In this context, there is one particularly significant benefit regarding the reduction of the rate to zero for income tax withheld (IRRF) on earnings by residents or parties domiciled abroad deriving from revenue from transportation, chartering, renting and leasing of ocean or river vessels, commensurate with article 691 of the 1999 Income Tax Regulations and Law N°. 9.532/97.
In 2012, taxpayers were surprised by notices of tax deficiency from the Federal Revenue Service based on the new understanding that payments relating to the chartering of oil rigs were not eligible for the zero rate benefit, since oil rigs did not fall under the concept of ocean vessel as prescribed by tax law and, particularly, the bipartition of agreements providing for vessel chartering and provision of services was considered to be artificial, among other arguments.
Regarding the nature of offshore rigs, there is no doubt that they are vessels insofar as they move on water, by their own means or otherwise, have the capacity to transport loads and persons and must be registered with the maritime authority.
With respect to the bipartition of agreements, the existence of a charter agreement entered into with a foreign company and another service agreement entered into with a Brazilian company has a business purpose and economic substance, since the legal nature of both is entirely different. Whereas the first contract refers to a complex agreement with an “obligation to give” (delivery of vessel), the other is undoubtedly an “obligation to do” (service provision).
At the beginning of the year, a casting-vote decision served by the Administrative Board of Tax Appeals was contrary to the interests of taxpayers: it upheld the notice of deficiency for the collection of CIDE (contribution for intervention in the economic domain) incident upon revenues from rig chartering, on the understanding that part of the technical service provision was included in the charter without taxation. The notices of deficiency relating to withholding tax (IRRF) are still pending decision by the Administrative Board of Tax Appeals.
The recent notices of deficiency cast doubt on the intention of the Brazilian Government: if on the one hand the government has in recent years granted significant relief to oil companies with the aim of stimulating the sector, on the other hand, at this time, it is noted that its voracious appetite for collecting taxes may jeopardise everything, adversely affecting sector development and scaring off important potential investors from this market in Brazil. It is hoped that the analysis of the case relating to IRRF will consider only the factual and legal arguments, and not the government’s impetus for tax collection.
Alessandra Gomensoro (agomensoro@mattosfilho.com.br) is a partner at Mattos Filho, Veiga Filho Marrey jr e Quiroga, the principal Brazilian correspondents of the Tax Disputes channel on www.internationaltaxreview.com
