This content is from: Brazil

The conflict of non-deductability on software payments between Brazil and the OECD

Mauro Berenholc and Luiz Fernando Dalle Luche Machado of Pinheiro Neto explore why questions regarding corporate income tax deductability are still commonplace for Brazil subsidiaries of software groups.

Brazilian subsidiaries of multinational software companies operate to distribute and sub-license software developed abroad by their parent companies for the local market, and also regularly provide services related to the maintenance and support of such software. In recent times, they have increasingly faced questions from the Federal Revenue Office (RFB) regarding the deductibility - for corporate income tax purposes - of their payments associated with their services.

One key element underlying the legal discussion is the fact the Brazilian transfer pricing (TP) rules have left such transactions out of its existing scope, meaning that the deductibility of such payments is governed by regulations which had been enacted in the 1950s in concern of the payment of royalties to abroad. These regulations are far from being fit to deal with today’s transactions related to the digital economy. Apart from being opposite to the law adopted in the TP Guidelines set forth by the OECD, this unconventional tax policy approach often gives room for misinterpretation. 

The stand taken by the Administrative Council of Tax Appeals (CARF) had initially recognised the full deductibility of such payments. However, there was an eventual  change of heart in such a stand, and this subsequently led to the consolidation of the administrative case law in 2017 against said deductibility. This involved the inclusion of some rather questionable arguments – for instance, that the said payments were not essential to the business conducted by the Brazilian subsidiaries of the software groups or even that they should not be treated as copyrights given that only individual persons could be deemed as authors or creators of a given work.

Following the reversal of the administrative courts’ stand, the legal discussion (which currently reaches few billions in US$ figures) has now moved on to the judicial courts, where the first decisions have been granted in favour of the taxpayers. Even though there is a long way to go until this tax matter is finally resolved by the superior courts in Brazil, these first judicial decisions are certainly a positive indication of the path to avoid an expropriation of the software companies’ assets represented by the disallowance of expenses which are clearly the core of their businesses.

From an international tax policy standpoint this situation also leads to double economic taxation. The matter was also highlighted in the “Transfer Pricing in Brazil: Towards Convergence with the OECD Standard” report prepared as one of the outcomes of the Brazil/OECD Transfer Pricing Project, which was launched following the submission by Brazil of a formal request to join the OECD as a full member. 

Now the question is whether it will be up to the Brazilian judicial courts or the lawmakers to correct this critical misinterpretation and allow Brazil to converge its tax policies with the ones of the most developed nations. 


Mauro Berenholc
T: +55 11 3247 8614

Luiz Fernando Dalle Luche Machado
T: +55 11 3247 6270


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