Interpretative Act (Ato Declaratório Interpretativo) No. 7, of August 15, 2014, issued by the Brazilian Internal Revenue Service (Receita Federal do Brasil – RFB), hereinafter referred to simply as IA 7/2014, deals with the taxation of cross-border payments for the use of data centers located abroad (i.e. based outside Brazil), known as offshore data centers. Our comments on IA 7/2014 are expressed herein.
IA 7/2014 is in full force and effect since August 18, 2014, date of its publication in the Official Gazette of the Union (Diário Oficial da União - DOU), and it applies to any and all amounts paid, credited, delivered or remitted by individuals or legal entities resident or domiciled in Brazil to companies headquartered abroad which are identified as offshore data centers.
According to IA 7/2014, when the Brazilian source of payment hires offshore data centers for the use of infrastructure for storage and remote high performance data processing systems, the transactions are deemed to be typical provision of services, and cannot be characterized as rental of movable assets, for tax purposes.
The consequence of this interpretation is that the use of offshore data centers triggers the following federal taxes in Brazil:
- withholding income tax (Imposto sobre a Renda Retido na Fonte – IRFF), at the rate of 15%. This percentage will be increased to 25% whenever the recipient is located in a tax haven jurisdiction;
- Cide-royalties contribution (Contribuição de Intervenção no Domínio Econômico destinada a financiar o Programa de Estímulo à Interação Universidade-Empresa para o Apoio à Inovação – Cide-royalties), at the rate of 10%, regardless of the location of the recipient;
- PIS-importation contribution (Contribuição para o PIS/Pasep-Importação), at the rate of 1.65%, regardless of the location of the recipient;
- Cofins-importation contribution (Contribuição para o Cofins-Importação), at the rate of 7.6%, regardless of the location of the recipient; and
- IOF (Imposto sobre Operações de Câmbio), which is the financial tax levied on the foreign exchange transaction, at the rate of 0.38%, regardless of the location of the recipient.
IA 7/2014 only refers to the federal taxes and it does not address the Services Tax (Imposto sobre Serviços – ISS), since the ISS is a municipal tax. The ISS rates vary from 2% to 5%, depending on each municipality. In the city of São Paulo, for example, the applicable ISS rate is usually 5%.
Prior to IA 7/2014, RFB issued Ruling (Solução de Divergência Cosit) No. 6, published on July 29, 2014, in which it is mentioned that the performance of support activities, security, internet access, room temperature control and management services may not be segregated, for tax purposes, from equipment rental, since those services are embedded in data center activities.
Furthermore, the interpretation outlined herein clarifies that it modifies any conclusions on the contrary that may be expressed in Query Solutions (Soluções de Consulta) or Rulings issued prior to the publication of IA 7/2014, regardless of any communication to the public.
The applicable legislation remains exactly the same and no changes whatsoever have been introduced so far. IA 7/2014 is a simple clarification of the interpretation of the Brazilian tax authorities on the subject and affects all the users of offshore data centers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.