This article aims to provide an overview of the tax aspects on international cost-sharing agreements, in view of the Brazilian legislation and some recent Private Letter Rulings issued by the local tax authorities. The comments hereof refer to structures by means of which an international company centralizes administrative costs, being reimbursed by a participating company in Brazil.
Firstly, one must note that international cost-sharing agreements of non-core activities have always been a controversial matter in Brazil, once this topic has never been properly regulated by the local legislation.
In this context, tax authorities had originally issued some Private Letter Rulings[i] stating that the expenses incurred by the Brazilian participating entity were non-deductible for corporate income taxes purposes and the remittances related to the recharges would have to be subjected to the same taxation as on service provisions.
In this regard, the adoption of international cost-sharing agreements used to be avoided by multinational enterprises in Brazil, taking into account its tax inefficiency (non-deductibility in the Brazilian level and high taxation on the recharges).
Notwithstanding, Private Letter Ruling 8/2012, issued by the General Tax Coordination Office ("COSIT"), changed this understanding in favour of taxpayers who intended to adopt the international cost-sharing structure. This Ruling stated that – as long as some requirements are met – tax deductibility of the cost allocation is allowed and the correspondent remittances may be taxed or not, according to the nature of the recharge.
In summary, Private Letter Ruling 8/2012 determined that expenses related to non-core activities, shared by means of international cost-sharing agreements, are tax deductible for the participant companies in Brazil, as long as the involved companies observe the following requirements:
- the expenses refer to services/goods effectively provided/received;
- the shared services or costs are considered necessary expenses to support the participating companies' main activities and their ability to generate profits;
- the cost-sharing agreement sets forth reasonable and clear criteria for allocation of the expenses among the companies and the amounts reimbursed cannot include a profit margin; and
- the centralizing company records as expense, in its income statement, only its share of the expenses.
Therefore, if these requirements are met, the expenses are tax deductible in the Brazilian level. Otherwise, in case they are not observed, the cost-sharing shall be regarded as a service provision, and the tax deductibility of the shared expenses will have to be submitted to the arm's length principle, calculated by means of one of the transfer pricing methods in force.
Besides, Private Letter Ruling 8/2012 stated that recharges must be subjected to withholding taxation in Brazil only when related to services subcontracted by the centralizing company abroad to outsourced providers. In this case, recharges must be subjected to the same taxation on the remittances as if the Brazilian company were directly hiring the outsourced company abroad. For example, if the centralizing company contracts a third party service and shares its cost along with the other companies of the group under the cost-sharing agreement, the Brazilian participant's recharge will be subjected to all taxes levied on services provided by a non-resident.
Hence, according to Private Letter Ruling 8/2012, recharges related to activities performed by the centralizing company abroad itself (i.e., not outsourced) should not be subject to withholding taxation in Brazil.
Notwithstanding, recently, tax authorities issued Private Letter Rulings 43/2015 and 50/2016, which binds all taxpayers, changing the understanding previously issued by Private Letter Ruling 8/2012, with regards to the withholding taxation. According to the aforementioned Private Letter Rulings, international cost-sharing agreements represent a service provision, in a way that the recharges must be taxed as a payment for services provided abroad, not being relevant whether the activities were performed by the centralizing group company or outsourced to third parties.
Note that Private Letter Rulings 43/2015 and 50/2016 analysed specifically the levy of the Contribution for Intervention on the Economic Domain (CIDE-Royalties) and PIS/COFINS-Import, respectively. Nevertheless, as they concluded that cost-sharing agreements represent a service provision, all the correspondent taxation should apply, as follow:
- Withholding Income Tax ("WHT") at a 15% rate, or 25% rate if the beneficiary is located in a tax haven or a country with a privileged tax regime;
- Contribution for Intervention in the Economic Domain ("CIDE") at a 10% rate (remittent's tax, possible to be discussed in Courts);
- Social Contributions on Revenues and Importation ("PIS/COFINS-Import") at a 9.25% rate (remittent's tax);
- Municipal Tax on Services ("ISS") at a rate that varies from 2 to 5%; and
- Foreign Exchange Tax ("IOF-FX") at a 0.38% rate (remittent's tax).
Nonetheless, we believe that there are still strong arguments to challenge the interpretation set out by Private Letter Rulings 43/2015 and 50/2016, towards the non-taxation of the international cost-sharing recharges (not related to outsourced providers), as long as all the requirements related to this structure, as listed above, are duly observed.
[i] Private Letter of Rulings 23/2008, 354/2008 and 462/2006.
Georgios Theodoros Anastassiadis
Director of the Direct Taxes Consulting Area at Gaia Silva Gaede Associados. Master of Science degree in Law and Accounting at the London School of Economics and Political Science (LSE). Degree in Corporate Law at the Pontificia Universidade Catolica de Sao Paulo (PUC-SP). Bachelor's degree in Law at the University of São Paulo (USP).
Heitor Cesar Ribeiro
Supervisor of the Direct Taxes Consulting Area at Gaia Silva Gaede Associados. Degree in Tax Law at Fundacao Getulio Vargas – GVLaw. Bachelor's degree in Law at Universidade Presbiteriana Mackenzie.
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