Brazil has reduced from 20 percent to 17 percent the maximum income tax rate required to designate a location that meets the other requirements as a low-tax jurisdiction for transfer pricing and other tax purposes.

The change was made via Ordinance 488/2014 of the Ministry of Finance, published in the official gazette December 1.

Since 2009, Brazil's transfer pricing and low-tax jurisdiction rules have applied to any transaction subject to a favorable tax regime in the home country, even if the parties are unrelated.

The following conditions now characterize a tax regime as sufficiently favorable to trigger the transfer pricing rules and punitive withholding tax:

  • no tax on income or taxation at a maximum rate of 20 percent;
  • tax breaks for nonresident individuals or companies with no requirement for substantial economic activity in that country or location, provided there is in fact no substantial economic activity in that country or location;
  • no tax on foreign-source income or taxation at a maximum rate of 20 percent; and
  • no access to information about the corporate structures of legal entities, the ownership of assets or rights, or economic transactions.

With the publication of Ordinance 488, countries with income tax rates higher than 17 percent will no longer be treated as low-tax jurisdictions, provided they do not meet the other conditions.

The new rules may require a further change to Brazil's blacklist of low-tax jurisdictions to remove Brunei and the Madeira Islands.

In practice, the rate reduction may exclude transactions with some countries from stricter tax and transfer pricing rules, as well as restrictions on the deduction of interest and other payments.

The Federal Revenue Department will soon issue regulations indicating the locations now excluded from Brazil's blacklist as a result of Ordinance 488.

Originally published in the December 3, 2014 edition of World Tax Daily (Copyrights Tax Analysts)

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