Brazil: How tax authorities are interpreting cost sharing rules
Taxpayers should make sure they have agreed and documented how the costs and expenses of a cost sharing agreement in Brazil should be divided up between the parties involved.
The tax authorities have issued a Conflict Resolution Ruling (No 23/2013) disclosing their understanding of the possibility of centralising, in one sole company, the expenses of administrative support departments that benefit other companies of the same group for a later apportionment between them. This ruling further clarifies:
the requirements to be complied with for the deduction of such expenses for income tax purposes, and
the non-levy of the PIS and COFINS contributions (which are due on all the revenues received by the taxpayer of such contributions) on reimbursements received, as well as the possibility to use credits in case of taxpayers that are subject to the non-cumulative system for the payment of such contributions.
The importance of such a ruling is mainly because, historically, the tax authorities’ understanding was that the PIS and COFINS should be due by the company that received the reimbursement, though some decisions of the Administrative Council of Tax Appeals (the second level administrative court) favoured the taxpayers’ interests. These decisions were grounded on the fact that the recovery of the costs or expenses incurred on behalf of other companies is not an actual revenue of the company centralising the expenses and that the reimbursement represents a mere return of amounts advanced.
Even so, this ruling clarifies that, to deduct the amounts reimbursed to the centralising company for income tax purposes, as well as to avoid the PIS and COFINS taxation on the amount received as a reimbursement, the following conditions must be complied with:
(a) with regard to the shared costs and expenses, they must:
(i) be necessary, normal, usual and duly proved;
(ii) be shared based on reasonable and objective criteria that allocate to each company the corresponding expenses; such criteria shall be provided in a written agreement entered into among the involved parties;
(b) the centralising company must allocate as expense only the portion to which it is entitled and register the amounts to be reimbursed as credits to be recovered, in accordance with the apportionment criteria;
(c) the companies that benefit must allocate as expense just the portion that is allocated to them; and
(d) all the companies involved must have separate entries/accounts in relation to the costs and expenses shared.
As for the PIS and COFINS credits, the ruling clarifies that each company is only allowed to use the credits calculated based on its portion of the costs and expenses shared, provided that the charging of such costs and expenses allow identifying the expenditure items that trigger – for each legal entity that supports them – the right to credit.
In summary, in line with what was disclosed by the Conflict Resolution Ruling, it is important that taxpayers:
enter into a contract among the parties involved, which clearly states the criteria adopted and other required provisions; and
prepare and share with the interested parties the calculations and documents that supported the apportionment of the costs and expenses between them, to be presented to the tax authorities, if required.
Júlio de Oliveira (JOliveira@machadoassociados.com.br) and
Juliana Carla Alioti Passi (JAlioti@machadoassociados.com.br), members of Machado Associados, the principal correspondents for Brazil for the indirect tax channel of www.internationaltaxreview.com.