Brazil signed a Double Tax Treaty (DTT) with Uruguay, as well as a new protocol to the existing DTT with Sweden
Brazil has signed a DTT with neighboring country Uruguay in June 2019, which, despite following the Organisation for Economic Co-operation and Development (OECD) Model Convention, still introduces new provisions when compared to the older treaties and follows the trend established for the more recent DTTs signed with Switzerland and Singapore.
Highlights of the Brazil/Uruguay DTT include: (i) a much more detailed provision on permanent establishments (PEs), which includes a new clause for agents routinely signing agreements on behalf of a resident of one of the contracting states in the other contracting states; (ii) inclusion of a specific article for technical services, which reduces the withholding tax (WHT) rate to 10% (as originally done in the Singapore/Switzerland DTT); (iii) inclusion of anti-abuse rules, such as a limitation of benefits (LOB) clause; and (iv) inclusion of a provision to deal with transparent entities under Article 1, in line with the Base Erosion and Profit Shifting (BEPS) Action 2 plan to address hybrid instruments.
In line with Brazil’s previous treaty practice, Article 9(2) of the OECD Model Convention that grants credits in case of transfer pricing adjustments in the other contracting state is also absent.
The Brazil/Sweden protocol also established some differences in relation to the former DTT text, such as: (i) technical service payments are now classified as royalties and taxable from a Brazilian perspective (but subject to a reduced 10% WHT rate); (ii) interest on net equity is classified as interest and thus under Article 11; and (iii) tax sparing clauses were eliminated for dividend, interest, and royalties; consequently, only the actual tax paid can be creditable in order to avoid double taxation in such scenarios.
Both the DTT and the new protocol require Congress, followed by Presidential, approval in order to be enacted.
Brazil creates a council to oversee the necessary steps to become an effective OECD member
Following Brazil’s official request to join the OECD in May 2017, the Brazilian government has taken one additional step to ensure the necessary adjustments are made to the domestic law to allow Brazil to be accepted as a regular member of the OECD.
Decree 9,920 of 18 July 2019 introduced the Brazil/OECD Council, which shall be responsible for: (i) approving the strategy for the preparation and monitoring of Brazil’s accession process and (ii) approving the communication policy of the members participating in the council in all matters relating to the Brazil accession process. The council will essentially be composed of the ministries from Foreign Affairs and Economy, linked to the Presidential Executive Office, as well as representatives from such ministries who shall form auxiliary organs to further assist the council.
Brazilian Congress approves amendment to Double Tax Convention (CDT) with Norway, South Korea, and India
From May 2017 to May 2018, the Brazilian National Congress approved several Protocols that amend the CDT between Brazil and Norway, South Korea, and India in order to improve the exchange of information between the competent authorities of the contracting states.
Except for the case of the Protocol signed with India, which is already in force, the Protocols signed with Norway and South Korea have been submitted to Presidential approval in order to complete the ratification process in Brazil.
Opinion from the Attorney General of the National Treasure details requirements for 0% IOF on export revenue maintained abroad
The tax on financial operations (IOF) is a tax applicable to several financial operations, including foreign exchange (FX) transactions. FX operations associated to export revenue were historically subject to a 0% rate as an incentive to Brazilian exporters and regardless of if the funds were immediately internalised or whether kept in foreign bank accounts.
The opinion establishes that the IOF 0% rate will only be observed upon nationalisation and/or receipt of such funds occurs within 750 days counted from the export of the goods/services. Where an FX agreement has been previously closed prior to the export of goods/services, then a 360-day term is granted instead, also counted from the date the goods are shipped/services are rendered.
The introduction of the terms indicated above is applicable to any export operation, regardless of whether the Brazilian exporter has opted to receive such funds in offshore bank accounts or not.
Administrative ruling clarifies extension of non-deductibility of royalty payments to shareholders
Brazilian legislation, as a rule, denies the tax deductibility of royalty payments to shareholders of the Brazilian entity performing such payments abroad. Arguably, even payments to domestic shareholders could be considered as non-deductible as a result of the current wording adopted by such provision.
A recent administrative ruling dealing with the payments for the right to commercialise software (which have been lately considered as royalties in administrative case law) to indirect shareholders abroad clarified that the provision restricting deductibility of such payments is only applicable to direct shareholders of the paying entity. Other group companies, even if indirect shareholders, would not trigger the non-deductibility.
Brazilian tax authorities provide guidance on the WHT treatment of accrued interest in the context of a ‘debit to shareholders account’ transaction
On 1 July 2019, the Federal Brazilian Tax Authorities (RFB) published Solução de Consulta - Cosit 210/2019 (dated 24 June 2019) providing that WHT should be levied at a rate of 15% on interest that is accrued but not yet due, where the outstanding debt is used to reduce accounting losses of a Brazilian company via a ‘debit to shareholders account' transaction.
By way of background, a ‘debit to shareholders account’ (débito à conta de sócio) is a transaction whereby the Brazilian entity performs a balance sheet transaction involving an accounting debit to the relevant liability in the balance sheet and a corresponding accounting credit to the balance of accumulated accounting losses within the net equity of the Brazilian entity.
Pursuant to the previous administrative guidance (see Paracer Normativo Cosit 4/1981), such transactions were considered equivalent to a contribution of capital that did not impact the results (i.e. income statement) or represent an effective inflow for the Brazilian entity. As such, when correctly accounted for, the transaction has generally been considered not to give rise to taxable income in the hands of the Brazilian entity.
In this regard, the RFB took the position that the use of the accrued interest to reduce the Brazilian entity’s accumulated accounting loss balance will benefit the shareholder by effectively increasing the Brazilian’s entity’s capital stock (i.e.an account that is negatively influencing the net equity of the Brazilian entity is being reduced as a result of the transaction, and applied the 15% WHT rate on such benefit).
This position should be monitored and considered in future similar operations, especially in light of the limited guidance currently available on this topic and possible future implications (i.e. non-resident capital gain taxation).