Brazil: BRAZILIAN TAX REVIEW – July 2017

Brazilian Federal Revenue Office Reviews its Transfer Pricing Guidelines on International Cost-Sharing Agreements

The Federal Revenue Office has issued Private Letter Ruling 99,069/2017, which states, among other things, that transfer pricing rules apply to international cost-sharing agreements related to non-core activities. However, the ruling does not mention which arm's length method applies to this type of transaction.

The new ruling represents a change in the tax authorities' position on this matter. Previously, Private Letter Ruling 8/2012 stated that cost-sharing agreements were not subject to transfer pricing rules as long as the involved companies: (i) set forth reasonable and clear criteria for allocation of the expenses; and (ii) the amounts reimbursed did not include a profit margin.

New Interpretation on the Taxation of Remittances Abroad: Marketing and Distribution Rights Related to Software

The Federal Revenue Office has issued Private Letter Rulings 18/2017, 342/2017 and 7,014/2017, stating that the acquisition of marketing and distribution rights for software generates the payment of royalties to the extent that it involves the resale of software licenses.

Therefore, the payments for such rights from a Brazilian resident to a non-resident must be subject to a 15% withholding income tax. Moreover, if the transaction entails the transfer of technology (i.e., the source code is given to the final customer), the CIDE-Royalties tax is also levied at a 10% rate.

Brazilian Court Analyzes the Classification of Services in the DTC between Brazil and Belgium

The Federal Court for the 3rd Region has recently issued a decision favorable to a taxpayer on the classification of services in the Convention for Avoidance of Double Taxation ("DTC") entered into between Brazil and Belgium.

The classification of services in DTCs has always been a controversial matter in Brazil since the local tax authorities refuse to adopt the OECD guidelines and impose the source state taxation.

In this case, a Belgium-based entity provided technical services to a Brazilian resident and the Brazilian tax authorities classified the services as royalties (Article 12), based on item 6 of the DTC's protocol, in order to apply the Brazilian withholding income tax on the remittances.

However, the Federal Court held that only services strictly connected to the transfer of technology should be classified as royalties. Therefore, in line with OECD guidelines, the technical service provided by the Belgian entity was re-classified as business profits (Article 7), which are exempt from the Brazilian withholding income tax. This decision is not final and might be subject to appeal before the Superior Courts.

Federal Administrative Tax Tribunal (CARF) Issued Important Decision on the PIS and COFINS Taxation of Loyalty Programs

The Federal Administrative Tax Tribunal (CARF) has issued a favorable decision to the taxpayer regarding the application of the Social Contributions on Revenues (PIS and COFINS) to a loyalty program service provider.

Even though the tax aspects of these programs have never been properly regulated in Brazil, the tax authorities maintain that the loyalty program provider must collect PIS and COFINS on the sale of points to its partners (banks, credit card and airline companies).

However, differently from the tax authorities' interpretation, the Federal Administrative Tax Tribunal (CARF) has held that the related revenues should be subject to PIS and COFINS taxes only at the end of the transaction, i.e., on the redemption of the accrued points by the client.

Services of Credit and Debit Cards, Leasing and Health Care Must be Paid to the Municipalities Where the Clients Are Domiciled

The Brazilian Congress has overridden the presidential veto on Supplementary Law 157/2015, aiming to enable municipalities to charge the Tax on Services (ISS) on credit and debit cards, leasing and health care in the cities where the final consumers are domiciled.

Previously such services were subject to the general ISS rule, according to which the tax should be paid to the municipality in which the service provider is located. This criterion was also confirmed by the Superior Court of Justice a few years ago. However, as a result of the new provisions, taxpayers will have to be in compliance with the regulations of each municipality in which they have customers.

Given the potential increase in compliance costs derived from the approved taxation model in light of differing regulations in different municipalities, some associations have already stated that they intend to challenge the new measures in court.

Federal Government Approves a New Amnesty Program for Tax Debts (PERT)

Published in an extra edition of the Official Gazette of May 31, 2017, Provisional Measure 783 establishes the Special Tax Regularization Program (PERT) and allows a reduction of fines and penalties related to federal outstanding debts up to April 30, 2017. The reductions apply to individuals and legal entities, including those that were subject to previous programs or that are the subject of administrative or judicial proceedings.

Among its benefits, the PERT allows taxpayers to use tax losses to offset tax debts, pay the debts in 120 monthly installments, apply discounts on penalties and interest etc., depending on the type of liability and the terms of the program.

The deadline for interested taxpayers to apply for the PERT is August 31, 2017.

Federal Administrative Tax Tribunal (CARF) Cancels the Tax Assessment Related to the Goodwill Resulting from the BOVESPA-BM&F Transaction

The lower chamber of the CARF has decided that the goodwill resulting from the merger between the São Paulo Stock Exchange (BOVESPA) and the Futures and Commodities Exchange (BM&F) was valued and amortized correctly.

The assessment was issued because the tax authorities challenged the valuation of the absorbed company's equity within the merger and, thus, the tax amortization of the goodwill derived from the transaction. Despite this, the CARF held that the valuation was appropriate and canceled the tax assessment.

The decision is not final and might be modified by the CARF's upper chamber.

Printing Services Should Not be Subject to the Excise Tax

A printing service provider has succeeded in defending the position that the Excise Tax (IPI) should not be levied on its core business, receiving a favorable decision from the Federal Administrative Tax Tribunal (CARF).

Contrarily to the tax authorities' position that printing services are subject to both the Excise Tax and Municipal Tax on Services (ISS), the Tribunal held that the Excise Tax could not be levied when the transaction is listed as subject to the Municipal Tax on Services.

This decision can be used as a precedent for the position that the Excise Tax should not be levied on other types of transactions on which the federal authorities are currently levying it.

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.

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