Federal Revenue Office Issues Important New Regulation on Transfer Pricing

The recent Normative Ruling 1,870/2019 has amended Brazilian domestic legislation on transfer pricing, clarifying some details on how it is calculated. These include the correct assessment period, taking into account the characteristics of each arm's length method, and how the adjustment must be added back to the corporate income tax calculation basis.

Additionally, the new legislation also clarified some aspects of items that must compose the practiced price and/or the arm's length price, such as freight and insurance, as well as the initial inventory.

Finally, the divergence margin calculation was changed for the 2019 calendar year to align domestic procedures with international practices.

Deadline for Ultimate Beneficial Owner Disclosure has Been Extended by the Brazilian Tax Authorities

Aiming to comply with the OECD/G20 Base Erosion and Profit Shifting (BEPS) approach and to create greater transparency in its business environment, the Brazilian Government has passed legislation requiring companies incorporated in Brazil to identify their ultimate beneficial owners and report them to the local tax authorities.

Originally, these companies would have to report their ultimate beneficial owners by December 31, 2018. However, Normative Ruling 1,863/2018 has extended this deadline by 180 days, so ultimate beneficial owners will have to be reported to the local tax authorities by the end of June of 2019.

Brazil Aims to Increase its Double Taxation Convention Network

In November 2018, Brazil and the United Arab Emirates signed a Double Taxation Convention, which still has to be approved by the Brazilian Congress and promulgated by a Presidential decree in order to become effective.

In addition, the Brazilian government is negotiating a Double Taxation Convention with the Czech Republic, as well as amending protocols to the existing agreements with Mexico and Canada, aiming to adapt them to the BEPS's minimum standards.

Brazil Regulates the Dispute Resolution Mechanisms Provided for in Double Taxation Conventions

The Mutual Agreement Procedure (MAP) is a mechanism to resolve disputes arising from Double Taxation Conventions. Although all of the Brazilian Double Taxation Conventions contain MAP clauses, there was no domestic legislation regulating the subject in Brazil until the enactment of Normative Ruling 1,669/2016.

This legislation was recently replaced by Normative Ruling 1,846/2018, which complies with the minimum standards of BEPS Action 14 and is a result of public consultation and consequent suggestions from taxpayers.

Seeking More International Cooperation, New Tax Information Exchange Agreements Have Been Approved by the Brazilian Congress

The Tax Information Exchange Agreements signed by Brazil and Switzerland and Jersey were approved by the Brazilian Congress at the end of 2018. These agreements must still be promulgated by presidential degrees before they become effective.

Tax Authorities Provide Objective Criteria to Impose Joint and Several Liability on Companies' Managers and Shareholders

The Brazilian Federal Revenue Office has issued Normative Opinion 4/2018, which provides some objective criteria and conditions to impose joint and several liability on companies' managers and shareholders.

These individuals can be considered jointly liable for a company's tax liability only if a common interest in the event is proved. However, anyone who participates in tax planning that is considered abusive may be held liable for the corresponding tax obligations, which is a very controversial interpretation considering the National Tax Code.

It should be noted that this Normative Opinion is not binding on tribunals and courts and should be challenged if its application violates tax law.

Brazilian Federal Revenue Office Has Established a New Definition of Service Exports

The Brazilian Federal Revenue Office has issued the Normative Opinion 1/2018, which provides a new definition of service exports for tax purposes. Domestic tax law grants favorable tax treatment to service exports; however, there are several different definitions for these transactions, according to the legislation governing each type of tax.

The tax authorities adopted the destination principle and stated that the service export occurs when a service provided by a Brazilian resident is consumed abroad. For instance, if a service provided by a Brazilian resident is applied to real property located abroad, the transaction characterizes as a service export, even if the hirer is also a Brazilian resident.

Notwithstanding, Normative Opinion 1/2018 expressly states that new definition does not apply to the taxes for which legislation has already provided a specific definition. Therefore, the new definition does not apply to PIS and COFINS, ISS and ICMS-Communication taxes.

Conditions to Exempt the Chartering of Foreign Vessels from the Withholding Income Tax are Clarified by Tax Authorities

According to the Private Letter Ruling 166/2018, payments from Brazilian residents for chartering foreign vessels are exempt from withholding income tax, as long as the transaction was approved by regulatory authorities and the beneficiary is not a resident of a tax haven (black list) and does not benefit from favored tax conditions (gray list).

Moreover, the withholding income tax exemption applies even if the payment is not made by the Brazilian hirer but by a third party on its behalf.

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