In March 2021, the Brazilian Superior Court of Justice issued a decision (Case RESP Nº 1.759.081) confirming the understanding that had been rendered at the end of 2020, in the same lawsuit: the importation of technical services without technology transfer, from a country which Brazil has a double taxation treaty with, may give rise to corporate tax withholding, depending on the specific provisions of the treaty.
The result, on its own, would already be relevant to draw the attention both to technical services providers resident in Spain who export services to Brazil and Brazilian resident companies who import services from Spanish providers.
This is because it is the first time that the court has expressed its view on the subject after the entry into force of the Normative Declaratory Act (ADI No. 5/2014, enacted by the Tax Administration),considering the very specific provisions of the Brazil–Spain Convention.
However, the issue takes on even greater proportions insofar as the reasoning used by the court was generic enough to imply that potentially it could be applicable to every double taxation treaty, indistinguishably from the added texts and peculiarities of Brazil–Spain treaty.
NDA No. 5/2014 was the tax authorities’ main legal basis in case RESP No. 1.759.081 and it set that consideration for technical services provided by non-residents, regardless if these services imply technology transfer or not, must be considered in the OECD’s Model Convention primarily as royalties (Article 12) or as independent personal services (Article 14) and residually as business profits (Article 7).
Business profits (Article 7) would be no longer the primary qualification of such payments, as it was the understanding of the court by the occasion in which it repealed another tax administration act, the Normative Declaratory Act No. 1/2000, which generically qualified all fees for technical services as royalties, irrespective of any technology transfer implied by the contract.
On the other side, In this recent case specifically, it was discussed whether payments sent to Spain by a Brazilian company, in consideration for the provision of engineering services and administrative assistance, would be subjected to exclusive taxation abroad (residence) or this remuneration would also be subjected to withholding income tax in Brazil.
Following the literal ADI No. 5/2014, the court accepted the tax authorities’ understanding that an assessment for qualifying the mentioned fees in Articles 12 and 14 should have been carried out before taking Article 7 into consideration; therefore, the decision of the lower court was cancelled imposing the lower court to proceed to such assessment.
The issue is not yet definitively solved and there is no unequivocal position to be derived from this judgment on concerning all other similar cases of payments in consideration for services provision without technology transfer. It is not clear if they should be subject to withholding tax or not.
However, what draws the attention are the reasons adopted by the judges, which were generic enough to be applied in any case, regardless of the different wordings of the international double taxation treaties signed by Brazil.
As seen in Justice Mauro Campbell’s vote, the basis for expanding the concept of royalties to encompass even services without technology transfer – normative basis to legitimate the application of NDA No. 5/2014 to the case – was not the very wording of the Double Taxation Convention signed by Brazil and Spain and its protocol resulted out of a mutual agreement procedure (MAP) taken by the tax authorities of both countries.
The extension of the concept of royalty was carried out through a process of analogy to interpretations adopted in some decisions concerning domestic legislation on corporate and income tax (Law No. 4.506/64) and on Contribution of Intervention on the Economic Domain (Law No. 10.168/2000).
Mainly, the judges may not have realised that, in addition to the Brazil–Spain treaty (Act No. 76.975/76) and its attached protocol, between those two countries there is a MAP that could have solved the entire interpretative issue.
Consubstantiated by Interpretive Declaratory Act No. 27/2004 (ADI No. 27/2004), in its Article 3, the MAP provides textually the possibility that, between the tax authorities of these two countries specifically, the term ‘royalty’ can be defined as the fees for “all technical services or technical assistance, regardless of whether, in themselves, they imply a transfer of technology”.
If Brazilian and Spanish tax authorities, through the exchange of information and successive communications that ended up in ADI No. 27/2004, agreed among themselves the concept of royalty for international taxation purposes, it is at least pointless to decide the case without taking it into account. Besides that, if in the context of such treaty it was necessary to take part into a MAP in order to 'amplify' the concept of royalties, it means that the context of other treaties is completely different in the absence of such an act resulting from a MAP.
The conclusion reached at the trial itself is not the main issue because in the specific case of Brazil and Spain there is a forecast to reach the result revealed in case RESP No. 1.759.081.
However, the inaccuracy (and even flaws) in the court’s reasoning may allow an extensive interpretation of concepts presented in double taxation treaties, thus, increasing Brazilian tax jurisdiction despite the specific determinations of each treaty, what can clearly be considered a violation of the treaty from the point of view of other countries, except for Spain.
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