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How to comply with Brazil’s updated consortium rules


The Federal Revenue of Brazil has updated rules on how consortiums are regulated with changes on how to contract on behalf of a consortium, elect a leader company, and bill a consortium’s operations.

Normative Ruling 1.199/2011 came into effect on October 17.

“The changes have not generated turmoil because they are not extreme,” said Luiz Felipe Centeno Ferraz, of Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados. “They are, however, welcome for consolidating loose rules and therefore providing one-document guidance on such rules – expressly issued by the Brazilian Revenue Service.”

“The most interesting orientation therein is the necessity of election of a leader for tax purposes, in case that is not described in the consortium agreement,” added Ferraz.

The revoked regulation required the consortium leader to maintain accounting records of consortium operations. The new provision allows that in the absence of a leader, a consortium member will be elected for the purpose of bookkeeping.

In light of the changes, advisers have urged clients to think about the joint liability implications of engaging under the consortium when planning their affairs, as well as having robust contractual measures in place to ensure appropriate tax contributions are made by liable members.

“Clients should carefully consider whether they wish to engage people and suppliers under the consortium name and tax ID, rather than separately, because of the risk of joint liability,” said Maria Fernanda Furtado Fernandes, of Trench Rossi e Watanabe. “But, assuming this would be required given the nature of consortium operations, clients should be involved in the planning and review the tax treatment of the activities performed under the consortium tax ID, as well as have a clear view of the consortium tax ancillary obligations.”

Contracting on behalf of the consortium

The rules do not implement fundamental changes, but clarify the joint and several liability of consortium members when it comes to withholding taxes in situations where the consortium contracts with legal entities on its own behalf.

“The basic rules remain the same and the regulations reinforced the rules issued by Law 12.402 this year – such law created a joint and several liability among consortium members in case of failure to withhold taxes on payments made to individuals or legal entities contracted by the consortium itself, which would not be the case if the contract were signed by a consortium member individually,” said Ferraz.

The responsibility for tax withholding and compliance with ancillary obligations lies with the consortium members if the consortium only performs the hiring, leaving the responsibility for payment to the consortium members benefitting from the hire. In circumstances where the consortium is responsible for both hiring and payment, the consortium has those responsibilities.

Billing of the consortium’s operations

Billing in relation to consortium transactions should be done by consortium members, which each complete an invoice for the proportion of the member’s participation.

The new regulations state that in cases where one or more consortium members are responsible for different parts of the consortium agreement and for separate billing, each such member should send the consortium leader monthly documentation of its revenues, costs and expenses incurred.

Not welcomed

The changes were not greeted well by taxpayers.

“These changes have created a situation of joint liability between the consortium members and are also unwelcomed by taxpayers because some have been misinterpreting them to consider that consortiums have a tax personality of their own now, which is not correct,” said Furtado. “Some say these changes could affect infrastructure projects, mainly those associated with the 2014 Football World Cup and 2016 Olympic Games [both to be hosted in Brazil].”

In essence, said Furtado, consortiums continue to be pass-through structures without a legal or tax personality of their own.

“In this sense, the end-result of the relevant changes was limited to an increase in the Brazilian tax authorities’ ability to control the consortium transactions and to assess the consortium members’ liability for lack of compliance with the tax obligations resulting from the consortium activities,” she said.

“The Brazilian government claims that the relevant changes were introduced to simplify and expedite the consortium transactions while enabling the parties to use the consortium name and taxpayer ID to enter into transactions and comply with tax obligations directly,” added Furtado.

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