Brazil: Tax authorities confirm treatment of foreign reimbursements related to partner-administrators or expatriate costs
Alvaro Pereira and Mark Conomy of PwC Brazil explain why the RFB’s publication of SC 2006/2020 has confirmed favourable outcomes for certain transactions although the consequences concerning the broader treatment of foreign reimbursements remains controversial.
The Federal Brazilian Tax Authorities (RFB) on August 25 2020 published Solução de Consulta DISIT/SRRF02 2006 (dated July 20 2020) (SC 2006/2020). It confirms that the reimbursement by a Brazilian entity of certain costs originally supported by an entity in the same group located abroad should not be subject to withholding tax (WHT), or other contributions that are applicable on cross-border payments. Furthermore, it confirms that such amounts should be treated as deductible for corporate income tax purposes where such expenses are necessary to the business activities of the Brazilian entity.
By way of background, the reimbursement of costs to foreign related parties has been a controversial issue over the years. In addition to common cost-sharing issues faced by taxpayers in foreign jurisdictions relating to adequate allocation and documentation criteria, the RFB has recently released decisions providing that international cost-sharing arrangements should generally be treated similarly to the importation of technical services.
This triggers the application of WHT, as well as other federal contributions, being the contribution for the social integration programme (PIS), contribution for social security financing (COFINS) and contribution for intervention in the economic domain (CIDE). The heavy taxation of such import operations often lead to distortionary treatment and practices in international cost-sharing arrangements.
SC 2006/2020 considers reimbursements made by a Brazilian entity to foreign headquarters or a foreign entity within the same group, in relation to supported costs associated with partner-administrators or expatriates resident in Brazil, up to the amount perceived abroad. In summary, SC 2006/2020 considers:
The amounts remitted are not subject to WHT as they should not be characterised as income of the foreign company;
For the purpose of calculating Brazilian corporate income taxes and contributions (IRPJ and CSLL), the amount reimbursed by the Brazilian company to its foreign headquarters or related party via an invoice should be deductible, provided that such expenses are necessary for the activities of the Brazilian entity for the maintenance of its income production source and is considered usual for the line of business;
The amounts remitted are not subject to PIS/COFINS-importations, as they should not be characterised as consideration for services rendered by the foreign company; and
The amounts remitted are not subject to CIDE, as they should not be characterised as consideration for the provision of technology, provision of technical assistance, technical services or administrative assistance.
The decision refers to earlier decisions from August 2017 to September 2017, including Solução de Consulta - Cosit 378 dated August 23 2017 (SC 378/2017) and Solução de Consulta - Cosit 469 dated September 21 2017 (SC 469/2017).
While a Solução de Consulta does not represent law or legal precedent, it does provide further support and guidance for Brazilian entities in relation to how the RFB is treating arrangements under consideration.
It is important to highlight that the decisions referred to above contemplate costs passed to the Brazilian entity relating to partner-administrators or expatriates. However, the rationale adopted by the tax authority in coming to its decision appears aligned with previous guidance issued by the RFB supporting the non-application of transaction taxes in the context of international cost-sharing agreements (i.e. that the reimbursement does not constitute income in the hands of the foreign entity).
In the context of international cost-sharing arrangements, the recent trend of decisions by the RFB has been to characterise such remittances as income, consideration or remuneration for technical services (depending on the particular tax or contribution). As such, while the decision is favourable for certain operations, the treatment of broader international cost-sharing arrangements remains controversial.
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