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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.

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