Withholding Income Tax on Transactions between Residents and Nonresidents – New Rule on Capital Gains and Technical Services
On March 7, 2014, Brazilian Federal Tax Authorities issued a new Normative Ordinance (IN 1,455) regarding the withholding income tax on transactions between residents and nonresidents. Among the issues addressed by the Normative Ruling, two specific points must be highlighted: (i) taxation of capital gains earned by nonresidents; and (ii) the extension of the definition of technical services to determine the withholding income tax rate.
Capital gains
Under IN 1,455, capital gains earned by a nonresident on the sale of Brazilian assets are subject to the withholding income tax at a 15% rate, or at a 25% rate if the beneficiary of the income is located in a blacklisted country. The controversial point presented in IN 1,455 is the way the capital gains must be calculated, especially with respect to the currency that must be used to convert the cost of the investment sold.
Historically, the capital gains earned by a nonresident have been calculated in foreign currency, which means that the selling price and the cost of the investment made by the nonresidents were usually converted to Brazilian currency at the exchange rate on the transaction date.
However, IN 1,455 has introduced different criteria, requiring the capital gains to be calculated in Brazilian currency. This means IN 1,455 requires the cost of the investment sold by the nonresident to be calculated based on the historical value of the investment made in Brazilian currency, which could lead to higher taxation regardless of the absence of capital gains in the foreign currency (i.e., it taxes changes in the exchange rate). IN 1,455 is subject to broad challenges in this regard since it introduces a new calculation method without legal grounds.
Extension of the Definition of Technical Services
IN 1,455 confirms the understanding that technical services are subject to the withholding income tax at a 15% rate, or a 25% rate if the beneficiary of the income is in a blacklisted country. Additionally, it introduces a new definition of technical services, defining them as services in which “the performance relies on technical expertise or involves administrative assistance or providing advice, performed by an independent professional or through an employment relationship, or even through automated structures with clear technological content.”
It is important to point out that this new definition is wider than others usually adopted by the tax authorities in previous normative ordinances and rulings and also can affect the classification, under the double taxation treaties that Brazil has entered into with other countries, of the income derived from technical services in cross-border transactions.
New Interpretation of IPI taxation on Imports on behalf of Third Parties
Imports on behalf of a third party are subject to the Industrialized Products Tax, or IPI, on customs clearance as well as on the remittance of the imported product from the trading company to its acquirer (the third party). Since the third party is considered the actual importer in these transactions and the trading company a mere services provider, the latter issues a services invoice against the importer to be compensated for the services provided, as the goods are purchased directly from the exporter by the third party. Hence, the IPI is levied on the customs value (CIF) plus import duty, at the time of customs clearance, and on the total cost of the product on the further remittance.
However, the recent COSIT (General Coordination of Taxation) Ruling 30/2014 holds that the calculation basis of the IPI levied on the remittance of the imported product must include the price for the service charged by the trading company, which means that trading companies will be subject to higher taxation on the transaction, even though the difference may be credited by the third party (the IPI is a type of value added tax, in which earlier tax payments can be credited against later ones involving the same goods).
We highlight that COSIT Ruling 30/2014 is binding for all Federal Tax Authorities.
Normative Instruction 1,460/2014 – Changes to the Express Customs Clearance Procedure (Blue Line or“Linha Azul”)
Brazilian tax authorities issued Normative Instruction 1,460 to make changes to Normative Instruction 476/2004, which governs the Express Customs Clearance Procedure called “Linha Azul”. This procedure aims to provide express custom clearance for imports, exports and customs transit for companies that meet the requirements and conditions established by Brazilian Federal Revenue.
Under the new rule, some requirements and conditions are not mandatory for companies eligible for the Program for Support to Technology Development of the Semiconductor Industry (PADIS), which makes it easier for these companies to receive this benefit.
UN Convention on Contracts for the International Sale of Goods (CISG) comes into force in Brazil
The United Nations Convention on Contracts for the International Sale of Goods (CISG) came into force in Brazil on April 1, 2014. The Convention governs commercial contracts for the import and export of goods between Brazilian companies and most of their foreign trading partners.
