Norway and Brazil sign new Treaty to avoid Double Taxation
On November 4th, 2022, Brazil signed an international agreement with Norway that, among other things, would eliminate double taxation on income, as well as prevent tax evasion.
The purpose of the new agreement is to update and modernize – based on best international practices – the rules of the tax treaty in force that was signed between the two nations over three decades ago (Decree 86.710/1981).
The new treaty determines specific provision regarding offshore activities and brought about several changes, including a separate article to deal with the taxation of remuneration for technical services.
The novelty brought by the treaty is in article 23 which established that, if an enterprise carries on exploration or exploitation of the seabed or subsoil or their natural resources in a state for a period of more than 30 days within a 12-month period, the activity shall be deemed to be carried on through a permanent establishment, resulting in taxation.
Validity of the new international agreement still depends on the text being ratified by the Brazilian Congress and signed into law by the country’s President.
Brazil signs another Treaty to avoid Double Taxation, now with the UK
On November 29, 2022, Brazil signed another international treaty, this time with the United Kingdom, to eliminate double taxation on income and prevent tax evasion. Until now, the two countries did not have such a treaty signed and the new measure will contribute to greater legal security between them, potential increase in the flow of investments and reduced tax burden.
This agreement is in line with the Convention Model of the Organization for Economic Cooperation & Development (OECD) guidance and with the OECD’s project for Erosion of the Domestic Tax Base and Shifting of Profits (BEPS), and has been developed by this international institution in a clear movement in the process of Brazil signing on to the OECD.
The Treaty with the UK has introduced certain novelties in relation to those already signed by Brazil with other nations so far, notably: (i) tax rate of 10% levied on the payment of royalties (rather than 15% as in most of the agreements signed by Brazil with other countries); (ii) a specific article to regulate taxation of payments for technical services, including reduction of rates applicable in the first years of effect; and (iii) mutual agreement procedure for granting adjustments on operations subject to transfer pricing operations.
The final text further depends on certain procedures in Brazil and the UK and will require the text to be ratified by Brazil’s Congress and signed into law by the President of the Republic.
Waiver of financial statements for Brazilian subsidiaries overseas
On December 13, 2022, Brazil’s highest administrative tax appeals panel, the Administrative Tax Appeals Council (CARF), did away with arbitration of profit for Brazilian income tax purposes (Corporate Income Tax – IRPJ and Social Contribution on Net Income – CSLL) for subsidiaries of Brazilian companies set up in the US State of Delaware and in Panama.
Under a strict interpretation of Brazilian legislation, in case of non-submission of tax documents and record books, the Brazilian Federal Revenue Bureau (RFB) is to arbitrate a company’s profit and, based on this amount, set IRPJ and CSLL taxation. With respect to cases where Brazilian companies have subsidiaries overseas, our legislation calls for financial statements to be drawn up according to the norms of the commercial legislation in effect in the country of domicile.
Nonetheless, in determined locations and under specific circumstances – as in the case of Delaware and Panama – there is no local requirement for preparation and publication of financial statements.
Despite this waiver regarding preparation of financial statements, the RFB recently assessed a company with registered offices here and arbitrated the profit accrued by its overseas subsidiaries, alleging that it had not submitted the latter’s financial statements.
However, the prevailing interpretation is that such profit cannot be arbitrated, since the Brazilian company is not subject to such arbitration in relation to that part of its overall accrual that comes from subsidiary companies headquartered in places that waive the preparation of financial statements.
New transfer pricing rules
Towards the end of last year, December 29, 2022, Brazil’s transfer pricing rules changed substantially with Provisory Measure (MP) 1.152/2022 as regards determination of transfer prices on controlled transactions carried out between Brazilian companies and their related parties abroad.
The new set of regulations, which was one of the requirements for Brazil to join the Organization for Economic Cooperation & Development (OECD), establishes new methods for determination of transfer prices, including on operations involving services and intangible items, always based on the international arm’s length principle:
• Independent Comparable Price (abbreviated here as PIC);
• Resale Price less Profit (PRL in Brazil);
• Cost less Profit (MCL here);
• Net Transaction Margin (MLT in Brazil);
• Division of Profit (MDL); and
• Other alternative methods that can be justified by the taxpayer.
Owing to adoption of the arm’s length principle, criteria based on arbitration of margins and/or interest rates have been replaced by comparative transactional methods, for purposes of IRPJ and CSLL deductibility.
Among other relevant aspects that can be noted, the following also deserve being highlighted:
• The amount of the adjustment relating to transfer prices is to be reimbursed by the overseas related party to the Brazilian company, subject to updating at the rate of 12% p.a., for as long as it remains unsettled; and
• The interest related to operations for supply of financial resources which, according to the criteria established by the Provisory Measure, may be considered as a capital operation, are to be considered non-deductible for IRPJ/CSLL purposes.
Besides the new transfer pricing rules, MP 1.152/2022 restricts deductibility of royalties and technical, scientific, administrative or similar assistance in cases of payments to: a) beneficiaries domiciled in states with favorable or privileged taxation rules (the so-called “tax havens”); b) related parties, in cases in which deduction of the expense results in double non-taxation; and c) when the amounts are intended to finance related parties resulting in the cases highlighted above.
Provisory Measure (MP) 1.152/2022 only takes effect as from January 1, 2024, though the new rules may be adopted already in 2023 at the taxpayer’s option.
Travel Agencies – Reduction of Brazilian Federal Withholding Income Tax
To enhance the competitiveness of Brazilian travel agencies on international operations where they serve as intermediaries, the Federal Government has enacted Provisory Measure (MP) 1.138/2022 to reduce the Withholding Income Tax (IRRF) on such operations for a total five-year period.
At present, the IRRF rate on remittances made from Brazil to overseas firms intended to cover the expenditures of Brazilians on international trips is 25%. Considering that the tourism industry was one of the ones most affected by the COVID-19 pandemic, the IRRF rate will be reduced to 6%, with progressive increases of 1% every year and ceasing in 2027 at a 9% rate.
Considering that this Provisory Measure was published on September 22, 2022, its 60-day effective period was to have terminated on November 20, 2022. Even so, since it has not yet been debated by the nation’s Congress, its effective period has been tacitly extended for an equal period, hence closing on March 3, 2023 (final deadline considering the annual Congressional recess).
Accordingly, it is necessary for travel agencies to pay attention in relation to the deadline for this MP’s effective period. This is because if it does not become converted into a law, travel agencies operating here will still be subject to the 25% IRRF rate on remittances made overseas to cover the expenditures of Brazilians on international trips.
Superior Court of Justice – Interest on Capital Invested in Prior Years
In recent judgments, the Superior Court of Justice (STJ) handed down two decisions favorable to taxpayers, authorizing the deductibility of expenses incurred by companies on payment of expenses for Interest on Capital Invested (JCP) from prior years.
The decisions that define the legal basis for the JCP do not impose any time limit for deductions of payments made on this basis. They merely reiterate the condition that the company must have profits for the year or retained earnings and earnings reserve in an amount equal to or greater than twice the JCP that will be paid. As regards the accrual basis of accounting, the rulings determined that the obligation to pay the JCP arises when decided by the shareholders and at this time the expense is to be recognized accounting-wise, as is the respective tax ramification.
Although the two judgments highlighted here have not been affected as repetitive appeals, this positioning on the part of the STJ merely reinforces its interpretation favorable to the deduction of prior years’ JCP, an issue that has been debated for more than a decade now.
These precedents reinforce the importance of such interest, besides providing greater legal security to companies availing themselves of this option as a means of remunerating the capital invested by their shareholder.
New Administration intends to take up tax reform again
With the new government of President Luis Inácio da Silva (Lula), the Ministry of the Treasury will now have seven secretariats, as follows: Executive Secretariat; Special Federal Revenue Secretariat; National Treasury Secretariat; International Affairs Secretariat; Economic Policy Secretariat; Economic Reforms Secretariat; and Extraordinary Secretariat for Tax Reform.
The new Treasury Minister, Fernando Haddad, who took over his position on January 1, 2023, has appointed economist Bernard Appy as Secretary for Tax Reform.
Bernard Appy is the author of the bill for Constitutional Amendment 45/2019, which calls for the unification of all the taxes presently levied on consumption at present with just a single Tax on Goods and Services (“IBS”).
In interviews, Bernard Appy has stated that he is confident that approval of the new system of taxing consumption will be granted next year, which has aroused considerable expectations on the part of the market.
Government Extends Benefits on Taxation of Brazilian Multinational Profits
The Brazilian federal government has enacted a provisory measure (MP) that renews for two years certain provisions that deal with worldwide taxation set to expire as from 2023.
The first extension refers to the possibility of consolidating the P&L of all Brazilian company’s overseas subsidiaries and the second extension refers to the possibility of a presumed 9% credit on the foreign tax calculation basis, which can be used to offset the difference between the tax paid abroad (usually 25%) and that paid in Brazil (34%). This applies to overseas investees involved in manufacturing beverages and food products, construction of buildings and infrastructure projects, besides industries in general.
The Brazilian market received such extensions with tremendous relief. This is because, without renewal, both benefits would cease being effective as from 2023, making taxation of our nation’s multinationals more complex and possibly making them lose their competitiveness.
Income Tax Exemption for Certain Investments Made by Foreigners
A Provisory Measure (MP) issued by the Brazilian government reduced to zero the income tax owed by foreigners who have certain investments here.
Under the new rule, the exemption applies to the earnings of parties resident or domiciled abroad that are shareholders of Funds for Investment in Infrastructure Equity Interests (FIP-IE) and Investment in Equity Interest in Intensive Economic Production in Research, Development and Innovation (FIP-PD&I) that are received between January 1, 2023, and December 31, 2027.
Moreover, also exempted from income tax are a series of earnings received by overseas residents generated by bonds or securities that are publicly distributed, issued by private companies not classified as financial institution or mutual funds investing in credit rights regulated by the Brazilian Securities Commission (CVM), the originating party of assignor of which is not a financial institution.
The exemptions mentioned above are also valid for investments made by sovereign funds even if they are headquartered in tax havens.
Brazil expects that, with these tax benefits, it will be able to obtain funding from foreign resources for investment in the nation’s financial market.
