28 August 2019

Brazilian Tax Review – August 2019

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After 20 years of negotiations, the European Union and Mercosur have moved forward with the free trade agreement between the two blocs.
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Mercosur-EU Free Trade Agreement Moves Forward

After 20 years of negotiations, the European Union and Mercosur have moved forward with the free trade agreement between the two blocs.

The agreement provides for international standards for transparency rules, increases access and competition in government purchases and provides efficiency and cost reductions for imports and exports.

The draft document is still subject to a legal review, translation to all participants' official languages and final signature by the two blocs. Afterwards, the final document will be ready for parliamentary approval in each country-member of the EU and Mercosur.

New Reporting Guidelines for Cryptocurrency Transactions

Normative Ruling 1,888/2019 established that cryptocurrency transactions must be reported to the Brazilian IRS from August 1, 2019. However, reporting guidelines were still to be issued.

These guidelines were issued in the recent Normative Ruling 1,899/2019, which states that all cryptocurrency transactions (acquisition, sale or donation) must be submitted to the tax authorities via the Virtual Service Center (e-CAC) on a monthly basis, if the sum of these transactions exceeds BRL 30,000.00.

The obligation to report must be observed by all the cryptocurrency exchanges domiciled in Brazil and any Brazilian resident that performs transactions with non-residents or without the intermediation of an exchange. Non-compliance with the reporting requirements will result in high fines from the tax authorities.

San Marino is No Longer Blacklisted in Brazil

Normative Ruling 1,896/2019 has removed the Republic of San Marino from the Brazilian tax haven list.

This status modification will affect the determination of the withholding income tax rate on payments to San Marino residents, as well as the application of transfer pricing and thin capitalization rules in transactions between residents of Brazil and San Marino.

Amendment Protocols to the Denmark and Norway DTCs

The Decrees 9,851/2019 and 9,966/2019 have promulgated the amendment protocols to the Denmark and Norway Double Taxation Conventions with Brazil. These amendments modify several topics, such as withholding tax reductions to some specific incomes.

By means of these Decrees, the amendments to the DTCs were internalized in domestic legislation and became effective.

Equipment Rental from Israel is Subject to a 10% Withholding Income Tax in Brazil

Private Letter Ruling 216/2019 states that payments from Brazilian residents to Israeli residents, derived from the use of industrial equipment, are subject to a 10% withholding income tax in Brazil, rather than 15%.

The tax authorities stated that the rental fees must be classified as royalties under the Brazil-Israel DTC, applying a reduced withholding tax rate.

The reduced rate applies only when the Israeli beneficiary does not conduct the rental activities through a permanent establishment in Brazil.

Technical Services Rendered by Finnish Providers are not Subject to Withholding Income Tax

Private Letter Ruling 6,017/2019 states that remittances to residents of Finland for technical services are exempted from withholding income tax, due to article 7 of the Brazil-Finland Double Taxation Convention.

The exemption applies only when the Finnish beneficiary does not perform the activities through a permanent establishment in Brazil.

Debt Forgiveness from Non-Residents Is Subject to the Withholding Income Tax, Claims the IRS

Private Letter Ruling 210/2019 states that debt forgiveness from non-residents to Brazilian companies, related to interest derived from loans, is subject to a 15% withholding income tax.

In the specific case, the Brazilian company had accrued the interest expenses in its financial statements and reverted them to accumulated losses as a result of the debit forgiveness.

The tax authorities took the position that the triggering event for the withholding income tax is not only the income's remittance or payment, but also the "use" of the income for other purposes.

This private letter ruling is very controversial and might be challenged by taxpayers in court.

IOF Exemption on Exports Applies Even if the Revenue is not Repatriated Immediately

Private Letter Ruling 231/2019 has changed the IRS's position on the IOF exemption for export revenues, so as to observe Opinion 83/2019, issued by the Attorney General's Office.

According to that opinion and the new private letter ruling, the IOF exemption applies to exports, even if the corresponding revenue is maintained in a foreign bank account, instead of being immediately transferred to Brazil. However, in order to take advantage of the exemption, the revenue must be repatriated within 750 days.

This new private letter ruling should put an end to court cases between taxpayers and tax authorities on this matter.

Administrative Tax Tribunal Has Canceled Customs Fine Applied to an Exporter for Hiding the Actual Acquirer

Brazilian law states that the use of a conduit person to hide the actual buyer in import or export transactions is a customs infraction, which is subject to the penalty of seizure of the merchandise.

In this context, exports conducted through foreign trading companies that belong to the same economic group are usually questioned by customs authorities, which claim that this structure is used to hide the actual acquirers.

In a recent decision, the Administrative Tax Tribunal canceled the customs fine imposed on a Brazilian exporter since the company was able to identify the final acquirers and prove the business purpose on the structure.

This decision is certainly a good precedent for Brazilian exporters and will influence future decisions of the Administrative Tax Tribunal on the same matter.

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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