The Brazilian tax authorities have for the past few months issued a number of rulings designed to preserve and/or modify the related tax base. Some recent rulings worth mentioning are the following:
Remittances of royalties to Spain
The Brazilian tax authorities (Federal Revenue Department from the 8th Region) published Decision No 80 in the official gazette on April 16 2004. The ruling expresses the position of the tax authorities regarding royalty payments and technical services and assistance characterized as royalties made to an entity domiciled in Spain. Brazilian tax authorities have previously set forth that technical services characterized as royalties are services, including a transfer of technology or know-how, and for which the underlying contracts are subject to registration with the Brazilian National Institute of Industrial Property (INPI).
Decision No 80 set forth that based on the most-favoured-nation clause included in the Protocol of the Brazil-Spain Convention for the Avoidance of Double Taxation (tax treaty), remittances for royalties and technical services and assistance characterized as royalties to a resident of Spain are subject to a 12.5% withholding income tax (rather than the general rate of 15%). Such a decision is based on the Brazil-Japan tax treaty, which grants a similar withholding tax rate on remittances for royalties and technical services and assistance characterized as royalties. Nevertheless, it should be noted that the 12.5% withholding tax rate included in the Brazil-Japan tax treaty is solely applicable to royalties not arising from the use of, or the right to use trade marks and copyright of cinematograph films and films or tapes for radio or television broadcasting. Therefore, payments of royalties made to a resident of Spain for the use of, or the right to use the latter mentioned, should be subject to withholding income tax at the rates set forth by article 12 of the Brazil-Spain tax treaty (10% or 15%).
Importation of standard software
Decision No 96 was published in the official gazette by the Brazilian tax authorities (Federal Revenue Department from the 10th Region) on May 25 2004. The ruling expresses the position of the tax authorities regarding withholding income tax levies on payments made for purchases of standard or "off-the-shelf" software. The Brazilian legislation defines standard programs as a ready-to-use software made in large scale on a uniform basis and acquired for personal use or distribution and commercialization purposes. The ruling determined that "off-the-shelf" software imported into Brazil is not subject to withholding tax since it is considered as merchandise; Decision No 96 also set forth that the same tax treatment is applicable to standard software imported through download from the internet. According to the ruling, only payments made for software licences are subject to withholding tax (normally at a rate of 15%).
The ruling also set forth that the Customs value of an imported "physical media" which contains "data or instructions" would be determined based solely on the cost or value of the physical media. The Customs value does not include the cost or value of the relevant data or instructions, provided that the latter cost or value is identified separately from the physical media's cost or value. Therefore, entities importing standard software into Brazil through a physical medium, might avoid paying import duties over the total value of the software by splitting the value of the physical media from the value of the software on the invoice. When no distinction is made between the physical media and the software itself in the import documentation, the full amount would be considered as the Customs value and subject to import duties.
Nélio Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com), Sao Paulo
