Brazil: Brazilian Tax Review - June 2018

Brazil Signs New DTCs with Switzerland and Singapore, Seeking a Larger Tax Treaty Network

Brazil recently signed Double Treaty Conventions (DTCs) with Switzerland and Singapore. These DTCs contain several rules aligned with the BEPS Project (Base Erosion and Profit Shifting), such as general anti-avoidance rules and exchange of information among the contracting states' tax authorities.

These DTCs still need to be ratified by the Brazilian Congress and implemented through a presidential decree before they become effective.

Brazil Expands its Customs Mutual Assistance Agreements ("CMAA")

In 2010 the Brazilian Government signed a CMAA with Turkey, which was approved by the Congress in 2017 and now has become effective by means of a presidential decree published in April 2018.

Additionally, the Brazilian Congress approved another CMAA in May 2018, which was signed with China in 2012. This agreement still needs to be implemented through a presidential decree to become effective.

These bilateral agreements aim to provide each contracting state with administrative assistance for the proper application of customs law, for the prevention, investigation and combating of customs offences and to ensure the security of the international trade supply chain.

Important Decision on the Tax Deductibility of Royalties for the Commercialization and Distribution of Software Paid to Related Parties Abroad

The Administrative Tax Appeals Board (Conselho Administrativo de Recursos Fiscais), or CARF, has taken up an appeal filed by a Brazilian software provider that pays royalties to a related party abroad for the commercialization and distribution of software.

The taxpayer was issued an infraction notice by Brazilian Federal Revenue for having deducted all the royalty expenses from the income tax calculation bases (IRPJ and CSLL). The tax authorities claimed that tax legislation forbids this deduction if the payment is made to a non-resident owner.

The taxpayer argued that the licenser, even though it belongs to the same economic group, could not be characterized as an owner since it does not directly own its share capital. The CARF therefore held that all the royalty expenses could be deducted from the IRPJ and CSLL calculation bases.

Rules to Change Investment Fund Taxation are Not Implemented

In 2017 the Brazilian government published Provisional Measure 806/2017, introducing significant changes to the tax treatment of Closed-End Funds ("Fundos de Investimento Fechados") and Private Equity Funds ("FIP").

However, Provisional Measure 806/2017 became ineffective since the Brazilian Congress did not convert it into law before the regulatory deadline. The tax treatment of these investment funds therefore remains unchanged.

Brazil Approves WTO Protocol on Trade Facilitation

Brazil recently approved the first Protocol Amending the Marrakesh Agreement Establishing the World Trade Organization (WTO), by means of Decree 9,326 on April 3, 2018

This protocol is meant to insert the Trade Facilitation Agreement (TFA) into Annex 1A of the Marrakesh Agreement Establishing the WTO. In turn, the TFA contains provisions for expediting the movement, release and clearance of goods, including goods in transit.

The TFA also sets out measures for effective cooperation between customs and other appropriate authorities and trade facilitation and customs compliance issues. Furthermore, it contains provisions for technical assistance and capacity building in this area. The TFA came into force on February 22, 2017, when two-thirds of the 164 WTO members accepted it.

The TFA was the first agreement concluded at the WTO by all of its members. Brazil has been a WTO member since its creation in 1995. As for the incorporation of WTO agreements into Brazilian legal system, the Brazilian Congress must approve it and a presidential decree officially incorporates WTO agreements into Brazilian domestic legal system.

The State of São Paulo Launches a Groundbreaking New Tax Compliance Program

On April 7, 2018, the State of São Paulo launched a tax compliance program (Law 1,320) that is called "In Compliance" ("Nos Conformes"). The program is intended to foster a collaborative environment between tax authorities and taxpayers.

Under the new measures, taxpayers can be classified into categories – A+, A, B, C and D – according to certain factors: (i) outstanding ICMS tax liabilities; (ii) tax declarations, tax books and invoices issued; (iii) profile of taxpayer's suppliers.

Highly ranked taxpayers will have access to benefits such as: (i) better conditions for using and transferring accumulated tax credits; (ii) simplified renewal for special tax regimes; (iii) special conditions for the payment of the ICMS tax under the tax substitution regime, and (iv) use of ICMS tax credits to pay the ICMS tax due on imports (customs clearance), among others.

Implementing regulations for the program must be issued for it to become fully applicable.

Federal Tax Tribunal (CARF) Allows Tax Offsets before Final Judicial Decision

Recently the Administrative Tax Appels Board (Conselho Administrativo de Recursos Fiscais), or CARF, granted a taxpayer the right to offset tax debts against tax credits that are still under judicial review. The allowance was based on the fact that the matter challenged by the taxpayer had already received a favorable decision from Brazilian Supreme Court in a binding legal precedent.

Based on a systematic interpretation of section 170-A of the Brazilian Tax Code – which prevents taxpayers from offsetting taxes before a final judicial decision is entered – the CARF held that the taxpayer could offset PIS/Cofins tax debts as a result of the decision on Extraordinary Appeal RE 357.950/RS, with no need for a proper decision in its favor.

Federal Tax Tribunal (CARF) Rules Stock Options Taxable

On March 21, 2018, the Superior Chamber of the Administrative Tax Appels Board (Conselho Administrativo de Recursos Fiscais), or CARF, ruled against a leading Brazilian bank, upholding a 20% Social Security Tax assessment. The decision reverses a 2015 decision from a lower chamber of the CARF.

The CARF has decided that the stock options granted under the company's plans should be treated as compensation income rather than investment income, based on the specific characteristics of each plan. As compensation income, social security tax is due on it.

In two previous cases, the Superior Chamber of the CARF upheld lower court decisions in favor of employers.

Federal Tax Tribunal (CARF) Analyses PIS/COFINS Credits in Line with New Superior Court of Justice´s Position

For the first time, the Superior Chamber of the Administrative Tax Appels Board (Conselho Administrativo de Recursos Fiscais), or CARF, has considered the new concept of input adopted by the Superior Court of Justice (STJ) in Special Appeal #1.221.170 in a case providing Social Integration Program Tax (Programa de Integração Social), or PIS, and Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS, credits for purchasing a copyright.

STJ decision solidified the position that using these credits must comply with the criteria of the essentiality or relevance of the expense for the taxpayer´s activities.

Superior Court of Justice Considers Investment Abroad not Subject to IRPJ and CSLL

The Superior Court of Justice has issued a decision on Special Appeal #1.649.184 that reinforces the Court´s precedent that the Brazilian Corporate Income Tax (IRPJ and CSLL) is not due on the positive result of investment in a subsidiary abroad.

The Decision holds that article 7(1) of SRF Instruction 213/2002 expanded the tax base of taxes, with no legal basis, by considering the positive return of equity in earnings booked in the accounting of the Brazilian company, regarding the investments in the subsidiary abroad.

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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