Brazilian Tax Review – April 2021 14 de April de 2021

Supreme Court Schedules the Trial of the so-called “Tax Case of the Century”

The Supreme Court has scheduled the hearing of a motion for clarification of a decision that deals with the exclusion of the ICMS tax from the PIS and COFINS tax calculation bases for April 29, 2021.

In 2017, the Supreme Court ruled that the ICMS tax must be excluded from the PIS and COFINS tax bases. Now, the Court will decide a motion for clarification presented by the Federal Attorney General’s Office, which, among other matters, discusses what ICMS tax amount is to be excluded (the amount stated on the tax invoice or the ICMS amount actually paid by the taxpayer, i.e., after credits and debts). Additionally, the Federal Attorney General’s Office has requested a so-called “modulation” of the effects of the decision, in order for the decision to be applicable only to taxable events subsequent to the judgement.

As this case involves a very significant amount of money for taxpayers and the Brazilian government, it is being closely watched.


Supreme Court Concludes Tax Dispute on Software

The Supreme Court held that ICMS (state indirect tax on goods) does not apply to licensing or any assignment related to software, since these transactions are subject to the ISS (municipal tax on services).

The majority of the judges held that the supply of software, whether customized or off-the-shelf, is a service that results from human effort. Therefore, these transactions must be subject to ISS tax and not the ICMS tax.

The Supreme Court also modulated the effects of the decision, covering several situations involving taxpayers, states and municipalities, in order to establish an equal treatment amongst defaulters, liquidators and those with lawsuits pending in court.

For example, taxpayers that paid only the ICMS tax for the periods prior to the judgement are not entitled to a refund, and the municipalities cannot charge the ISS tax for the same period; whereas taxpayers that paid only the ISS tax had their payments validated and the states cannot charge the ICMS tax for past periods.

In this context, it is very important for companies to verify which tax was applied to their transactions so they can determine whether they need to take any action.


Supreme Court holds that gifts and inheritances abroad are not subject to the state Gift and Inheritance Tax

In February 2021, the Brazilian Supreme Court ruled, as a binding precedent, on the application of the Gift and Estate Tax (ITCMD) to gifts and inheritances that occur abroad. The Court held that states and the Federal District do not have the power to pass laws that govern the collection of these taxes when the taxable events occur abroad.

The decision was based on the fact that the Brazilian Constitution requires a supplementary law to levy the ITCMD tax when the donor is domiciled or resident abroad, as well as when the deceased person owned assets abroad, in order to determine which state has the power to tax such transactions.

This decision will apply only to taxable events that occur after the decision is published (it has not been published yet), but also safeguard the rights of taxpayers who have already filed lawsuits at the time of the trial.


Technical Services taxation controversy – Tax Treaty to Avoid Double Taxation between Brazil and Spain

The Superior Court of Justice (STJ) recently analyzed the taxation of cross-border remuneration for technical engineering services, provided by a Spanish company, to determine whether the amounts were subject to taxation abroad (country of residence) or subject to the Brazilian withholding tax (source country), under the Brazil-Spain DTC.

The Court ordered the return of the case to the Federal Regional Court (TRF3) to review the prior interpretation that the income should be classified under article 7 as “business profits,” and ordered the lower court to review whether the funds are considered profits and, therefore, should be subject to exclusive taxation in Spain; classified as royalties (article 12) and subject to a 15% WHT in Brazil and a 25% tax sparing credit in Spain; or as an independent personal service (article 14) and subject to a regular WHT in Brazil and deductible from the income tax basis in Spain.

The order for verification by the TRF3 aims to preserve the correct tax incidence on the transaction and to confirm whether the company is using a hybrid arrangement to avoid taxation in both countries, since the objective of the Treaty, in addition to avoiding double taxation, is also to prevent tax evasion.


Central Bank – Census of Foreign Capital in Brazil

April 4 was the deadline for submitting the Declaration of Brazilian Capital abroad.  Now companies should turn their attention to the five-year Census of Foreign Capital in Brazil.

The purpose of this declaration is to provide the Central Bank with information for decision-making on economic policy, in addition to assisting the activities of economic researchers and international organizations.

The following situations are subject to the obligation to provide the declaration, on the basis date of December 31, 2020:

  • Legal entities headquartered in Brazil, with direct ownership by non-residents in their share capital, in any amount;
  • Investment funds with non-resident shareholders, through their managers; and
  • Legal entities headquartered in Brazil, with a total debit balance of short-term commercial credits granted by non-residents, in an amount equal to or greater than the equivalent of US$ 1 million.

The period for submitting the declaration starts on July 1, 2021, and ends on August 16, 2021.


Supreme Court maintains secrecy of information on the repatriation of assets

In 2016, the law on the repatriation of assets abroad offered special conditions for regularization of assets with legal origin held by Brazilian taxpayers abroad. The regularization took place with the payment of 15% income tax on the regularized amount, plus a 100% fine on the tax amount.

In contrast to the taxpayers’ obligations, the legislation established the impossibility of using it as the only evidence or element for the purposes of criminal investigations and ensured the confidentiality of the information provided.

However, the guarantee of secrecy has begun to be challenged in the Supreme Court, under arguments of violation of constitutional principles.

In a decision in March 2021, the Supreme Court held that the prohibition on sharing information provided by taxpayers is constitutional and equated the disclosure of information with breach of fiscal secrecy.

That is an important decision to maintain legal security and the integrity of the repatriation program, mainly for taxpayers who trusted the law and chose to repatriate their assets abroad, based on the obligations and rights that were provided.


Recent decision on taxation of income from trusts

Trusts are a widely used tool internationally, but are not yet regulated by the Brazilian legislation.

In short, the settlor of the trust transfers the ownership of the assets to a third person (trustee), who is responsible for the administration of resources in favor of the beneficiaries of the trust.

Upon receiving amounts by the beneficiaries, there are discussions regarding the taxation in the Brazilian scenario as to whether there should be an income tax, if the revenue constitutes income from abroad, or from the Gift and Estate Tax (“ITCMD”), as these are perceived gifts. It is important do mention that the taxation by the ITCMD is more advantageous from an economic point of view.

Regarding this matter, in March 2021, the Brazilian IRS analyzed the taxation on the amounts received from trusts abroad and took the position that they are taxable income. It is important to mention that this position is binding on federal tax authorities.

At the judicial level, a recent trial court decision in São Paulo (Writ of Mandamus #5017217-81.2020.4.03.6100) held that it is not possible to classify the amounts received as gifts from the trustee to the beneficiaries and the income should be taxed by the income tax.

Despite the unfavorable precedents, it is a matter that has not yet been widely discussed by the judiciary, so that the situations of each specific case can influence in defining the legal nature of the amounts received and their tax consequences.


Superior Court of Justice Held that 1% Additional Amount of Cofins-Import does not apply to Exempt Products

The Superior Court of Justice (“STJ”) granted the special appeal of two pharmaceutical companies to remove the obligation to pay the additional Cofins-Imports, calculated at 1% on the imports of medicines exempted from this contribution.

For the court, the benefit granted to these products in 2008, which reduced the Cofins-Import rate to zero, was not changed in 2013, when the additional 1% in Cofins-Import was created.

One must note that, although the decision analyzed specific products, the conclusion could also apply to other products that are in a similar situation. Therefore, it is important that companies pay special attention to the taxation of products subject to additional Cofins-Import.