Brazil: New Provisional Measure requires disclosure of certain transactions
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Brazil: New Provisional Measure requires disclosure of certain transactions

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Alvaro Pereira


Mark Conomy

On July 21 2015, the Brazilian Government issued Provisional Measure 685/2015 (MP 685/2015) which, among other provisions, provides for new rules concerning the disclosure of certain transactions to the Brazilian federal revenue authorities (RFB). Broadly, MP 685/2015 provides that the following types of transactions occurring in the previous year should be disclosed to the RFB by September 30:

  • Actions or operations that cannot be explained by relevant non-tax motives;

  • Actions where the form of the transaction is unusual, uses indirect operations or specific contractual clauses to recharacterise (in whole or in part) the typical contract; and

  • Actions or operations explicitly provided for in an Act issued by the RFB.

The form, deadlines and conditions for making this disclosure are to be regulated by the RFB.

The disclosure by a taxpayer of a transaction that has not yet occurred will be treated in the same manner as a 'consulta' (a type of ruling in Brazil).

Where the RFB does not agree with the treatment of the transaction, the taxpayer will be notified to pay the amount (or installment) within 30 days, along with the corresponding interest. This will not apply where the transaction is under tax audit.

Broadly, the disclosure will be considered ineffective where:

  • the transaction is not disclosed by the taxpayer to whom the tax obligation eventually applies;

  • it omits essential details for the analysis/understanding of the act or operation;

  • it contains false material, ideas or fraud.

Non-compliance with the disclosure requirements or cases involving ineffective disclosure will be considered as a malicious omission by the taxpayer with the intent of fraud or evasion and the amount of the relevant tax will be charged along with interest and increased penalty.

By way of background, a Provisional Measure is a provisionary law issued by the executive branch of the Brazilian Government that has the authority of law until it is acted upon by the Brazilian Congress within a prescribed 60-day period. If Congress does not act within this initial period, then the measure expires unless extended for one additional 60-day period.

MP 685/2015 has already generated substantial debate in Brazil and there is no further indication as yet as to whether it will actually be approved (in whole or in part) by the Brazilian Congress. At this stage there is particular concern surrounding the potentially broad application of the rules as well as the lack of regulation and guidance accompanying the provisions. Academics and other stakeholders are discussing the constitutionality of the current provisions, and there remains a practical question as to whether the provisions will indeed achieve the desired transparency outcomes. While there remains significant uncertainty in relation to the provisions, it is generally expected that there will be substantial amendments made during the process of conversion into law.

Clarity on withholding tax for technical service fees paid to a treaty partner

The Brazilian tax authorities have released a tax ruling confirming that payments to France for certain technical services should not be subject to withholding tax.

On June 17 2015, the Brazilian federal revenue authorities released Tax Ruling No. 153/2015 providing that amounts paid or credited to individuals or entities domiciled in France in consideration for certain technical services/assistance should not be subject to withholding tax.

By way of background, in June 2014, Interpretative Declaratory Act 5/2014 was released detailing the tax treatment applicable to payments made by Brazilian entities in relation to technical assistance and services (with or without transfer of technology) to a company located in a country with which Brazil has signed a double tax treaty (DTT). Broadly speaking, ADI 5/2014 provided that where the relevant DTT or protocol treats technical services and/or assistance as royalties or the service relates to the technical qualification of a person or a group of persons, payments should be governed by the article dealing with royalties or independent personal services (generally Article 12 or 14 respectively). In these cases, the Brazilian DTTs generally grant taxing rights to Brazil. In other situations, payments should be governed by the article dealing with business profits (Article 7) in which case, Brazil is prevented from taxing the profits of the foreign entity unless the entity carries on business in Brazil through a permanent establishment.

In the case of the ruling being considered, the DTT signed between Brazil and France does not treat technical services and/or assistance as royalties and the particular services provided were not considered to fall within the definition of independent personal services. On this basis, the RFB considered that the remittances in relation to the services provided should not be subject to withholding tax. The ruling confirmed that the payments should still remain subject to Contribuição de Intervenção de Domínio Econômico (CIDE) at the rate of 10%.

Alvaro Pereira (alvaro.pereira@br.pwc.com) andMark Conomy (conomy.mark@br.pwc.com)

PwC

Website: www.pwc.com.br

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