All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Brazil: Attorney general of the National Treasury issues opinion so as to apply treaty provisions regarding the payment of service fees

portela.jpg

carmona.jpg

Durval Portela


Gustavo Carmona

On December 21 2013, the National Treasury's Attorney General's Office (PGFN) published Opinion No. 2363/2013, through which it formalised a new understanding regarding the incidence of withholding income tax on remittances to non-residents regarding the payment of services rendered without transfer of technology, in cases where the beneficiary of the payment is resident in a jurisdiction with which Brazil has concluded a double tax treaty (DTT). Until publication of the new opinion, both the PGFN and the Federal Revenue (RFB) had the understanding that such payments should not be classified under Article 7 of DTTs (business profits), but rather under Article 21 or 22 (other income), in which case such income would also be subject to withholding tax (WHT) at 15% according to Brazilian domestic tax law, since Article 21/22 of DTTs signed by Brazil allow for taxation in both states. This understanding was strongly criticised by taxpayers and scholars.

In May 2012, the Superior Court of Justice (STJ) unanimously decided against the levy of WHT on service fees remitted by a Brazilian source to foreign service providers located in countries with which Brazil signed DTTs. The court held that the tax authorities' understanding of the term "business profits" was too restricted, and that it in fact encompasses a company's main and ancillary activities, which would include income (and its related profit) received from the supply of services.

In view of this the PGFN reassessed its previous interpretation on the matter and issued a new opinion which is substantially grounded in the STJ decision with a wider view of the term "business profits", thus urging the Brazilian tax authorities to review their official position included in a Declaratory Act from 2000 (ADI 01/2000).

Nonetheless, the opinion also emphasised that Article 7 of DTTs signed by Brazil should only be applicable to cases where the services provided do not include the transfer of technology and where service fees are not included in the definition of royalties either because of the provisions of Article 12 or of the protocol to the relevant DTT. In such cases, Brazil would be allowed to levy WHT at rates varying from 10% to 15% on such payments, pursuant to the wording of Article 12 of the relevant DTT.

Note that the majority of tax treaties signed by Brazil include protocols which define technical services as royalties under Article 12 – exceptions exist – and the debate now may be related to whether or not the service fees paid to the non-resident indeed falls into Article 12 of the applicable DTT.

Durval Portela (durval.portela@br.pwc.com) and Gustavo Carmona (gustavo.carmona@br.pwc.com)

PwC

Website: www.pwc.com

more across site & bottom lb ros

More from across our site

Companies in the UAE can prepare for a corporate tax regime in 2023, while the Trump Organization was found guilty of 17 counts of tax fraud.
The companies have criticised proposals for the gig economy, while the UK and EU VAT gaps have fallen in percentage terms, and ITR speaks to a European Commission adviser about its VAT reforms.
Corporations risk creating administrative obstacles if the pillar two rule is implemented too soon, sources say.
Important dates for the Women in Business Law Awards 2023
The Italian government published plans to levy capital gains tax on cryptocurrency transactions, while Brazil and the UK signed a new tax treaty.
Multinational companies fear the scrutiny of aggressive tax audits may be overstepping the mark on transfer pricing methodology.
Standardisation and outsourcing are two possible solutions amid increasing regulations and scrutiny on transfer pricing, say sources.
Inaugural awards announces winners
The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.