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Brazil: Senate ratifies DTA with Russia and Protocol to India DTA; Official request to join the OECD; New federal tax debt settlement programme

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Giacobbo
Gottberg

Fernando Giacobbo

Ruben Gottberg

Senate ratifies DTA with Russia and Protocol to India DTA

On May 24 2017, the Brazilian senate ratified the text of the agreement for the avoidance of double taxation (DTA) between Brazil and Russia, signed on November 22 2004, as well as the amendment to the protocol of the DTA between Brazil and India, signed on October 15 2013.

As it has become usual in Brazilian DTA practice, the DTA between Brazil and Russia treats technical services and technical assistance as royalties. Further, it does not restrict the application of thin capitalisation and controlled foreign corporation (CFC) rules.

In contrast with other DTAs signed by Brazil, remittances of interest on net equity (Juros sobre capital próprio – JCP) are expressly regarded as interest, leaving no room for potential discussions on their characterisation for DTA purposes.

Finally, the DTA between Brazil and Russia includes a provision on the limitation of benefits (LoB), aimed at preventing treaty abuse.

With regard to the ratification of the amendment to Article 26 of the DTA between Brazil and India, the exchange of information between the competent authorities is expected to improve.

Moving forward, contracting states should now exchange notes to complete their internal procedures before the DTAs enter into force.

Brazil presents official request to join the OECD

On May 29 2017, Brazil presented an official request to become member of the OECD.

Although being a member of the G20 and an observer to the OECD for several years, Brazil is not a member of this organisation. However, this may change as Brazil has filed a formal request to join the OECD, which represents the first of a number of steps that must be taken before the country is accepted as a member of the organisation.

From a tax standpoint, a relevant question that may be raised is whether the request – and the eventual accession of Brazil to the OECD – may lead to changes in the Brazilian tax legislation, including its transfer pricing rules, which significantly deviate from the OECD standards.

New federal tax debt settlement programme

On May 31 2017, the Brazilian government published Provisional Measure (PM) 783/2017, introducing a special tax regularisation programme (PERT by its Portuguese acronym) to incentivise companies to settle their federal tax debts.

Under the PERT, individuals and legal entities may include any liabilities – tax related or otherwise – with the Brazilian Revenue Service (RFB) and National Treasury's Attorney General's Office (PGFN) due for payment up to April 30 2017. The PERT covers liabilities subject to prior instalment programmes as well as liabilities subject to administrative or judicial proceedings. The PERT may include all liabilities in the name of the individual or legal entity as either the taxpayer or liable party.

Taxpayers must enter the PERT by August 31 2017.

As in previous tax regularisation programmes, the PERT foresees the settlement of liabilities with both net operating losses (NOLs) and tax credits, as well as the option to pay in instalments. As a new feature, the PERT introduces the possibility of reducing late payment interest and fines, as well as legal costs, depending on the settlement option chosen.

Taxpayers that enter the PERT to settle RFB-assessed liabilities may opt to settle the liabilities under any of the alternatives below:

  • Upfront payment in cash of at least 20% of the total outstanding liabilities, without reductions, in five monthly and successive instalments from August to December 2017; with the remaining balance settled with:

  • NOLs or tax credits, subject to the restrictions set forth in the PERT rules (see below); and/or

  • Payment in cash in 60 instalments.

  • Payment in 120 monthly and successive instalments calculated based on certain percentage rates applied to the total outstanding liabilities;

  • Upfront payment in cash of at least 20% of the total outstanding liabilities, without reductions, in five monthly and successive instalments from August to December 2017; with the remaining balance settled with:

  • A single payment in January 2018, with reduction of both 90% of late interest payment and 50% of fines;

  • Payment in 145 monthly and successive instalments, with reduction of both 80% of late interest payment and 40% of fines; or

  • Payment in 175 monthly and successive instalments, with reduction of both 50% of late interest payment and 25% of fines.

A taxpayer can use NOLs generated from its own activities and NOLs generated by related group companies to the extent the NOLs have been (i) accrued by December 31 2015, and (ii) declared by July 292016.

A taxpayer may use group companies' NOLs only if the taxpayer and the group entities have been part of the same economic group from December 2015 until the time the taxpayer joins the PERT.

For PGFN-assessed liabilities, the settlement alternatives do not allow the use of tax losses or tax credits. Instead, taxpayers may opt to settle their liabilities as:

  • Payment in 120 monthly and successive instalments calculated based on certain percentage rates applied to the total outstanding liabilities; or

  • Upfront payment in cash of 20% of the total outstanding liabilities, without reductions, in five monthly and successive instalments from August to December 2017; with the remaining balance settled with:

  • A single payment in January 2018, with reduction of 90% of late interest payment, 50% of fines and 25% legal costs (including attorney fees);

  • Payment in 145 monthly and successive instalments, with reduction of 80% of late interest payment, 40% of fines and 25% legal costs (including attorney fees); or

  • Payment in 175 monthly and successive instalments, with reduction of 50% of late interest payment and 25% of both fines and legal costs (including attorney fees).

It is important to note that the PERT provide additional benefits to taxpayers with total debts lower than BRL 15 million ($3.6 million).

Finally, multinational enterprises with Brazilian subsidiaries that have past or present tax liabilities should evaluate the PERT. The ability to use NOLs and tax credits, as well as benefitting from a reduction in late payment interest/fines and legal costs could provide potential cash-flow benefits.

Observations

The PERT was created through issuance of a provisional measure by the Brazilian executive branch. Provisional measures have the authority of law until and if the Brazilian congress approves them within a prescribed 60-day period, plus an additional 60-day period, if extended. Changes to provisional measures during the process of conversion into law are relatively common. Therefore, it is important for taxpayers to monitor developments related to PM 783/2017.

Fernando Giacobbo (fernando.giacobbo@pwc.com) and Ruben Gottberg (ruben.gottberg@br.pwc.com)

PwC

Website: www.pwc.com.br

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