Brazil: Secretary of Finance defines spread for TP rules on interest payments

Nélio B Weiss		Philippe Jeffrey

As reported in the March 2013 issue, new legislation introduced significant changes to existing transfer pricing rules for the remittance of interest payments to non-resident related parties. While Law No 12.766 of December 27 2012 changed the deductibility criteria that previously existed, basing the new ones on the market rate of sovereign bonds in some cases and on the six month LIBOR rate in others, said law provided for an additional spread that would need to be defined by the Secretary of Finance. On August 2, Ordinance No. 427 was published with the objective of defining this additional spread, which was set at 3.5%, applicable to all remittances of interest payments to non-resident related parties carried out based on loans signed as from January 1 2013.

On the other hand, the spread applicable to the receipt of the minimum amount of financial revenue by Brazilian residents, for corporate income tax computation purposes, under Brazilian transfer pricing rules, was set at 2.5% for agreements signed as from August 2 2013. Please note that the applicable rate for such operations carried out from January 1 2013 until this date was set at zero.

Two recent first-instance court decisions involving large multinationals have ruled against the inclusion of withholding income tax (IRRF) in the calculation basis of the contribution for the intervention of economic domain (CIDE) on the remittance of royalties to non-residents. According to these decisions, in cases where the Brazilian payor assumes the IRRF burden, though the IRRF has the characteristics of an expense of the Brazilian payor, it does not represent remuneration for the non-resident. These are the first cases that obtained a decision at judiciary level and come amid significant debate on the matter.

In general terms, Brazilian tax law imposes the levy of IRRF on any royalty amounts paid, credited, delivered, made available or remitted to non-residents at the rate of 15% (25% if the beneficiary is located in a tax haven or low-tax jurisdiction), which is due by the non-resident but collected on its behalf by the Brazilian payor. However, in case the payor contractually accepts to assume the burden of the tax, Article 725 of the Income Tax Regulations (RIR) requires a grossing-up of the amount to be remitted, over which the IRRF is calculated.

With regards to CIDE, Law No 10.168 states that the contribution is levied at 10% on amounts paid, credited, delivered, made available or remitted to non-residents as remuneration for the import of technical or administrative services, as well as the payment of royalty fees. It has been the position of the Federal Revenue (RFB) for some time that the CIDE calculation basis should include the amount of IRRF paid (that is, with gross-up), which is the total amount deducted by the Brazilian payor, regardless of the fact that the beneficiary does not receive that amount in full.

Notwithstanding the RFB's position, the court sided with the defence, which argued that CIDE's calculation basis should be the value of the operation (that is, the contractually agreed remuneration), rather than the grossed-up amount and that the IRRF represents a cost to the payor which is not received by the non-resident beneficiary. The tax authorities have already appealed against one of these decisions and are preparing to appeal the other, as it understands that companies may contractually agree to increase the operation's value, considering the cost the Brazilian company will incur with payment of the tax.

Until now, only administrative decisions had been issued on the matter. The Administrative Council of Federal Tax Appeals (CARF) has held both in favour and against the taxpayer in recent decisions. As can be seen, despite having reached the judicial sphere, the matter remains contentious and will continue to fuel debate, requiring taxpayers to carefully consider both sides.

Nélio B Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com)

PwC

Tel: +55 11 3674 2271

Website: www.pwc.com