BRAZILIAN TAX REVIEW – MARCH/APRIL 2018 6 de April de 2018

Superior Court of Justice Establishes Criteria for Approval of PIS/COFINS Credits on Inputs

The Superior Court of Justice has taken up the decision of Special Appeal #1.221.170/PR, which deals with the definition of inputs for the purposes of Social Integration Program Tax (Programa de Integração Social), or PIS, and Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS, credits.

In the decision, which was submitted to the system for repetitive binding appeals, the court solidified the position that using the credits must observe the criteria of the essentiality or relevance of the expense for the taxpayer’s activities.

The Superior Court of Justice also approved the following thesis that summarizes the issue: “The definition of input must be determined in light of the criteria of the essentiality or relevance, taking into account the importance of a given item, good or service for the conduct of the taxpayer’s economic activity.”

Although the appellate decision has not yet been formalized and will need to be analyzed to determine the real scope of the decision, it is nonetheless true that the Superior Court of Justice’s position is favorable to taxpayers and could open a path to recovering amounts overpaid in the past and to reducing PIS/COFINS amounts paid monthly by companies.

PGFN Issues Regulations for Freezing Assets without a Court Order

Attorney General’s Office for the National Treasury (Procuradoria-Geral da Fazenda Nacional), or PGFN, Ordinance 33/2018 regulates the procedures for freezing debtors’ assets without seeking a court order, under Law 13,606/18. With this ordinance, the treasury can record the debt in real and chattel property registries immediately after it has been listed as a past-due debt, even before a tax execution action has been filed.

The constitutionality of this measure has already been challenged before the Federal Supreme Court, under the argument that the so-called “pre-execution recording” violates the principles of due process, adversary proceedings, a broad defense and separation of powers, among others.

OECD/G20 and the European Commission Publish Reports about the Tax Challenges of the Digital Economy

On March 16, 2018, the OECD published an intermediary report about the tax challenges arising under the digital economy, as a continuation to the studies published in BEPS Action 1.

The report discusses how digitalization affects all the areas of tax systems, to provide new service tools to the tax authorities and to taxpayers and to increase the efficiency of identifying tax evasion and of collecting taxes.

A few days later, on March 21, 2018, the European commission proposed new rules to ensure that digital business activities are taxed fairly and in a way that favors growth in the European Union. The suggested measures include a joint reform of the European rules for the taxation of corporate entities in so-called digital economy activities, such as the creation of a definition of a virtual permanent establishment and rules for the allocation of profit among the member states, as well as a provisional tax on certain revenue from digital activities. These suggestions will be submitted for deliberation.

PGFN Regulates Transfer of Real Property in Payment of Tax Debts

The Attorney General’s Office for the National Treasury (Procuradoria-Geral da Fazenda Nacional), or PGFN, has published PGFN Ordinance 32/2018, which states the conditions and requirements for indebted taxpayers to transfer real property as payment. The ordinance covers nontax and tax debts listed as past-due, whether or not subject to a court decision, except those that originated under the “National Simple” system.

Among the provisions that should be noted is the requirement that the taxpayer release a claim to any overpayment if the appraisal price of the real property is greater than the debt to be extinguished, and the requirement that, if there has been a deposit into court, the real property can be used only for the balance not covered by the deposit.

Seeking Greater Exchange of Information, Brazil Approves Protocols in Treaties to Avoid Double Taxation with India, South Korea and South Africa

The presidential decree implementing the protocol that amends the Convention to Avoid Double Taxation between Brazil and India has been published. Additionally, the Brazilian Senate has ratified similar protocols in the conventions with South Korea and South Africa (a presidential decree is still needed to bring these latter two protocols into effect).

In all three cases, the protocols are intended to update and expand the reach of the article concerning the exchange of information among the tax authorities of Brazil and the other countries, allowing the signatories greater access to information that is material to collecting taxes in their countries.

Brazil Expands its Social Security Agreement Network

Brazil has signed a social security agreement with Israel, which still needs to be ratified by the Brazilian Senate and implemented through a presidential decree before it becomes effective. Additionally, the Brazilian Senate has ratified a Social Security Agreement between Brazil and Luxembourg, which is still awaiting a presidential decree.

These agreements give each country’s workers who are resident in the territory of the other country the opportunity to take advantage of the contribution periods in the two countries to obtain the social security benefit.

Brazil Potentially Joining the OECD Entails an Important Work Program to Study Local Transfer Pricing Rules

The OECD and the Brazilian government have launched the project “Transfer Pricing in Brazil,” with the following objectives over the course of three phases: (i) to analyze the legal and administrative framework in effect in Brazil; (ii) to evaluate its strengths and weaknesses; and (iii) to explore options for closer alignment between Brazil and OECD member countries.

This work program was created in the context of Brazil potentially joining the OECD. Since there are important differences between the transfer pricing rules used in Brazil and OECD guidelines, the OECD has chosen to create this program to better understand the differences and avoid double taxation and practices that hide profit.

CARF Decides that Revenue from Travel Agencies Is Restricted to Commissions

The Administrative Tax Appeals Board (Conselho Administrativo de Recursos Fiscais), or CARF, has taken up an appeal filed by a travel agency in which the composition of the company’s revenue is at issue.

The taxpayer was issued an infraction notice by Brazilian Federal Revenue for not having included all of the amounts received by the agency in the sale of tourist packages, which include the amounts passed on to hotels, airlines, tourism operators, etc., in its taxable operating revenue. In its challenge, the taxpayer argued that those amounts were not its own revenue but that of third parties, with its own operating result consisting exclusively of the commissions received for this intermediation service.

On the merits of the case, the CARF board granted the taxpayer’s appeal, recognizing that, in fact, the travel agency should recognize revenue only in relation to the commissions on the sales. Brazilian Federal Revenue’s position on this matter was therefore rejected.

Voluntary Admission Does Not Apply to Special Customs Methods

The Superior Chamber of the Administrative Tax Appeals Board (Conselho Administrativo de Recursos Fiscais), or CARF, has analyzed a case in which the taxpayer was issued an infraction notice with a fine for failing to comply with the deadline for exporting a good under a temporary admission customs method. In the appeal, the taxpayer claimed that the penalty should be lifted because it made a voluntary admission of its failure.

However, the CARF maintained the infraction notice on the argument that the institute of voluntary admission eliminates requirements related only to the principal obligation and does not impede the application of customs fines.