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Brazil: New decision reverts CARF’s understanding on taxation of foreign profits

The Brazilian administrative council of tax appeals (CARF), the penultimate administrative instance for the discussion of federal tax assessments, has recently granted a favourable decision for Marcopolo, a large bus and coach manufacturer headquartered in the South of Brazil.

The decision disregards a tax assessment issued against the company, which alleged lack of payment of corporate income tax and social contribution on net income, over part of the profits accrued, with operations carried out between 2001 and 2007. The tax authorities demanded payment of fines which amounted to at least BRL 200 million ($113 million), accusing the company of simulating export transactions with its foreign subsidiaries, so as to exclude part of the sales profits from its local bookkeeping and consequently reduce the applicable taxation.

The structure implemented by Marcopolo consisted of the export of products to two foreign subsidiaries, Marcopolo International Corporation (MIC), located in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, which would then sell the goods to final customers, though their physical transfer would actually be made directly by the Brazilian head office. The tax authorities at the first administrative level argued that the company used to export to the subsidiaries at an amount lower than the price charged at the subsequent resale, and that the profit resulting thereof was never taxed in Brazil.

Marcopolo, on the other hand, maintained that this operational model was adopted by the company for its international sales over 20 years, and that the foreign subsidiaries acted as commercial representatives, negotiating directly with clients. Furthermore, Marcopolo stated that the operations were legally valid and compliant with the Brazilian transfer pricing rules.

The CARF councillors understood that Marcopolo developed a legitimate tax planning structure that cannot be regarded as tax simulation due to the lack of consistent evidence. The councillors concluded that any potential irregularity in the tax planning should be verified on the results accrued by the foreign subsidiaries, which must be subject to taxation in Brazil based on the domestic legislation.

This decision is contrary to the previous understanding issued by the Taxpayer’s Council (former denomination of the CARF) back in 2008, in an almost identical case also involving Marcopolo. The tax assessment referred to the same type of operations carried out by the company between 1999 and 2000. In that case, the councillors qualified the foreign subsidiaries as re-invoicing centres, which have never actually received the goods exported by the Brazilian head office, serving only to accrue part of the profits abroad, so reducing the tax burden applied in Brazil. At that time, the company was unable to prove that MIC and Ilmot effectively acquired and resold the products from a regular commercial standpoint and the council maintained the tax assessment.

For tax experts, the new decision came as a good precedent for Brazilian taxpayers, although it is expected that the superior chamber of the CARF will issue a final decision to unify the understanding about this controversial matter.

Nélio Weiss ( & Philippe Jeffrey (


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