Comparative Guides
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Results: 4 Answers
Corporate Tax
5.
Anti-avoidance
5.1
Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
 
Brazil
As is widely recognised, specific anti-avoidance rules (SAARs) are the primary tools used by countries to counter tax avoidance. In this sense, several SAARs apply to corporate taxpayers under the Brazilian legislation (see question 5.3).

Brazil does not have a statutory general anti-avoidance rule (GAAR). That said, the limits of tax planning are the subject of intense debate, and the Brazilian tax authorities and administrative courts have been applying concepts such as abuse of law, substance over form, economic reality and business purpose to disregard transactions without an express statutory provision for several years.

For more information about this answer please contact: Henrique Lopes from Koury Lopes Advogados
5.2
What are the main ‘general purpose’ anti-avoidance rules or regimes, based on either statute or cases?
 
Brazil
Despite the lack of a GAAR in force (there is a general rule that allows the tax authorities to disregard acts undertaken for the purpose of concealing the occurrence of a taxable event, which has never been regulated), in recent years the tax authorities and the Administrative Council of Tax Appeals – the administrative body that hears tax disputes – have been disregarding transactions based on fraud, sham, abuse of law, abuse of rights, lack of business purpose, lack of economic substance and other Brazilian or foreign doctrines.

Accordingly, it has been argued in some administrative decisions that the existence of a real business purpose is an essential condition for the validity of a structure adopted by the taxpayer. Hence, it is necessary to verify whether a transaction was undertaken for the sole purpose of obtaining a tax advantage, with no other relevant purpose other than reducing the tax burden. In practice, the analysis by the administrative courts is undertaken on a case-by-case basis. This discussion has resulted in many tax assessments, several of which have involved very large amounts.

At the level of the judicial courts, there are few precedents on the limits of tax planning and they tend to be more favourable towards taxpayers in the sense that the tax authorities cannot disregard transactions put in place by taxpayers based on mere indication of fraud.

For more information about this answer please contact: Henrique Lopes from Koury Lopes Advogados
5.3
What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
 
Brazil
Brazilian corporate entities are subject to several SAARs, which include the controlled foreign company (CFC), transfer pricing and thin capitalisation rules, limitations on the deductibility of royalties and limitations on the deductibility of losses. The most relevant rules are outlined below.

Controlled foreign companies: Pursuant to the current CFC rules, taxation is imposed at the level of the Brazilian controlling company on profits accrued by each direct or indirect foreign subsidiary on 31 December of each calendar year, on an accrual basis and regardless of any distribution. Foreign tax credits are available against IRPJ.

Transfer pricing rules: The transfer pricing rules have applied since 1997, when Law 9,430/96 came into force. The system allows for the determination of the maximum amounts of deductible expenses and the minimum amounts of taxable revenues for Brazilian entities engaged in transactions with related parties established outside Brazil or in cross-border transactions with parties domiciled in low-tax jurisdictions or entities subject to privileged tax regimes.

Although inspired by the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, the Brazilian rules do not provide for a functional analysis, but rather provide for the calculation of the benchmarks through the application of objective methods provided for by law.

Thin capitalisation rules: Brazilian law also includes thin capitalisation rules, which establish limitations on the deductibility of accrued interest based on debt-to-equity ratios in case of loans executed with related parties and parties under a privileged tax regime or domiciled in low-tax jurisdictions.

In general terms, a 2:1 debt-to-equity ratio applies to transactions where the related party creditor, individual or legal entity resides in a jurisdiction subject to regular taxation. A 0.3:1 debt-to-equity ratio applies where the creditor is domiciled in a low-tax jurisdiction or is subject to a privileged tax regime. If any excess is verified regarding the limits set forth in the legislation, the excess interest will be considered a non-deductible expense in calculating IRPJ.

Restrictions on deductibility of royalties: Brazilian law imposes limitations on the deductibility of royalties which vary, depending on the industry involved, to a maximum of 5% calculated on the net sales of the products manufactured or services rendered under an agreement, including payments for the transfer of technology, the rendering of technical assistance and the licensing of patents and trademarks.

The 1% to 5% deduction limitation rules have been subject to debate, particularly as regards payments between companies in Brazil and cases where several items of intellectual property are licensed in a single agreement. In such cases the tax authorities may seek to restrict the deduction of several licensed rights up to a global limit of 1%, instead of applying the 1% limit to each item and the 5% globally.

Restrictions on deductibility of payments abroad to low-tax jurisdictions and privileged tax regimes: In addition to the transfer pricing and thin capitalisation rules, Article 26 of Law 12,249/10 states that amounts paid, credited, delivered, employed or remitted under any title (except for interest on equity), either directly or indirectly, to individuals or legal entities domiciled in low-tax jurisdictions or that are subject to privileged tax regimes will not be deductible for IRPJ purposes, unless the following facts are cumulatively evidenced:

  • the identity of the effective beneficiary of the payment overseas;
  • the operational capacity of the non-resident individual or legal entity performing the transaction; and
  • the payment of the respective price and receipt of the goods or services, or use of the right transacted.

Disguised distribution of profits: Domestic transactions between related parties are subject to disguised distribution of profits rules, which require assets and transactions to be valued at a level that is not excessively below market value. If the transaction is conducted for a value that is excessively below market value, the difference between the value attributed to the assets or transaction and the actual market value is imputed as a taxable gain to the seller. If the assets or transaction is overvalued, the excess will not be deductible for the buyer.

Market value is calculated based on prior recent negotiations involving the same asset, or recent negotiations involving similar assets, between parties that are not compelled to transact, or that benefit from the knowledge of circumstances that may influence the price determination. If such criteria cannot be used, the market value may be calculated based on expert appraisal.

Limitation on deductibility of losses: According to Brazilian law, net operating losses (NOLs) generated in a given period can be offset against taxable income for the following period, up to a cap of 30% of taxable income (ie, for each R$1.00 of income, R$0.70 must be subject to taxation, regardless of the amount of NOLs). Tax losses may be carried forward indefinitely.

For more information about this answer please contact: Henrique Lopes from Koury Lopes Advogados
5.4
Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
 
Brazil
Taxpayers have the right to request a ruling from the tax authorities on the interpretation of the tax law, as applicable to any specific facts, under Article 46 of Federal Decree 70,235/72, which regulates administrative tax proceedings.

This tax ruling will remain effective until either the law changes or the taxpayer is notified that the ruling has been revoked due to a change in interpretation of the law. The tax authorities do not need court authorisation to revoke a ruling.

Specific rules apply regarding such administrative proceedings at the federal, state and municipal levels. Generally, however, a request cannot be filed if any tax procedure to investigate the subject of the request is pending or if its effects will be void if filed under such circumstances.

For more information about this answer please contact: Henrique Lopes from Koury Lopes Advogados
5.5
Is there a transfer pricing regime?
 
Brazil
The transfer pricing rules are designed to prevent Brazilian legal entities from avoiding tax by underpaying or overpaying related parties, parties domiciled in low tax jurisdictions or entities subject to a privileged tax regime.

The Brazilian transfer pricing rules apply to:

  • expenses incurred through the acquisition or import of assets, goods, services or rights;
  • revenues deriving from the export of goods, services or rights; and
  • interest expenses and revenues.

They do not apply to domestic transactions or to royalties paid in consideration for the transfer of technology, which are subject to specific rules.

Brazilian law provides for specific methods with pre-determined profit margins. Taxpayers may choose the method which best suits their particular case and leads to the lowest tax adjustment, except in the case of commodities, for which a specific method must be used. The chosen method must be used consistently for each type of asset, good, right or service. Only the methods expressly provided for by law are allowed. No other method can be used, even if based on arm’s-length principles or the OECD Transfer Pricing Guidelines.

The Brazilian transfer pricing rules provide for four methods to determine the maximum deductible expenses, costs and charges related to goods and services or rights imported from a related party, as follows:

  • comparable independent price;
  • resale price less profits;
  • production cost plus profits; or
  • imported quoted price.

If the benchmark reached by the application of one of these methods is greater than the import prices that are subject to transfer pricing control, then no adjustment is required when calculating IRPJ and CSLL. If the benchmark is lower than the import prices and this difference exceeds the variations deemed acceptable under law, such difference must be added to the IRPJ and CSLL tax base.

Brazilian taxpayers that export to related parties are subject to the transfer pricing rules if the average sales price is lower than 90% of the average sales price charged to unrelated parties in the Brazilian market during the same period and under similar payment conditions. If the average price with related parties is lower than 90% of that charged in the Brazilian market, the taxpayer is subject to one of the following methods:

  • export sales price;
  • wholesale price in country of destination less profit;
  • retail price in country of destination less profit;
  • acquisition or production cost plus taxes; and
  • exported quoted price.

If the benchmark obtained through one of these methods is lower than the actual export prices that are subject to transfer pricing controls, no adjustment shall be made to the IRPJ and CSLL tax base. If the benchmark is higher than the export prices and this difference exceeds the variations deemed acceptable under law, such difference must be added to the IRPJ and CSLL tax base.

For more information about this answer please contact: Henrique Lopes from Koury Lopes Advogados
5.6
Are there statutory limitation periods?
 
Brazil
The tax authorities may generally audit taxpayers up to five years after the end of the fiscal year in which the taxable event occurred. There is some debate regarding when this five-year period begins to run, depending on the type of tax considered and the situation. In general, this term also applies to tax refunds and amendments of tax returns, although certain specific taxes and labour obligations have a longer statute of limitations.

For more information about this answer please contact: Henrique Lopes from Koury Lopes Advogados