Brazil: Brazilian Tax Review – October 2018

Important New Private Letter Ruling on Transfer Pricing

The Federal Revenue Office issued the Private Letter Ruling 95/2018, which has analyzed the transfer pricing calculation through the Resale Price Method by a company that imports steel bars and cut them into pieces for the resale in the domestic market.

The tax authorities held that this activity is not characterized as "siderurgy", but as "manufacturing in general", in a way that the company is eligible to use a lower fixed margin for transfer pricing purposes, which is more advantageous for the taxpayer.

Important to note that this Private Letter Ruling might be applicable to other industries and reduce other TP margins, depending on a case-by-case analysis.

Tax Authorities Revise its Understanding on the Taxation of Admitted Reinsurers' Business in Brazil

The Federal Revenue Office issued the Private Letter Ruling 91/2018, which, among other aspects, has revised its understanding on the taxation of the admitted reinsurer's business in Brazil.

According to the tax authorities, if the admitted reinsurer's representative in Brazil habitually exercises the full authority to conclude contracts on its behalf, the profits earned by the non-resident must be levied by the domestic taxation.

On the other hand, if the representative only provides auxiliary activities to the admitted reinsurer, such as relationship with regulatory bodies or technical and commercial assistance, there would be no attribution of a permanent establishment in Brazil. Thus, only the source taxation would be levied.

This is a change to the Federal Revenue Office's interpretation. Previously, the Private Letter Rulings 62/2017 had assumed that the admitted reinsurer's representative always exercises the authority to conclude contracts on its behalf, in a way that the profits earned by the non-resident would be subject to the domestic taxation in any occasion. However, according to the new ruling, such qualification demands a case-by-case analysis.

Brazil-USA Social Security Agreement is Effective as of October 1st, 2018

Brazil has signed a social security agreement with the United States of America, which became effective as of October 1st, 2018.

This agreement gives each country's workers who are resident in the territory of the other country the opportunity to take advantage of the contribution periods in the two countries to obtain the social security benefit.

Important New Definition of "Service Export" for PIS and COFINS Exemption Purposes

According to the Brazilian legislation, services provided by Brazilian companies to non-residents, which generate cash inflow, are exempted from PIS and COFINS.

In this context, the Federal Revenue Office issued the Normative Opinion 1/2018, stating that the PIS and COFINS exemption only applies if the benefit (result) of the service is verified abroad the Brazilian territory. Moreover, such Normative Opinion has analyzed many situations that could be considered as a service export.

Notwithstanding, this requirement (result of the service occurring abroad) has been stated only in the ISS legislation, in a way that it should not be applicable to PIS and COFINS. In this sense, PIS and COFINS exemption must be applicable to any service provided to non-residents, which generate cash inflow, regardless where its result occurs. The exemption is also set forth in the Federal Constitution which makes Normative Opinion 1/2018 challengeable before courts.

Federal Revenue Office's Controversial Opinion on ICMS Exclusion from the PIS and COFINS Tax Bases The Federal Revenue Office has issued the Private Letter Ruling 13/2018, analyzing the

effects of Supreme Court's decision on the ICMS exclusion from PIS and COFINS bases (RE 574.706/PR).

According to the tax authorities, the aforementioned decision supposedly held that the ICMS to be excluded is the amount to be paid on a monthly basis, i.e., the net amount of debts and non-cumulative credits. Despite of that, Minister Carmen Lucia, the rapporteur on the case, followed by the majority in the trial, held that the ICMS to be excluded is the amount highlighted in the tax invoice, i.e., before the offset against the non-cumulative credits.

Therefore, the Federal Revenue Office's opinion has no legal grounds and might be challenged by the taxpayers.

Brazilian Government allows funds to invest in bitcoins and cryptocurrencies abroad

Earlier this year, the CVM – the equivalent to the SEC in Brazil – had issued a regulation to forbid local funds from investing in bitcoins and other cryptocurrencies (http://www.cvm.gov.br/export/sites/cvm/legislacao/oficios-circulares/sin/anexos/oc-sin-0118.pdf).

On September 19, though, the CVM's office for supervision of relations with institutional investors clarified that this regulation does not prevent indirect investment in bitcoins and other cryptocurrencies, by means of acquisitions of other funds' shares or derivatives, as long as these operations are allowed in the foreign jurisdictions concerned (http://www.cvm.gov.br/noticias/arquivos/2018/20180919-1.html).

As the CVM's technical department has pointed out, however, administrators, managers and auditors must keep some precautions in mind when acquiring and maintaining a portfolio that includes bitcoins and other cryptocurrencies.

The CVM highlights the following issues as a concern for market operators: unlawful practices, governance and due diligence, independent auditors and pricing.

As for the possible unlawful practices, the funds must be aware of money laundering, non-equitable and fraudulent practices or price manipulation.

The funds' management must also carry out its operations with due diligence to avoid the purchase of fraudulent cryptocurrencies.

When it comes to valuation, the CVM recommends that the cryptocurrencies must have liquidity so as to allow the periodic pricing of the funds' shares.

Brazilian Tax Authorities confirm their understanding on the Taxation of Remittances regarding Marketing/Distribution and End-User Rights Related to Software

The Federal Revenue Office (RFB) has recently issued Private Letter Ruling (PLR) 2,010/2018, 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 is subject to a 15% withholding income tax.

This PLR confirms the authorities' position that such remittances must be subject to the taxation as royalties. In other

On the other hand, according to Private Letter Ruling 6,014/2018, also issued recently by the Federal Revenue Office, payments made by Brazilian sources to non-residents for an end-user software license are not subject to such taxation since the software is destined for the exclusive use of the purchaser and there is no intention to sell it to third parties. In this case, the RFB maintains that the license is equivalent to an import of digital goods that is subject to neither the taxes due at regular customs clearance of merchandise nor to the remittances related to the import of services, as long as the software is downloaded by the end-user (a different RFB interpretation applies to software-as-a-service).

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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