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Tax havens: The Brazilian listing procedure and the recent list adjustment

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Jurisdictions with nil, low, favourable and benefitted tax rules have played an important role in shaping today’s globalised environment, providing efficient structures and even permitting abusive and shamed transactions. To face this scenario, countries have imposed burdensome taxation for transactions involving tax havens, among other initiatives.

Brazil is no exception, and through a pack of laws enacted since 1996 it imposes burdensome rules for transfer pricing, thin capitalisation, gains and income of non-residents and profits of controlled foreign corporations (CFCs), with different concepts of tax havens.

Overcoming the lack of uniform features, tax havens are broadly divided in two main blocks: (a) favourable tax jurisdictions (FTJ), as the countries and dependencies that do not tax income or that tax income at a rate lower than 20% or where the legislation does not permit access on information about corporate interest position or ownership; and (b) privileged tax regimes (PTR), deemed to be those (i) that do not tax income or that tax it at a maximum rate lower than 20%; (ii) that provide tax advantage for their residents, without requiring development of substantial economic activities or restricting local substantial economic activities; (iii) that do not tax or tax non-territorial income at a maximum rate lower than 20%; or (iv) that do not permit access on information about corporate interest position, ownership of assets and rights or implemented economic transactions. For PTR purposes, the 20% can be modified by the authorities, which has been temporarily reduced to 17%.

With this rationale, since 1999 the Brazilian authorities have been refining a listing procedure for identifying FTJ and PTR, treating the list as exhaustive and convenient, even though legally speaking the list should be illustrative, mainly because the legal concepts are very broad and the laws have not entrusted a restrictive approach.

Not free of doubt, one may conclude that authorities could then change their position within the legal bounds. On September 14 2016, new modifications came to apply as of October 1 2016. Through Normative Instruction (NI) No. 1,658, the tax authorities have adjusted (a) the FTJ list to include Curacao, St Martin and Ireland and exclude the Netherlands Antilles and St. Kitts and Nevis and (b) the PTR list to include entities incorporated as holding companies in Austria.

In theory, such immediate application should be appropriate for changes within the laws, as the NI should only bring new interpretation for the legal concepts. However, the list should not be used retroactivity to claim for tax contingencies. Thus, even though the listing procedure chosen by Brazil to identify FTJ and PTR can permit future modifications, it should on the other hand grants comfort for taxpayers who rely on it to conduct their transactions.

This article was prepared by Andrea Bazzo Lauletta (abazzo@mattosfilho.com.br), a partner at Mattos Filho, ITR's tax disputes correspondents in Brazil.

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