Law 11,727 of 24 June 2008, in addition to introducing several other changes to the Brazilian tax legislation, expanded the concept of tax haven jurisdictions in a way that could result in additional transactions being scrutinised for transfer pricing purposes.
First time around
Article 24 of Law 9,430 of 1996 was the first rule defining the concept of tax havens for Brazilian tax purposes. It provided that tax havens were those countries which do not tax income or tax it at a rate lower than 20%.
This definition was introduced in the Brazilian tax legislation as part of the Brazilian transfer pricing rules. Its main result was to make the transactions carried on by Brazilian residents with residents of tax havens subject to a transfer pricing review regardless of any actual relationship between the involved parties. As a consequence, transactions between a Brazilian legal entity and an entity resident of a tax haven is always subject to transfer pricing review.
In the following years several other laws governing a range of different topics either repeated the definition or made express reference to article 24 of Law 9,430 when establishing a more punitive tax treatment to transactions carried on with tax havens. The most notable cases were the increase in the withholding income tax rate from 15% to 25% applicable to income or capital gains earned by residents of tax havens and the non-application of the beneficial tax treatment for investments in the Brazilian capital markets (for example, exemption for gains in the sale of shares in the Brazilian stock exchange).
Based on such definition the Brazilian Federal Revenue Service published its first “black list” of jurisdictions in 1999. Three additional updates were already published and the current “black list” includes more than 50 different jurisdictions.
In 2002, Law 10,451 was enacted and, although not changing the concept of tax havens provided by Law 9,430, included under the scope of the Brazilian transfer pricing rules, irrespectively of any type of corporate affiliation between the involved parties, the transactions carried on by Brazilian residents with residents of countries or states which legislation secures the confidentiality of the ownership of its legal entities.
The new law and the impact for transfer pricing purposes
Law 11,727 introduced a new paragraph to article 24 of Law 9,430 establishing that those countries or states that do not permit access to information relating to
(i) the ownership of legal entities residing in their territory or
(ii) the identity of the beneficial owner of the income attributable to non-residents.
should also be considered as tax havens
This amendment has a limited effect when applying Brazilian transfer pricing legislation. This is because Law 10,451 back in 2002 already contemplated access to the ownership of resident legal entities as a reason for defining if a country or state would be considered as a tax haven. The novelty then relates only to the need to disclose the identity of the beneficial owners of income attributed to non-residents, but it is unlikely that this will have a relevant impact as most jurisdictions that still have secrecy laws are included in the current list of tax havens (for example, Liechtenstein).
Furthermore, a new concept of “favourable tax regime” was introduced through the creation of article 24-A of Law 9,430. According to this provision, transactions carried on by Brazilian residents with individuals or legal entities benefiting from a favourable tax regime, irrespective of their country of residence and of any corporate relationship among them, will be automatically subject to the Brazilian transfer pricing rules.
A tax favourable regime is defined as being that which:
(i) does not tax income, or taxes it at a rate lower than 20%;
(ii) provides a tax advantage without a substantial economic activity being carried on within its borderlines or provides a tax advantage conditioned to the non-performance of a substantial economic activity within the country;
(iii) imposes no taxation or a taxation lower than 20% on offshore income; or
(iv) does not permit the access to information concerning the ownership of legal entities, or the ownership of goods and rights, or of economic transactions executed therein.
The idea behind this seems to target “favourable tax regimes” existing in jurisdictions which are not per se treated as tax havens. However, the wording is broad and although it is not completely clear what existing regimes would be achieved, possible ones would include:
(i) those applicable to the limited liability companies with no trade or business in the US and
(ii) the participation exemption regime for dividends applicable in several European countries.
In practice if the non-resident party benefits from a favourable tax regime the Brazilian transfer pricing rules will automatically apply to the Brazilian legal entity engaging in a transaction with such party (for example, an import or export transaction).
Unlike the amendment to article 24, which may affect transactions falling out of the scope of the transfer pricing regulations, we believe that there is no legal basis for the concept of “privileged tax regime” to apply for other purposes than transfer pricing, including the punitive withholding tax treatment for income and capital gains. The reasoning behind this relies on the fact that article 24-A is a new provision and references made by other laws to article 24 would not encompass article 24-A.
It is expected that before such amendments become effective (which is scheduled for January 12009) the Federal Revenue Service would publish a new and updated black list. It will be important to examine how the two concepts - tax havens and privileged tax regime – will be covered in the list and whether appropriate differentiations will be made in light of the restricted scope of article 24-A (only for transfer pricing purposes).
