International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Uncertainty remains around tax treatment of Brazilian current account structures

Current account structures enable companies in the same economic group to make cash available to each other, generating reciprocal obligations of booking the amounts corresponding to withdrawals and disbursements of cash, without one being considered a creditor or debtor of the other.

The balance recorded in the current account will only be required of either party upon settlement of the transaction, when it will be verified as withdrawals and disbursements of cash and the eventual settlement of the difference due among the parties.

Such transactions are commonly used in Brazil to simplify operational relations of the parties involved which require joint administration and control of the cash due to each other, which is duly offset when the current account is settled.

From a tax perspective, current account transactions should be neutral, not resulting in the assessment of any tax in Brazil – however, the tax authorities think differently.

They believe that current account transactions should be treated as a loan subject to a tax on financial transaction (IOF) due at a daily rate of 0.0082% on the outstanding balance, plus a surplus tax of 0.38%. If we consider that, in general, the current account transactions do not establish any precise amount nor deadlines, the IOF at daily rates may effectively represent a significant contingent liability.

In our opinion, the transactions are completely different, especially because in the current account there is no definite figure of the creditor and debtor reciprocally assuming rights and obligations, at least while the transaction is not settled. Also, there are no deadlines and no conditions that are generally agreed upon for loan transactions.

Obviously any argument as to the distinction of these transactions will be fruitless if the reciprocal financial flows are not properly booked at all entities involved in the current account transaction so as to reflect clearly and accurately its nature.

This issue is quite controversial; there is no common understanding stated so far at administrative and judicial courts. We notice, however, that there is a slight tendency of the courts to refuse the assessment of IOF in such transactions, provided that the main characteristics of the current account are fulfilled as stated herein.

Either way, it is expected that the Supreme Court will eventually resolve the impasse; the problem is knowing when. In the meantime, uncertainty remains for business groups that adopt this type of mechanism as a way to facilitate the transfer of cash among its companies.

Antonio Carlos Marchetti Guzman (guzman@mattosfilho.com.br) is a partner at Mattos, Filho, Veiga Filho, Marrey jr e Quiroga, a principal tax disputes correspondent for International Tax Review.

more across site & bottom lb ros

More from across our site

ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.
Karl Berlin talks to Josh White about meeting the Fair Tax standard, the changing burden of country-by-country reporting, and how windfall taxes may hit renewable energy.
Sandy Markwick, head of the Tax Director Network (TDN) at Winmark, looks at the challenges of global mobility for tax management.
Taxpayers should look beyond the headline criteria of the simplification regime to ensure that their arrangements meet the arm’s-length standard, say Alejandro Ces and Mark Seddon of the EY New Zealand transfer pricing team.
In a recent webinar hosted by law firms Greenberg Traurig and Clayton Utz, officials at the IRS and ATO outlined their visions for 2023.