One of the most controversial subjects in connection with the taxation of remittances abroad from a Brazilian party for certain payments to foreign residents is the amount to be adopted as taxable basis of the Economic Intervention Contribution (CIDE).
The CIDE, created by Law 10168, of December 29 2000, is due by the Brazilian engaging party on remittances abroad as remuneration for:
agreements involving the licence to use or acquisition of technical knowledge and transfer of technology (comprising trade mark and patent licences);
royalties of any kind; or
technical services, technical assistance, administrative assistance or “similar services”.
Software licences have been excluded from this taxation, except for cases involving technology transfer.
Under Law 10168/00, the CIDE’s taxable basis is the amount monthly paid, credited, delivered, employed or remitted to individuals or legal entities resident or domiciled abroad as remuneration for the obligations engaged, and on which a 10% tax rate is levied. The CIDE is not covered by any of the tax treaties Brazil has entered into.
In an important dispute involving Petróleo Brasileiro S/A Petrobras and the Brazilian Federal Revenue Service (RFB), some good news about the controversy related to the CIDE’s taxable basis emerged at the Administrative Council of Tax Appeals (CARF), the highest federal administrative court in Brazil.
In a judgment favouring the company, the CARF rendered Appellate Decision No 3403-002.702, establishing that the CIDE’s taxable basis is precisely the remuneration of the supplier domiciled abroad provided for in the contract, and that both the addition and the exclusion of the Withholding Income Tax (IRRF) — rate of 15%— of CIDE’s taxable basis are illegal.
If a contract establishes that the foreign party shall receive its remuneration net of taxes, the Brazilian engaging party shall bear the whole tax burden on the transaction, including the two taxes due by the foreign party in Brazil: the IRRF and the Service Tax (ISS). In the case at hand, the CARF decided that even in this situation, the IRRF should not be added to the remuneration established in contract to increase the CIDE’s taxable basis, that is, that the IRRF should not be included by means of “gross up”. Accordingly, CARF ruled that the CIDE’s taxable basis should be considerably lower than the one established by the RFB.
The IRRF is a federal tax due on the remuneration receivable by foreign parties in certain transactions, but that must be withheld and paid in Brazil by the engaging party as the liable taxpayer.
Grossing up
The RFB has been construing by means of its rulings and tax assessments that if the parties agree upon a payment to the foreign party net of taxes, the Brazilian party must carry out the adjustment of the CIDE’s taxable basis by grossing up the remuneration agreed with the inclusion of the IRRF amount, the same way it does to calculate the IRRF itself (with legal grounds). Though there are no formal pronouncements in this regard, in accordance with the RFB’s understanding, we believe that the tax authorities could also demand the inclusion of the ISS in the CIDE’s taxable basis, because the ISS is also a tax due by the foreign party, which must be withheld and paid by the Brazilian party.
By taking such a stance on the inclusion of the IRRF in the CIDEs’ taxable basis, the RFB has been triggering numerous tax assessments, bringing about illegal and unconstitutional demands with unfair and confiscatory consequences.
The main argument against RFB’s construction is that the word “remuneration” must be understood as the amount established under agreement as consideration due by the Brazilian party to the foreign party. According to this line of reasoning, the agreement by the parties regarding who is going to bear the financial burden of the IRRF and the ISS will not modify the remuneration agreed upon, and so the CIDE’s taxable basis can only be the amount of the remuneration resulting from such agreements.
In brief, the paying source taking on the burden of the IRRF and of the ISS does not mean that the amount of the remuneration under agreement has been increased - it means that this remuneration has not been reduced by the taxes due because they have not been supported by the beneficiary abroad.
To this effect, CARF’s decision is very welcome, as it states that the CIDE’s taxable basis is the remuneration of the foreign supplier for the obligations engaged, and that there is no legal provision stating that the CIDE’s taxable basis shall be adjusted by means of gross up including the IRRF whenever the Brazilian party undertakes the financial burden of such tax. According to our viewpoint, the same reasoning may be applied to the ISS.
The issue is still very controversial within the CARF and there are other precedents orientated towards both constructions. In this situation, it is expected that Appellate Decision No 3403-002.702 will represent a precedent indicating what is lawful, moving away from the RFB’s illegal stance. While the discussion is not settled, taxpayers may go after the defence of their rights, either preventively, by filing a lawsuit with the Judiciary Branch or, remediably, by filing defences against tax assessments.
Ricardo Marletti Debatin da Silveira (rsilveira@machadoassociados.com.br) and
Gabriel Caldiron Rezende (grezende@machadoassociados.com.br) are members of the indirect tax team of Machado Associados, the principal Brazilian correspondents of the indirect tax channel on www.internationaltaxreview.com
Juliana Alioti, former lawyer at Machado Associados, has also authored this article.
