The growth of economic groups has resulted in the widespread increase of cooperation agreements. In their modern definition, economic groups often end up operating through a number of companies across several different areas, both in the domestic and international markets. The emergence of the new model has meant that agreements are signed with the intention of making many common, non-core business activities centralised into a single company.
These agreements are better known as a 'cost-sharing agreement' or as an 'apportionment of costs and expenses agreement'.
Although these are lawful contracts and are justified by the need to optimise costs and standardise operations across the board, the tax impact of the agreements have evoked discussion. This includes reference to whether operations between groups are located exclusively in Brazil, or where the centralisation of such activities take place abroad.
The cost-sharing agreement
The cost-sharing agreement, as a rule, stems from the need for optimisation, efficiency, cost reduction and standardisation in performance. In an economic group, a parent company, or a company created specifically for that purpose (a shared service centre), can agree on the cooperation of certain aspects. This can include the apportionment of expenses and costs resulting from non-core business activities, such as accounting, marketing and legal services, and research and development, among others.
In one of these structures, the company that will centralise such common activities will provide support to the other companies, which will participate in the apportionment of the costs and expenses involved.
Although there is debate on the nature of such contracts, it is possible to identify, depending on the structure established between the parties, at least three distinctive types: (i) cost-sharing agreement; (ii) intra-group service agreement; and (iii) cost-contribution agreement.
A cost-sharing agreement is put in place when co-participants, with common interests, incur costs for the fruition of assets and rights of one of the companies of the group – which make them available to the other ones – according to justified apportionment criteria. Contribution to costs, in the face of fruition, would be a way to reimburse the company holding the right or asset.
On the other hand, the intra-group service agreement, given the relationship between companies within an economic group, sets out an effective service provision at a fair price as if it were an independent company from the group.
Finally, it is possible to identify the cost contribution contract, whereby a group of companies share costs and risks in the production or use of assets, services or rights. In general, the sharing of such expenses is related to research and development, the intangible right or assets being the counterpart.
Therefore, it is clear that either an expense, cost or contribution agreement are entered into by companies which aim to share and allocate costs or expenses incurred by one of them for the benefit of all companies within the group, who are involved in the production of goods, services or rights.
Such contracts are not to be mistaken with:
i) Technology transfer agreements (these contracts are often reimbursements for administrative expenses and not technical services);
ii) Purchase and sale agreements (there is no transfer of any asset or object with the payment of a price); and
iii) Service agreements (there is often a remuneration with a profit margin, while in cost-sharing agreements there is no claim to profit, but only reimbursement).
Table 1 illustrates the differences between service agreements and cost-sharing agreements.
In order to verify such characteristics, one must consider the agreement itself, as well as its implementation by the parties, which could lead to different tax effects.
|Table 1: Differences between service and cost-sharing agreements|
|Service agreement||Cost-sharing agreement|
|Legal basis||Articles 593 to 609 of the Civil Code||It is not typified in the law (atypical contract)|
|Documents required by law||Service invoices||Debt note|
|Activities carried out||Core business activities and non-core business activities||Non-core business activities|
|Classification of revenue for tax purposes||Income||Refund|
Tax aspects of cost-sharing agreements between companies based in Brazil
In these circumstances, the taxes that may apply are:
i) Corporate income tax (IRPJ) and social contribution on profit (CSLL);
ii) Social security contributions on revenue (PIS/COFINS); and
iii) Tax on services (ISS).
The main characteristic of the cost-sharing agreement is that expenses are simply reimbursed. This is because there is only a sharing of such expenses between the parties, as the parent company does not render services in order to profit from such activities.
If the sharing between the parties aims to merely be a compensation of the costs, it is not possible to levy taxes such as:
i) IRPJ and CSLL – as there is no income or profit;
ii) PIS and COFINS – as there is no revenue from sales, provision of services or other economic activity; and
iii) ISS – as there is no provision of services, given the absence of a price, which includes cost and value as a profit margin.
In fact, this is the position of the Federal Revenue of Brazil, which was addressed in the focus of Consultation Solution 94/2019 and Divergence Solution 23/2013, where it clearly recognises that:
i) Cost-sharing agreements are lawful;
ii) The amounts paid under a cost-sharing agreement is reimbursement; and
iii) The amount paid, in collaboration with such expenses, would be deductible, as long as: (a) it is proven that they are usual, regular and necessary; (b) they are calculated according to reasonable and objective assessment criteria, previously agreed by the parties; (c) Payment be made for the actual expense of each company for the fruition of such services or goods; (d) that the centralising company only appropriates the expense that it is entitled to; and (e) – there is a control over such shared expenses and reimbursements. In addition to the deductibility for IRPJ and CSLL purposes, there would also be the possibility, within the same reasoning, for the company to offset PIS and COFINS credits in the non-cumulative regime.
Therefore, as long as these conditions or requirements are met, the Federal Revenue Service's position allows them to conclude that no taxes (IRPJ, CSLL, PIS and COFINS) apply. It is also reasonable to conclude that the same reasoning prevents municipalities from levying ISS. Moreover, there is a possibility of deducting expenses (IRPJ/CSLL) or crediting them (PIS/COFINS).
Tax aspects of cost-sharing agreement between companies based in Brazil and abroad
There are cases where the cost-sharing agreement involves a centralising company based abroad. This is a very common agreement entered by multinational enterprises (MNEs), which make the tax issue somewhat different, as the taxes in question would be:
i) IRFONTE – withholding income tax on remittances abroad;
ii) PIS and COFINS-imports – contributions that are levied on the import of services; and
iii) ISS – service tax on imports of services.
As a starting point, to support the understanding of non-incidence of such taxes on remittances for reimbursement, it is important to understand the premises already mentioned in the transactions between companies domiciled in Brazil: (i) existence of a written contract; (ii) provision for objective and reasonable criteria for apportioning expenses; (iii) apportionment of activity-means and not activity-end; and (iv) no profit margin.
In our view, Brazilian tax authorities are not entitled to tax remittances sent abroad under a cost-sharing agreement with non-resident companies because:
i) There is no income or equity increase in reimbursement; and
ii) There is no effective provision of services, which is required for CIDE, PIS/COFINS-import and ISS to apply.
However, the Federal Revenue has issued several answers determining that tax should be levied on such remittances (Solução de Consulta Disit/SRRF09 No. 9026, of August 29 2018). However, it seems to us that this interpretation is more linked to the specific case because, in theory, it does meet the requirements of an effective cost-sharing agreement.
This allows us to conclude that, in fact, the Federal Revenue does not have a clear guidance against the non-taxation of remittances abroad when it comes to a cost-sharing agreement. In this regard, for example, it is worth remembering the Answer to Tax Ruling Request No. 21 – General Tax Coordination Office in Brazil (COSIT) 2015, which distinguishes between mere reimbursement and the effective provision of services for the purposes of information provided in an ancillary obligation named Siscoserv:
"In view of this, in a contract for the apportionment of costs and expenses signed between companies belonging to the same economic group involving residents and non-residents in the country, the activities made available to the resident legal entity by a non-resident legal entity must be registered with Siscoserv, if the activity in question is provided for in NBS. It is a transaction that comprises an operation that produces variation in the equity of the legal entity, insofar as the reimbursement offered as a counterpart to the activity made available represents an expense, which will necessarily imply equity variation. In the context of the cost apportionment agreement, there is a subcontracting of certain services by the centralising legal entity in favour of the other members, the resulting mandatory relationship will have the nature of an authentic provision of services, with the contracted third party being the provider and the group's legal persons as the policyholder, to whom the services of indeed benefit. If the provider is resident or domiciled abroad, the registration of information on Siscoserv will be mandatory, to be carried out by a policyholder resident in Brazil."
It is important to highlight from this ruling the fact that when there is a sharing of costs, due to the hiring of a third service provider by the centralising company, such a hypothesis would not be a simple refund, and characterising it as a service would lead to the taxation of the remittance sent abroad.
In essence, the fact that there is an eventual hiring of a third party abroad does not neglect the characteristic of the remittance because there is still a mere apportionment through reimbursement of an expense or cost of common interest centralised in a company abroad.
However, the Administrative Tax Appeals Council (CARF) in the Arcos Dorados – McDonald's case, has ruled unfavourable to taxpayers, arguing, among the reasons, that the services reimbursed were outsourced.
Despite the controversy regarding the taxation of remittances, the deductibility of expenses and costs – IRPJ/CSLL – and credit – PIS/COFINS – has a favourable position for taxpayers, according to Answer to Tax Ruling Request No. 94 COSIT of March 25 2019, which states:
"It is possible to concentrate, in a single company, the control of expenses related to centralised administrative support departments, for later apportionment of common administrative costs and expenses among companies that do not maintain the concentrated administrative structure. In order for the amounts moved due to the aforementioned apportionment of costs and expenses to be deductible in the calculation of the IRPJ, it is required that they correspond to necessary and normal costs and expenses, duly proven and paid; that are calculated based on reasonable and objective assessment criteria, previously adjusted, formalised by an instrument signed between the intervening parties; that correspond to the actual expenditure of each company and the global price paid for goods and services; that the centralising company of the operation as an expense, only the portion that falls under the apportionment criterion, as well as the decentralised companies that benefit from the goods and services must proceed in an identical manner, and account for the portions to be reimbursed as rights to recover credits; and, finally, that a separate bookkeeping be kept of all acts directly related to the apportionment of administrative expenses.
It is possible to concentrate, in a single company, the control of expenses related to centralised administrative support departments, for subsequent apportionment of common administrative costs and expenses among companies other than the one that maintains the concentrated administrative structure. In order for the amounts moved due to the aforementioned apportionment of costs and expenses to be deductible in the calculation of the CSLL, it is required that they correspond to necessary and normal costs and expenses, duly proven and paid; that are calculated based on reasonable and objective assessment criteria, previously adjusted, formalised by an instrument signed between the intervening parties; that correspond to the actual expenditure of each company and the global price paid for goods and services; that the centralising company of the operation as an expense, only the portion that falls under the apportionment criterion, as well as the decentralised companies that benefit from the goods and services must proceed in an identical manner, and account for the portions to be reimbursed as rights to recover credits; and, finally, that a separate bookkeeping be kept of all acts directly related to the apportionment of administrative expenses."
Although the court has ruled in some specific cases for the taxation of remittances abroad, in contrast, it has allowed for the deduction and compensation of such expenses for tax purposes.
In Brazil, it is possible to say that reimbursements under cost-sharing agreements entered by domestic companies are not subject to taxation under IRPJ/CSLL, PIS/COFINS and ISS, provided that certain requirements are met, as well as such expenses are deductible or allow for credits regarding the taxes in question.
On the other hand, when it comes to cost-sharing agreements with companies based abroad, as a rule, the Federal Revenue has positioned itself by taxing the remittance through IRFONTE (15%), PIS/COFINS-imports (9.65%), CIDE (10%) and ISS. Although, the decisions usually state that they had not identified an effective apportionment in specific cases, which is a reason for the taxes to apply. Conversely, the Federal Revenue has acknowledged the deduction or right to credit regarding such expenses and costs.
In such conditions, the issue still raises doubts and controversies. However, where there is an effective cost-sharing agreement with the respective controls, we believe that, whether by decision of the Federal Revenue, administrative court or judicial courts, there will be acknowledgment of the impossibility of taxation.
|Fábio Pallaretti Calcini|
Tel: +55 11 3087 4800
Fabio Pallaretti Calcini is the managing partner and head of the department for federal tax (IRPJ, CSLL, PIS COFINS, CONTRIBUIÇOES PREVIDENCIÁRIAS, ITR, IR, IPI, IOF, Imposto importação, exportação). He is based in São Paulo and has been practising law in Brazil since 2002.
His practice is focused on tax law (litigation, advisory, legal opinions, corporate tax, M&A, restructuring, tax consulting, international tax, audit defence and planning).
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