According to the definition that took effect in articles 24 and 24-A of Law nº 9,430/96 from December 27 1996, favourable jurisdictions and privileged tax regimes are countries, dependencies or regimes that, for example, tax income at a rate lower than 20%, or do not tax it at all. With the publication of Ordinance 488, this limit has been reduced to 17%.
The change directly affects imports and exports of goods, services or rights made by Brazilian companies,reducing the scope of transactions under transfer pricing rules.
Articles 24 and 24-A are also the reference for the applications of other tax rules, meaning Ordinance 488 indirectly changes those parameters – the cases regarding thin capitalisation, Law 12,249 from June 11 2010; worldwide corporate income taxation, Law 12,973 from May 14 2014, and outbound income remittances, Law 9,779 from January 19 1999.
Regarding thin capitalisation, cutting the maximum rate to 17% reduces the situations in which a Brazilian company must deduct interest expenses to a specific 30% of its net worth.
In worldwide corporate income taxation, the change will increase the number of cases in which it will be possible to consolidate the results obtained by controlled foreign companies (CFCs) and defer taxation by corporate income tax (IRPJ) and social contribution tax (CSLL) of the accrued profits. It will also widen the concept of related companies and reduce the concept of equivalent to controlled companies, as long as the controlled entity does not fall within the concept of ’subject to subtaxation’, which is specified as 20%.
Regarding the withholding of income tax on outbound remittances of income or capital gains to beneficiaries domiciled in favourable tax jurisdictions, the change of Ordinance 488 reduces the scope of transactions, subject to taxation at a rate of 25%. Conversely, the change does not affect transactions where the beneficiary is not domiciled in that jurisdiction, even if it benefits from privileged tax regimes. The change also ignores transactions of infrastructure-related debts because of Law 12,431 from June 24 2011, from which the rules are autonomous regarding articles 24 and 24-A.
It is important to stress that, through Normative Instruction 1,037 from June 4 2010, the Brazilian Federal Revenue Office lists the jurisdictions deemed to have favourable taxation and the fiscal regimes deemed to be privileged. Considering the publication of Ordinance 488, it is to believe that the list will be revised and publicised in a new Normative Instruction.
Luiz Felipe Centeno Ferraz (lferraz@mattosfilho.com.br) is a tax partner of Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, the principal Brazilian correspondents of the Tax Disputes channel on www.internationaltaxreview.com.
