REFORM OF TAX ON SERVICES APPROVED BY BRAZILIAN CONGRESS
The Brazilian Congress has enacted Supplementary Law 157/2016, amending Tax on Services regulations.
Important changes to the rules include:
Taxation of streaming services;
Update of the Taxable Services’ List, especially concerning technology services;
Reinforcement of the prohibition against granting tax benefits that lead to a tax burden of less than 2%;
Punishment for municipal administrators who maintain or grant benefits below the 2% minimum rate.
It is important to mention that each municipality must approve its own rules to put the new regulations into full effect. Once approved, the new rules become valid only in the subsequent fiscal year.
BRAZILIAN SUPERIOR COURT OF JUSTICE REVIEWS ITS POSITION ON THE EXEMPTION OF EXPORTED SERVICES FOR TAX ON SERVICES (ISS) PURPOSES
Brazilian taxpayers now have a new argument to avoid the Tax on Services on exported services. This is because the Brazilian Superior Court of Justice has held that services for which the results take effect abroad are not deemed rendered in Brazil.
The case analyzed involves an engineering company that prepared designs to be used in a construction project in France. According to Brazilian tax authorities, these services should be taxed in the municipality where the company is established since that was where the service was actually provided.
However, the Brazilian Superior Court of Justice rejected this position, holding that, although the project was done in Brazil, it was an export of services because the result would not take place in Brazil.
This decision provides taxpayers with strong arguments not to pay the Tax on Services on exported services.
FEDERAL TAX TRIBUNAL HOLDS THAT ICMS SUBVENTIONS SHOULD NOT BE SUBJECT TO SOCIAL SECURITY CONTRIBUTIONS (PIS/COFINS)
Following judicial precedents previously enacted, the Federal Tax Tribunal has held that ICMS incentives, such as presumed credits, are not taxable revenue and thus PIS/COFINS are not levied on them.
The main argument that led the Federal Tax Tribunal to this decision is that ICMS incentives work as a factor to reduce expenses rather than as regular revenue, as well as being compensation for investments made by taxpayers.
Although this decision was not issued by the Federal Tax Tribunal’s upper chamber, it is an important administrative precedent to argue that this type of incentive should not be taxable.
BRAZILIAN GOVERNMENT REGULATES THE COUNTRY BY COUNTRY REPORT – BEOS PROJECT
On December 28, 2016, Brazilian Federal Revenue issued Normative Ruling 1,681, introducing the country-by-country report. This report is part of the BEPS (Base Erosion and Profit Shifting) project developed by OECD (Organization for Economic Co-operation and Development), which aims to analyze the risks deriving from the application of international tax rules by multinational enterprises.
The report must be submitted to the tax authorities with the income tax return (i.e., by July 31) with the information for the previous year.
AUSTRIAN HOLDING COMPANIES WITH NO SUBSTANTIAL ECONOMIC ACTIVITIES ARE CONSIDERED A PRIVILEGED TAX REGIME
On December 28, 2016, the Brazilian Government issued a new blacklist and greylist under Normative Ruling (“Instrução Normativa”) 1,638. With respect to Austrian companies, the new rule clarifies that only holding companies with no substantial economic activities are considered a privileged tax regime.
As a consequence, transactions between a Brazilian entity and these companies are subject to transfer pricing rules. Also, the tax deductibility of interest expenses related to loan agreements that are incurred by a Brazilian entity are subject to thin capitalization rules. In both cases, it does not matter whether the parties are related.
TAX REGULARIZATION PAYMENT PROGRAM (PRT)
The Brazilian Government has established the Tax Regularization Payment Program (“PRT”), which aims to give taxpayers the possibility of settling federal tax debts due up to November 2016 in installments under special conditions.
However, differently from other programs, PRT does not grant an amnesty from penalties.
Debts that are being challenged administratively or in court and debts challenged by Brazilian Federal Revenue can be included in the program. The program allows the use of tax credits (including tax losses carried forward) to settle part of debts challenged by Brazilian Federal Revenue.
