services have been among the most in-demand legal services today as a response to the uncertainty caused by the unprecedented scenario in which the pandemic has put Dominican workers. In our country, as in most of the international community, telecommuting practices and the suspension of employment contracts have increased, and, consequently, brought a mechanism of legal procedures that allow for the proper management of work in accordance with the law and the established processes.

On the other hand, as far as trade is concerned, there has been an accelerated transition to e-commerce and the use of digital platforms. Both public and private institutions have adapted to the digital trade model, promoting modern tools such as the use of electronic signatures and online payment systems that contribute to the agile development of trade practices without the need for physical contact or transport to the distributor.

An unfortunate aspect of the crisis in the economic and social sphere is the inevitable insolvency of single-owner businesses and small- and medium-sized enterprises due to the lack of liquidity generated by the suspension of business, and the consequent drop in sales. These businesses developed a negative cash flow, paying employees, suppliers and other fixed expenses, without incurring any – or little – income.

Faced with this reality, the first steps that businesses can take are to invest more capital, if possible, or turn to bank financing to help pay for the drop in sales. However, if none of these options is feasible, then corporate restructuring should be considered as a solution so that businesses can reorganize without having to cease operations. In this regard, we count with the Law 141-15 on Restructuring and Liquidation of Companies and Natural Persons that entered into force in 2017, and that availing to its provisions is a highly feasible and currently required option to face the economic crisis, allowing, among other things, the restructuring of businesses facing economic difficulties, with a process leading to a reduction in the liability burden to enable the business to continue its operations, thereby benefiting its creditors and employees.

Finally, with regard to future options in the context of private investment, the Law on Public-Private Partnerships (PPPs) was recently enacted in the country, which seeks to facilitate the development of infrastructure and services of social interest, by channelling private sector funds to finance infrastructure and projects that contribute to the country’s sustainable development. PPPs have the potential to become one of the main mechanisms of support and cooperation for the reconstruction of the country’s economy, as they enable budgetary constraints to be addressed in a more timely manner, the execution and operation of works and services by the private sector, as well as diversifying the range of public services and infrastructures, allowing the incorporation of innovations and new initiatives in the sector, among other advantages.

At EY Law, we have the knowledge, experience and different lines of services aimed at meeting the legal needs that may be had in any of the aspects addressed in this article. We have innovative solutions and proposals that favor the development of an excellent business climate at local and international level, based on good business practices, ethics and responsibility with an integral and multidisciplinary team. 

See more from EY at: www.ey.com

Though not exactly a household name, Sergei Magnitsky has come to symbolize the American and Western efforts to combat foreign corruption and money laundering across the globe. Understanding these recent efforts is critical for general counsel operating in international markets.

Sergei Magnitsky was a Russian tax accountant who worked closely with one of Russia’s largest foreign investment firms. Magnitsky eventually uncovered a highly complex $230m fraud, whereby Russian officials used forged documents to claim ownership in the foreign fund and then sued the Russian government for millions in ‘overpaid taxes’, upon which the Russian courts speedily agreed and ‘repaid’. Magnitsky sued the Russian state and paid dearly: he was arrested at home in front of his children, imprisoned, contracted gall stones and pancreatitis, and was eventually beaten to death. What followed was an aggressive series of anti-corruption measures by the United States, the first of which included the Sergei Magnitsky Rule of Law Accountability Act of 2012. Commonly referred to as the Magnitsky Act, the law imposed economic sanctions on Russian officials thought to be responsible for his assassination.

So why is this so important for general counsel?  First, the scope. The original iteration of the Magnitsky Act froze Western assets of specific Russian oligarchs and officials, including finances and real estate, and also barred entry into the United States. But the Magnitsky Act has since evolved far beyond the borders of Russia. On 23 December 2016, the United States passed the Global Magnitsky Human Rights Accountability Act (Global Magnitsky Act), which authorizes the president to impose economic sanctions on human rights abusers and corrupt government officials anywhere in the world.

Second, the Magnitsky Act and its global successor are about money, which is enforced on the international stage through economic sanctions. Economic sanctions are used by the United States to accomplish foreign policy and national security goals. The administration and enforcement of these sanctions are delegated to the Office of Foreign Assets Control (OFAC), a financial intelligence agency that operates under the US Department of the Treasury. Basically, economic sanctions are imposed on countries, governments or individuals that are hostile to US interests. The Cuban embargo and the Iran nuclear-related sanctions are probably the most famous examples of these sanctions. OFAC regulates activity within the Global Magnitsky Act and Magnitsky Act under 31 C.F.R. Parts 583 and 584, respectively.

General Counsel must therefore maintain a basic understanding as to how these laws operate in practice. An individual or entity sanctioned under the Magnitsky Act or the Global Magnitsky Act is summarily included in the Specially Designated Nationals and Blocked Persons (SDN) List, a ‘blacklist’ maintained by OFAC. This occurs after an administrative investigatory process where the subject individual or entity has very limited opportunities, if any, to intervene in order to avoid being sanctioned.

Once an individual or entity is blacklisted by OFAC, all of its assets in the United States, or in possession or control of US persons, are blocked and cannot be dealt with in any way. A Magnitsky sanction is the equivalent of a blanket prohibition to engage in any transactions with the sanctioned individual or entity. These sanctions can be seen already, for example, in Latin America. In 2018, the United States used these sanctions to target government officials in Latin America, most recently against Nicaraguan officials of the Ortega regime (including Ortega’s wife, Vice President and First Lady Rosario Murillo) accused of committing serious human rights violations during the recent anti-government protests where hundreds of Nicaraguans where killed. And in 2017, the parent company for famed jeweler Cartier reached a $334,800 civil settlement with the United States after it shipped jewelry to Shuen Wai Holding Limited, an entity in Hong Kong that had been added to the SDN list in 2008. In 2018, OFAC added 17 Saudis to the SDN list following the killing of Washington Post journalist Jamal Khashoggi.

In light of these enforcement frameworks, here are some of the things that general counsel for companies involved in international business need to be aware of:

Companies engaged in international transactions must exercise great care to refrain from doing business with any individual or entity subject to Magnitsky sanctions. To complicate things further, OFAC has said that, pursuant to its so-called ‘50 Percent Rule’, the sanctions are also applicable to any entities directly or indirectly owned 50% or more in the aggregate by a sanctioned individual or entity. Even if the blacklisted individual or entity does not have an ownership interest in another entity, OFAC has warned that the mere fact that a sanctioned person is representing a non-sanctioned entity (albeit in a non-personal capacity) may lead to a violation.

Companies are strictly liable for violating these sanctions. ‘We did not know’ no matter how sincere, is not a defense. The penalties could be very harsh, including significant fines and imprisonment. Civil penalties of $295,141 or twice the amount of the transaction could be imposed under the Magnitsky Act. The Global Magnitsky Act proscribes penalties of up to 20 years in prison and a $1m fine. The Magnitsky sanctions make for risky business in many areas of the world.

Particular industries could be more susceptible to being identified under the Global Magnitsky Act. One general rule of thumb for identifying at-risk industries is FCPA compliance. Industries susceptible to Global Magnitsky Act violations often mirror those FCPA violations, such as energy, oil and gas, pharmaceuticals, and telecommunications.

Countries with a history of public corruption and human rights abuses warrant heightened scrutiny.

Strong compliance measures ensure adequate prevention and a swift reaction when a violation occurs. Like FCPA compliance, GCs should oversee a risk-based approach tailored to the business operations. And strong compliance begins with comprehensive screening.

Use experienced third-parties. Commercially available screening tools can aid effective screening. Some entities, particularly those owned or represented by a sanctioned individual or entity, can be harder to trace, because their names may not be included in OFAC’s SDN List.

These laws leave little room for error (and zero excuses). Significant investments in a robust compliance program that can conduct the most comprehensive due diligence available, while timely and expensive, will often pale in comparison to the price of violations that could have been avoided. 

See more from Polsinelli at: www.polsinelli.com

I am a lawyer with a master’s degree in Economic Law and have been working in the telecommunications sector for over 22 years. During these years I have witnessed innumerable modifications and changes in the telecommunications sector, and, at the same time, I have had the privilege of leading Telefónica’s legal team in Colombia from 2004 until today. Telefónica is a Spanish multinational with operations across Latin America in places such as Colombia, Venezuela, Peru, Ecuador,  Brazil, Argentina, Chile and Uruguay.

When it comes to the impact of COVID-19 in Telefónica´s legal team, I have to say that has not been as shocking as you might think at first glance. Indeed, before the COVID-19 outbreak, Telefonica had already implemented mechanisms to reconcile personal and professional life enabling tools such as teleworking one day a week. The COVID-19 pandemic has allowed us to expand such tools and to continue with the day-to-day business in a comprehensive teleworking environment.

Despite finance playing a role, legal also played a massive role with providing support and advice during this time. The finance and legal teams worked together to obtain the required approvals. We did a merger as well. We experienced a lot of challenges during this period. The legal team has done a great job. We have been very cohesive and have been working together, showing a high level of commitment, producing very high quality work.

To monitor the effectiveness of our employees we have set up weekly meetings. Every Monday we have a meeting and divide up the responsibilities we have for that week. At the end of the week we review everything and check in on our work developments and duties. I think communication is the main thing at this time. Not only with our immediate reports, but also checking in with our whole team. Meetings also help us keep in touch on a personal level. It gives everybody the space to explain what they are doing and how concerned they are on a personal level. We try and do some activities to check in on the emotional wellbeing of the team.

However, when doing huge amounts of work, the fact is you cannot be at every meeting all the time, so, you have to relinquish control and empower employees. You have to give them space. We want everybody to be part of the operations of the company. For example, we have adopted different procedures to make us more flexible with reviewing contracts, signing agreements, negotiating, and have adjusted procedures to obtain approvals inside the company. As a result, we became more agile and effective as a team without losing quality. We have improved the way we work from long distance.

I have engaged my team in activities that focus on personal wellbeing. I have tried to strike a balance between focusing on work, without losing focus on life as it is, we are mothers, wives and so on. So, it is important to promote a balanced approach where everything is not just about work. I believe this has emotionally helped our team.

At the beginning of lockdown, we had to do very long hours, but at some point, it became evident that we could not continue that way. At the very beginning we were all committed to supporting all company needs to adjust the operational continuity. Eventually, we realized it was not possible to sustain those working hours. We started to set boundaries and set work times, it was important to respect weekends and lunchtimes.

It is important to acknowledge everything has now gone virtual. As a telecommunication company, we have access to technology to support our work: technological tools for contracts, signing documents, litigation proceedings, virtual hearings. When it comes to legal tech we are not hesitant, we want to keep working and delivering high standards and are committed to moving in the way the company needs.

Specifically for us, Microsoft Teams has been very useful. It is so easy to use, this application allowed us to do our meetings, review documents and share presentations in a simple way. In addition, we have also introduced a contract software called Webdox. This software helps us keep track of all the negotiations and approvals inside the company. It helps us identify the legal areas that we are involved in. Our work as lawyers has a lot to do with negotiations and meetings. We can keep track of the different areas of the company – these are the clients we serve. We have implemented this software to streamline business operations, so we can deliver contracts and services to different parts of the business faster.

When looking at alternate dispute resolution, mediation is always preferred, if that is not possible, we always prefer arbitration over litigation. During this quarantine period, all litigation proceedings were suspended, but arbitration continued virtually, as well as mediation. During this period we reviewed all our litigation and we tried to mediate some of our litigation cases. As a result of this process, we were able to find mediation solutions to some of our litigation cases. As of 1 July, courts opened again.

Basically, all of our contracts have an arbitration clause. In Colombia we have confidence in arbitration and the way justice is provided. Arbitrators tend to be specialised in a particular area and can have more knowledge in a specific field. In contrast, litigation in Colombia can take years. When using arbitration, we are basically fast-tracking cases to get an end result.

Overall, in-house legal teams need to be more business minded and present across all business’ operations. They need to be working hand in hand with different areas of the company. They have to be aware of the legal issues and, also understand the practical business implications of legal decisions. In the future, we have to be more present in the groundwork, be more agile and flexible. We have to be open to redefining the way we work and the way we approach our internal clients.

Nowadays, it is not just about having legal knowledge, it is also about how to approach people and how to achieve goals as a team. It is extremely important to become more business minded – you have to know your company in order to serve them.

This chapter will cover a general description of Panama, taking into consideration several positive and strategic complements that influence the services that may be promoted in different areas such as business, logistics, financial and maritime matters that are seen from a global perspective. In this sense, Panama, as a country with a privileged geographic position that allows it to take advantage of economic competition and worldwide opportunities, is one of the countries with the highest growth and enrichment potential, while offering important benefits for foreign investments.

Panama allows us to provide all the necessary legal services to provide security and tranquillity to a multinational company that decides to establish in our country. For this, aside from our geographical position that allows greater logistic opportunities, we must consider the laws and regulations that make Panama one of the best countries for investment and competitiveness, achieving better profits compared to other countries in the region.   

Panama has special tax regimes with the objective of promoting productive activities in different areas of the country that help generate new jobs and economic growth by giving opportunities for the companies to start operations.

The Panama Pacific Special Economic Area, created by Law 41 of 20 July 2004, establishes a special legal, fiscal, customs, labor, immigration and business regime for the establishment and operation in the Area. This special Area aims to encourage and ensure the free flow and movement of goods, services, and capital, to attract and promote investment and jobs generation.

The companies located in the Panama Pacific Area have several tax benefits such as exemption from income tax on activities encouraged by law, exemption from remittances, interest, and business privilege for services abroad and capital gains, among many other benefits.

We also have Law 57 of 2018 of the Multinational Companies Headquarters (SEM for its acronym in Spanish) that allows a company to maintain its business offices in Panama to provide services to the headquarters and having benefits for both the companies and their executives who come to work in Panama:

• Tax benefits for companies: reduced rate of income tax, exemption from payment of dividend tax on operation notices and; exemption from the payment of the dividend tax, the complementary tax and the branch tax, without distinction that they are from local, foreign or exempt sources, among other benefits.
• Tax benefits for executives: by opting for the SEM (Migration) visa, they may obtain exemption from income tax, exemption from import tax for household goods and exemption from import tax on motor vehicles.

Taking into account the Panamanian migratory system, it is also relevant to point out that the SEM visa allows the headquarters to hire as many expats as necessary for the operation without limitation.  Additionally, it allows the expat to obtain a residence permit for his or her dependents with unlimited renewals and eventually grants the principal a permanent permission to remain that leads to a Panamanian identification document.

As part of the situation that arises from the COVID-19 pandemic, the labor environment has been transformed with various regulations issued under the State of National Emergency decreed by the Executive Branch, covering working hours reduction, labor contract suspensions, among other measures that benefits the employee and helps the employer to reduce the economic impact of the pandemic.

Regarding home office working, Panama has a recently enacted Law No. 126 of February 18, 2020 that regulates the offsite working option, which includes provisions related to the responsibility of the employer for the health and safety of the employees working from home.  The law establishes that teleworkers must be informed of the company’s policies regarding this matter and that a program to supervise and train personnel on health and safety matters must be adopted, as well as a manual of good environmental practices and general socialization.

In addition to the fiscal / tax measures that we have contemplated in previous paragraphs, other measures have also been issued to help alleviate the strong impact on the global economy due to of COVID-19, such as the following measures:

• Decree that grants a term of 120 days, effective once the decree was published, for the payment of any tax to be paid to the General Directorate of Income, without causing interest, surcharges, or fines for late payments.
• Deadlines are extended for the payment of taxes that are caused or must be paid during a period declared as a State of National Emergency, until 31 July 2020. Likewise, the payment of the Property Tax corresponding to the first four-month period of 2020. This, without entailing fines, interest, surcharges for late payment as well.
• Deadlines are extended to file the Tax Returns for fiscal year 2019 until 31 July 2020.
• Deadlines to submit the Transfer Price Report regarding the operations carried out with related parties during the 2019 fiscal period were extended until 30 September 2020.
• Extension of one year of exemption for companies registered with the Micro, Small and Medium Enterprise Authority (AMPYME).
• Extend the deadlines to present the Report of the special payroll 03 corresponding to the fiscal period 2019 until 31 July 2020.

Another important aspect of the Panamanian legal framework is Law 81 from 26 March 2019 regarding the protection of personal data. This law, to be implemented from March 2021, establishes principles, rights, obligations, and procedures that regulate the protection of personal data. Responsibilities for the infractions or faults and sanctions that may take place, among other provisions, are also included. It is very important for all companies established in Panama to make sure that their internal policy regarding this matter complies with the local law and in any case should adjust accordingly before the law comes into effect.

As to money laundering and terrorist financing, in the last 12 months Panama has adopted a series of laws, executive decrees, and other regulations that contribute to compliance with international standards, so it has strengthened it’s position as a safe and collaborative jurisdiction. In addition, it has improved its governmental administrative structure of both financial and non-financial obligated subjects to ensure full compliance of the money laundering and terrorist financing measures, including a legal mechanism to process tax evasion.

At EY Law Panama we can provide detailed legal guidance to help meet the needs that are required in general or more specific aspects of companies established or to be established in Panama, including those related to the consequences of COVID-19. Panama is a country full of opportunities where all the advantages and benefits given should be taken knowing that it provides for entrepreneurship and face the new global economy that we see every day with new challenges and complexities to achieve.

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Introduction

As the COVID-19 pandemic creates significant uncertainty and unique challenges in the global investment environment, its impact on Latin America presents several opportunities for private equity funds. In navigating the new investment landscape with respect to their Latin American investment programs, there are number of corporate, finance and tax issues PE funds should consider before proceeding with Latin American acquisitions or increasing investment in existing portfolio assets. This article discusses certain tax structuring, transfer pricing, and tax compliance considerations relevant for PE funds holding Latin American portfolio assets or expanding their investment in Latin America.

Tax Structuring Considerations

Acquisition of Distressed Latin American Companies

PE funds are seeking acquisitions of distressed Latin American companies or those requiring capital infusions to survive the economic downturn. For example, targets include, among others, family-held companies with shareholders seeking liquidity or diversification, companies unable to restructure their debt or continue with an existing IPO plan, and real estate holding companies with immediate cash needs but steady revenue flows.

In structuring acquisitions of Latin American targets, PE funds must identify the appropriate vehicles through which to invest. For example, a PE fund might analyze whether it should establish a tax treaty structure to effect an acquisition. In a private equity context, the primary tax consideration for most fund managers is taxation on exit (ie capital gains tax). For example, among others, Argentina, Brazil, Chile, Colombia and Mexico generally impose, with some exceptions, tax upon the sale of shares by nonresident investors. Accordingly, funds might establish a Spanish or Dutch investment structure because of Spain and the Netherlands’ significant tax treaty network in Latin America, or structures with transparent investment vehicles such as Canadian limited partnerships (eg Alberta or Ontario) and certain Luxembourg entities. Funds might also consider establishing local investment vehicles to mitigate taxation on exit, such as Brazilian Fundos de Investimento em Participações (FIPs), which can eliminate Brazilian capital gains tax on exit (although such structure has been scrutinized by the Brazilian tax authorities in recent years). Fund sponsors are rightly concerned that exit taxes in Latin America can reduce a fund’s IRR, especially if some taxes are not creditable against taxes of fund investors.

Tax due diligence is as important as ever. Among other things, deal teams should carefully examine items such as operating loss carryovers, permanent establishment risk for multinational targets, tax compliance, accrued and outstanding income, payroll, and VAT tax liabilities etc. Also, a target’s receipt of government subsidies, credits, or other assistance in response to the global pandemic could restrict its ability to pay dividends or even alter the timing of a future exit. If indeed a target has received such assistance, funds must consider whether the proposed acquisition will jeopardize continued assistance or if a sale or change of control will require immediate repayment of such assistance.

Debt Restructuring and Acquisition of Portfolio Company Debt

Dealing with portfolio company debt is another area that has recently received significant attention. In order to preserve cash to meet operational needs, leveraged portfolio companies have developed strategies for managing their debt service, including working with lenders to obtain a combination of additional borrowings, forbearance and standstill agreements, and debt covenant waivers.

In order to ease the process with lenders, some PE funds have chosen to request capital calls to fund their struggling portfolio companies, while others have lent to their Latin American portfolio companies. Other PE fund groups have instead opted to acquire their portfolio companies’ third party debt. In certain cases, funds seek to acquire the debt at a discounted price and sell it at a premium when market conditions improve, while in other cases, the motivation is simply to maintain some modicum of control over a portfolio company’s debt service. Some funds have considered raising credit funds and/or establishing a special structure for that purpose, such as an Irish intermediation structure.

PE funds must address the Latin American tax consequences arising from each alternative for both the fund and the portfolio company. Some key considerations include:

• Cancellation of debt considerations. As part of a debt restructuring, portfolio companies must consider whether income or other taxes are imposed on any amount of cancelled debt.
• Deductibility of interest payments. To the extent a PE fund lends to a portfolio company or acquires its third party debt, the fund should consider whether the interest paid by the portfolio company is a tax deductible expense, particularly if the fund and the portfolio company are considered to be related or if the fund is organized in a low-tax jurisdiction as determined by local law.
• Withholding taxes. Withholding taxes imposed on interest payments must also be analyzed. Most Latin American jurisdictions, including Argentina, Colombia, and Mexico, impose withholding tax on interest paid to nonresident lenders. An income tax treaty may reduce the withholding tax rate for PE funds using a treaty platform for their Latin American investments. Spain and the Netherlands, for example, are jurisdictions commonly used by PE funds (and other investors) for investing in Latin America.

In addition to the considerations listed above, PE funds must also address transfer pricing concerns, particularly as it relates to whether the terms and conditions of related party debt is arm’s-length and otherwise compliant with local transfer pricing rules.

Transfer Pricing

Reviewing, updating and, if needed, revising transfer pricing arrangements is a method by which portfolio companies may preserve cash and otherwise manage tax positions. For instance, adherence to the arm’s-length principal, in conjunction with contractual provisions in intercompany agreements (e.g., force majeure), permits related parties to adjust their intercompany arrangements to reflect economic reality. For example, in the absence of an advantageous income tax treaty, many Latin American jurisdictions impose significant withholding taxes on service payments, royalties, and management/monitoring fees paid abroad. Analyzing existing arrangements may yield opportunities to mitigate or otherwise restructure the payments, resulting in potential tax savings.

In any case, as Latin American governments seek to raise revenue through taxes and increased tax audits, portfolio companies should ensure their transfer pricing documentation and cost-sharing policies are compliant with local country transfer pricing requirements and of course, reality. They should examine whether their transfer pricing has reacted to supply chain and operational changes brought on by the pandemic, and whether such changes require remedial changes to internal pricing of goods and services. While Chile, Colombia, and Mexico are the only Latin American members of the OECD, the domestic legislation of a number of Latin American jurisdictions contain many of the same or similar principles set forth in OECD transfer pricing guidance. For those Latin American jurisdictions that do not explicitly adopt OECD transfer pricing principles, such principles may serve as secondary or supplemental guidance in interpreting domestic transfer pricing legislation (eg Brazil).

In assessing transfer pricing risk, portfolio companies should examine their current intercompany transaction flow and supply chain and corresponding intercompany agreements. Mature portfolio companies with older transfer pricing policies may discover their intercompany transaction flow and supply chain has evolved over time, such that their intercompany agreements do not accurately reflect current reality. For example, the method of compensation (eg profit split, cost-plus etc) originally provided for in an agreement may no longer be appropriate. Similarly, an intercompany agreement may not describe services actually provided between related parties. Because it is common for government auditors to request intercompany agreements in connection with a transfer pricing audit, such auditors can seize on the fact that intercompany agreements are not being followed, are otherwise inconsistent with reality, or do not even exist.

Tax Compliance

As Latin American governments continue developing strategies for battling the pandemic, they are also developing strategies for an economic recovery. While the pandemic’s true cumulative economic impact is still very much unknown, past economic downturns show us that PE funds can expect to see increased audit activity within their portfolio of Latin American companies.

Accordingly, PE funds should work closely with the management of their Latin American portfolio companies to ensure they have a robust tax compliance program in place such that they are well positioned to defend against potential tax audits or avoid potential penalties of lax internal pricing and arm’s-length documentation. They should consider and reassess material uncertain tax positions that, if successfully challenged, could result in significant tax liability and substantial penalties.

Conclusion

The COVID-19 pandemic will continue to generate significant challenges for many Latin American businesses, some of which sought additional funding and credit facilities from their shareholders and lenders, while others concluded filing for reorganization or bankruptcy is their only viable alternative. PE sponsors with Latin American investment programs face substantial challenges, but many others find investment opportunities notwithstanding the current economic environment. Addressing tax structuring, transfer pricing, and tax compliance considerations in Latin America is an important part of overcoming inevitable obstacles and seizing on new investment opportunities.

Cuestamoras Salud is a pharmaceutical distribution company. We have a portfolio of distribution assets that not only cover pharmacy, but also medical equipment. We serve the two biggest markets in Costa Rica: the public market – which consists of hospitals, clinics and the whole public health sector – and the private sector, which also includes hospitals, clinics and pharmacy outlets. I have legal oversight for compliance functions, regulatory affairs and value protection (formally known as asset protection).

Since COVID-19 our workload has increased significantly, especially in the areas of regulatory compliance, contracts, customs and public health bidding. Public health bidding has been a huge area for us, and in recent times it has obviously increased. The pharmacy and health sector have to buy products from the market, during a time when everybody is trying to buy the same products. This has been a really big challenge for us.

However, the biggest challenge in the last few months has been uncertainty. This is a fairly new disease and there is little known statistically and scientifically about the virus. So there are a lot of questions to consider, in terms of how to act and how to react. I believe keeping calm during this time can be just as contagious as the virus.  You need to make a proper assessment of all the information you have at hand and try to keep focused on goals. Our goals are keeping our employees safe, whilst continuing business operations.

One of our biggest regulatory hurdles has been getting the government to approve private testing. At first, health authorities in Costa Rica said no because they wanted to be in control of confirming who is a COVID patient and who is not. In order to get private testing approved we had to do some lobbying. We pressed the government with evidence of what had been happening Europe – in places such as Spain and Italy – to show that you need the private sector to help minimize and contain the spread of the virus alongside public officials.

Finally, authorities permitted private testing, providing the private sector with the tools to determine at an early stage who may be sick and who is not. From that we could determine who might need to be isolated. There was a business continuity incentive here, but it also had a public health component. It allowed us to stop and isolate a person, and ultimately minimise the spread of the virus within our warehouses.

With this we have moved forward on our proactive testing. This does not mean we are going to be testing everyone: we cannot test all 1900 of our personal. Instead we used statistical analysis and assessed the risk factor of employees. Data on where they live and how they travel to work were used to profile everyone in the company. This was done by experts in virology and statistical analysis. We had a separate team determining who was going to be tested based on their risk factor and exposure. In the end we did both reactive testing and proactive testing. Proactive testing is testing people who, though not showing systems may have a higher epidemiological risk. We have had proven results through this method.

From a legal standpoint, this testing involved a lot of negotiations. We had to negotiate with the service provider and our employees. The testing program was voluntary and as a result required consent from individuals. We also had to manage privacy issues surrounding access to and handling of employees’ private medical information.

Nevertheless, we obviously have inter-regulatory obligations with the government. When we determine through private testing that someone is positive with COVID, we need to inform the health authorities immediately. There is a lot going on.

Uplifting our digital capabilities on all fronts of the business has also been key. We have had to enhance our processes, and are currently going through a digital transformation right now. COVID has confirmed to us that this is the right way to go. We started the project at the end of the third quarter last year, but recent events made us move faster in order to take advantage of that opportunity.

The changing role of the workplace is also another area that needs to be defined. It is important to comply with a new normal. Working from home has shown there has been no impact on productivity in terms of results. If you are going to open your central offices, they have to serve a different purpose than what you are doing at home. The workplace has to become a beacon of corporate culture. That means developing and enforcing culture, so that people feel compelled to go to work.

We also need to facilitate interdisciplinary collaboration spaces, whilst keeping in mind all the regulations in terms of interactions. This is especially important when talking about innovation. We need to be able to provide space for creative opportunities, for the conversations you have with fellow colleagues in the hallways. Those spontaneous conversations that generate interesting ideas may be important for the company. That is one of the biggest burdens about working from home, you do not have those spontaneous opportunities to discuss anything with anyone else. Innovation does not happen when you plan it to happen. Going forward this is one of the things we are trying to deal with. We are working and trying to design what our idea of ‘offices of the future’ will be. This has enormous legal implications all-round.

Part of managing a crisis is providing emotional support to employees, and this has been a top priority. We set up a program within which our human resource team followed up with employees. This entailed picking up the phone and speaking to each and every member of staff who was working from home. It was important as a company to hear their worries and hear their concerns. Accordingly, we developed a program to address all the challenging aspects of working from home, from creating a proper physical space to task programming, organisation and leadership skills. By doing this we found our employees were more motivated. This is how we have managed to stay focused and deliver results.

Our mission is to keep access and supply of medications open for all. This is a goal that motivates our teams, because they understand the importance of what they are doing. Considering all challenges we have experienced during this pandemic, we have managed to maintain company results because of the effectiveness and productivity of our people.