News
Brazilian Network of Conventions to Avoid Double Taxation Expands
As from the beginning of next year (January 1, 2023) Decree 11.109/2022, which was enacted in June of this year, takes effect to avoid double taxation between Brazil and the major Southeast Asian market hub, the country of Singapore.
Moreover, in August of this year, Brazil signed a Protocol to update its agreement with the world’s second most populous nation, India, and signed a new agreement to avoid double taxation with South America’s second most populous nation, Colombia.
This year, the Commission of the Brazilian Representation in the Mercosur Parliament (Parlasur) also approved the agreement to avoid double taxation between Brazil and its small southern neighbor, Uruguay, that had been signed in 2019.
For the latter three cases above (India, Colombia and Uruguay), the documents signed still need to be approved by Brazil`s National Congress and signed by either President Lula or Bolsonaro (depending on which one of them wins the second round of voting set for October 30, 2022).
Brazilian Government Prepares to Alter the Nation`s Transfer Pricing Rules
Brazil`s Federal Revenue Bureau (RFB) has made a series of presentations to several major players in the nation`s economy regarding the future project intended to bring the country`s legislation more into line with the norms of the Organization for Economic & Commercial Development (OECD) regarding international transfer pricing transactions.
The idea is for the RFB to prepare a legislative bill or provisory measure after sounding out market suggestions and criticisms, though the precise form in which the project will be presented has not yet been defined.
This is currently a major concern of the Brazilian Government, as alignment of local transfer pricing rules to those of the OECD is one of the requisites for Brazil to join this major international organization.
Payment for Technical Services Rendered by Residents of Japan are Exempt from Brazil`s WIT
Brazil`s Federal Revenue Bureau (RFB) recently resolved Inquiry 20/2022 and issued its interpretation that the nation`s Withholding Income Tax (called IRRF) is not to be levied on payments for some services performed in Brazil by companies set up in Japan. The list of services includes technical and administrative assistance without technology transfer and sales commissions for such services.
This interpretation results from application of the Convention to Avoid Double Taxation signed between Brazil and Japan. The Convention calls for the profits of companies only to be taxed in the country where the party performing the services resides. Furthermore, such agreement does not equate remuneration for technical assistance services to royalties, which would permit IRRF taxation in Brazil.
The agreement with Japan is one of just five treaties signed (and the only one with a non-European nation), out of a total of 35 currently in effect, that does not equate technical assistance services with royalties. The other four are those with Austria, Finland, France, and Sweden.
Highest Brazilian Administrative Tax Chamber turns down taxation of profits earned by foreign subsidiaries
Earlier this year (on May 11, 2022), the 1st Panel of the Superior Tax Appeals Chamber (CSRF – the highest administrative judgment level) decided that Article 7 of the OECD Model Convention (followed by the treaties signed by Brazil with other nations to avoid double taxation) prevents profits accrued by non-Brazilian subsidiary companies from being taxed here (Decision 9101-006.097).
In the specific case analyzed by the CSRF, the corporate taxpayer had not included in its taxable income for Corporate Income Tax (IRPJ) and Social Contribution (CSLL) the profits accrued by its subsidiary companies in Spain and Luxemburg, owing to the provisions in this sense in the agreements with those nations signed by Brazil to avoid double taxation.
Brazilian legislation requires that profits accrued by foreign subsidiaries be included in the calculation of corporate taxes of Brazilian companies. The controversy arose regarding the classification of such earnings: whether the profits of the Brazilian company would be taxed (which would remove application of the treaties), or whether there would be indirect taxation of the earnings of companies headquartered abroad (which would be contrary to Article 7 of the OECD`s Model Convention).
The decision, ruling against taxation in Brazil, was handed down according to the tie-breaking criterion in the taxpayer`s favor, instituted by Law 13.988/2020, which overturns the CSRF`s previous interpretation. The new interpretation is in line with Brazilian Courts, and guarantees greater juridical security to Brazilian companies with overseas subsidiaries headquartered in nations that have double taxation avoidance treaties signed with Brazil.
Taxation Transaction – Negotiation of federal tax debts
Towards the middle of this year (June 2022) Law 14.375/22 expanded the transaction benefits and hypotheses regarding federal back taxes owed. The measure was adopted to permit renegotiation of tax debts, with the payment period expanded and the possibility of obtaining debt reductions included.
Among the main changes, highlights include the rise from 50% to 65% of the maximum discount that may be granted for such a transaction and expansion of the maximum installment period from 84 to 120 months. The new law also established the possibility of payment with IRPJ tax loss credits and negative results for CSLL purposes, precatory credits and the possibility of transacting debts that are being contested in the administrative sphere with respect to the RFB that have not been classified yet as federal active debts.
In August of 2022, the administrative rulings were published to regulate these matters by the Brazilian Federal Treasury Attorney General`s Office (PGFN) and the RFB.
At the level of the PGFN, the action had the positive aspect of expanding the access to individual transactions, reducing the minimum amount for this mode, and instituting the so-called “Simplified Individual Transaction“. On the other hand, the Ruling severely restricted the use of IRPJ tax losses and negative CSLL results, clearly extrapolating legislative provisions in their strict sense, paving the way for interested taxpayers to file suits to protect their rights.
In the case of the RFB, the positive aspects of the recent regulations decreed by the PGFN were upheld – such as greater access to “individual” and “simplified individual” transactions that may cover debts of higher than one million reais (R$ 1M). Also now allowed are broader use of IRPJ tax losses and negative CSLL result. On the other hand, the new regulations do not expressly deal with the possibility of using credits recognized by court decisions and qualified with respect to the RFB, which was one of the taxpayers` expectations.
Reduction of Brazilian Excise Tax Rates
Ever since April of 2022, Brazil`s Federal Government has been trying to reduce excise tax (IPI) rates on several products through Decrees that have been the target of constant questioning in the courts.
The object of the discussions involving the attempts to reduce the tax rates is the negative impact that the reductions would supposedly have on the operations of companies located in the Manaus Duty-Free Zone (ZFM) since its competitiveness could be affected by such reductions.
Considering that the zone`s differentiated economic model is protected by Brazilian Constitution, the reduction attempts carried out by the Federal Government have been suspended by decisions of the Supreme Federal Court – STF (direct constitutional appeal number ADI 7153), until the IPI rates for all ZFM products are kept at the original percentage.
The most recent adaptation, by the Executive Branch of the Federal Government, to the demands discussed by the Supreme Court, was the publication of Decree 11.182 on August 24, which has already been forwarded for analysis by the STF as direct constitutional suit number ADI 7153, though it has not yet been decided upon.
This is an issue that direct influences the competitiveness of companies operating in Brazil and is bringing juridical insecurity to taxpayers, since they are in a very difficult position regarding how to correctly apply excise taxation here.
Application of International Treaties for Avoidance of Double Taxation – Dividends received by Spanish individual taxpayer
In July of 2022, the Superior Court of Justice of Catalonia (Tribunal Superior de Justicia) analyzed a case involving the tax exemption of dividend received by an individual party from a Brazilian company.
In brief, the decision confirmed that dividends received by a Spanish Citizen are tax exempt in Spain on account of the “Convention between Brazil and Spain to avoid double taxation”, plus the prevalence of the international treaty over the national provisions of Spain.
Even though the case deals with an individual, it is an important precedent that should be appraised from a corporate standpoint. It could even be used to plead for tax exemptions in similar cases, including those involving other countries and corporate tax beneficiaries.
