Dutch Government Changes the Classification of Brazilian Interest on Shareholder Equity (“JCP”)
According to new directives from the Dutch Government, Interest on Shareholder Equity received by Dutch beneficiaries from Brazilian sources must now be classified as dividends instead of interest.
As a consequence, Dutch taxpayers who receive Interest on Shareholder Equity are no longer eligible to take advantage of a 25% tax sparing for the Brazilian withholding tax, but only a 20% credit. This may result in the tax position of the Dutch holding company changing from a tax-free position to having a net payable tax.
There is no grandfathering clause for the previous rule, which classified Interest on Shareholder Equity as dividends. Hence, payments made by a Brazilian subsidiary to a Dutch controlling company will – if all the required conditions are met – only qualify for a 20% tax sparing credit.
New Private Letter Ruling on the Brazil-Finland Double Tax Treaty –Payments for Technical Services are not Subject to WHT
Most of the Double Tax Treaties signed by Brazil, with a few exceptions, classified payments for technical services as “royalties” instead of “business profits,” meaning they are taxed in the source country.
The recent Private Letter Ruling 99,011/2020 states that the Brazil-Finland Double Tax Treaty is one of those rare exceptions, which does not classify payments for technical services as “royalties,” but as “business profits.” This means the withholding income tax does not apply when a Brazilian resident pays service fees to a Finnish resident.
Dividends Distributed by a Brazilian Company to its Swedish Controller Are Not Be Taxed by WHT
A Brazilian subsidiary of the Swedish group Volvo prevailed over the Brazilian government in a legal dispute concerning the application of the Brazil-Sweden Double Tax Treaty. The hearing, held as a Virtual Plenary Session of the Federal Supreme Court (“STF”), held that the Brazilian company was not required to pay Withholding Income Tax on dividends distributed to its controller in Sweden (base year of 1993).
The court accepted the taxpayer’s arguments that Brazilian tax authorities cannot impose income taxation on dividends paid to Swedish residents due to a reciprocity clause in the Brazil-Sweden Double Tax Treaty. In this regard, if dividends are not taxed for Brazilians residents, they cannot be taxed for Swedish residents either.
Brazilian IRS and OECD Invite Companies to Suggest Improvements to Brazilian Transfer Pricing Legislation
The Brazilian IRS and the OECD launched a joint study group called “Transfer Pricing in Brazil” in order to review and analyze the differences between Brazilian and OECD rules on transfer pricing. As a result, the group released a document called “Transfer Pricing in Brazil: Towards Convergence with the OECD Standard.”
As a milestone of this convergence, the IRS and OECD released a survey in which companies are encouraged to respond to a questionnaire. The answers they provide should help the authorities identify specific taxpayer needs.
This questionnaire contains 17 questions on subjects that include: (i) safe harbor regime development (releasing taxpayers from some tax obligations that would otherwise be due under the regular tax regime); (ii) Advance Pricing Agreements – (“APAs”), which reduce certain risks in more complex transactions; (iii) use of available comparative data; and (iv) other forms of simplification regarding Transfer Pricing operations. In the end, these measures are meant to contribute to increased legal certainty in the Brazilian tax system.
The questionnaire can be found at the OECD website and interested parties are invited to send their contribution via email by October 30, 2020, to [email protected], with copy to [email protected].
STF Issues Very Important New Decisions on the Constitutionality of Social Security Contributions
The Federal Supreme Court (“STF”) has recently issued three important decisions on social security contributions. The court ruled against the INSS levy on wages during maternity leave, but maintained the tax on the constitutionally required one-third extra vacation pay and the 10% social contribution on FGTS fines for termination without cause.
Regarding maternity leave, the Supreme Court pointed out that the social security contribution should be levied on amounts paid as consideration for the work or services provided to the employer, which is not the case during maternity leave, during which the worker stops providing services. Therefore, the benefit is not part of the calculation basis of the social contribution on payroll.
On the other hand, the Court held that the constitutionally required one-third extra vacation pay is a periodic supplement to remuneration for the work provided by the employee. Therefore, the Court reasoned, these amounts are subject to the social security contributions.
Finally, regarding the additional payment of 10% on the FGTS fine, the Supreme Court held that this contribution was created to preserve the social rights of workers, which is a genuine purpose under the Federal Constitution.
STF Issues Important Decisions on Several Tax Matters
Since the beginning of 2020, the Supreme Court has issued several important decisions involving tax matters.
Some of these decisions have clarified the STF’s position on the following matters:
- The Services Tax (ISS) tax list is exhaustive, but it allows for extensive interpretation for the activities inherent in the services listed. This interpretation is possible when the legislator, for example, includes terms such as “of any nature,” “of any kind” and “among others” when defining the services subject to taxation.
- STF guaranteed the possibility of refunding the amounts of overpaid PIS and COFINS taxes, in the tax substitution system, when the sale of goods occurs at a price lower than estimated.
- The IPVA (state vehicle ownership tax) must be paid to the state where the vehicle owner is domiciled, e., where the property must be licensed and registered, according to legislation on the subject.
- The value of real properties superior to the subscribed capital to be paid-in is not exempt from the ITBI (Municipal tax on transfer of real estate).
- ICMS is levied on transactions or installments prior to the export of goods. Thus, ICMS immunity does not apply to the manufacture of packaging for products to be shipped abroad.
- The taxpayer is entitled to offset ICMS credits only when supplementary legislation authorizes it. Therefore, the postponement of the right to offset ICMS credits on goods acquired for use and consumption does not violate the non-cumulative principle.
- A state decree requiring the advance payment of the ICMS tax, without tax substitution, on the entry of goods acquired from another state is unconstitutional.
- Retention of imported goods at customs for payment of tax differences does not violate the Constitution. According to the decision, it is not an indirect coercion aimed at tax settlement, but a rule that conditions the admission of the goods into the country to on the collection of differences.
- The contributions to SEBRAE, APEX and ABDI, calculated on the payroll, have the legal nature of Intervention Contributions in the Economic Domain (“CIDE”) and, therefore, are constitutional.
- The fees paid to credit and debit card administrators by the selling companies must be included in the PIS and COFINS calculation bases. According to the Court, administrative fees that will later be passed onto credit card companies must be taxed by PIS and COFINS at the source because they constitute an operating cost to be included in the revenue of companies that received payment by credit card.
STF Held that the Disallowance of Presumed ICMS Credits Granted without CONFAZ’s Authorization Is Constitutional
The Supreme Court held that state legislation that disallows the ICMS credit recorded by taxpayers due to acquisitions from other states is constitutional. The decision deals with credits that, even though fully stated in the tax document, exceeded the value of the ICMS effectively paid in the state of origin, reduced as a result of tax breaks granted without the approval of the National Council for Fiscal Policy (“CONFAZ”).
In this context, the STF also allowed the proportional reversal of ICMS credits due to the presumed tax credit granted by another state. In a hearing in a virtual plenary session of Extraordinary Appeal 628075, the STF justices, by majority, established this rule: “The proportional reversal of ICMS credit made by the state of destination, due to the presumed tax credit granted by the state of origin without authorization of CONFAZ, does not violate the constitutional principle of non-cumulativity.”
Brazilian Government Withdraws Urgency Status from Tax Reform Bill Sent to Congress
The executive branch canceled the urgency status request for the tax reform bill before the Brazilian Congress. This was evidently done because the administrative reform bill, which concerns the government apparatus and civil servants, is now the administration’s priority for the time being.
The tax reform bill was divided into parts to facilitate approval by Congress. The first part, which aims to replace the current PIS and Cofins taxes with the Goods and Services Contribution (“CBS”), already faces resistance for the services sector, indicating that the administration might have a difficult time getting it approved.
