Global Tax Alert (News from Americas Tax Center) | 25 February 2014
Brazil’s Federal Revenue Attorney General’s Office issues formal opinion on remuneration of services rendered by foreign companies
The Brazilian Federal Revenue Attorney General's Office (PGFN) recently published a formal Opinion,1 ratifying the Superior Court of Justice (STJ) decision that certain payments for services without transfer of know-how made by Brazilian residents to residents of jurisdictions with which Brazil has entered into a Double Tax Treaty (treaty) should not be subject to withholding tax (WHT).
As a general rule, cross border payments for services are subject to a 15% WHT rate (25% in case of low tax jurisdictions – generally, countries that do not tax income or tax it at a rate lower than 20%).2
However, controversy exists in relation to payments for services without transfer of know-how made by Brazilian residents to residents of jurisdictions with which Brazil has entered into a treaty. The debate involves the application of Article 7 (Business Profits) versus Article 21 (Other Income) of the OECD Model.
Taxpayers classify such service payments under the definition of Business Profits as established in the OECD Model.3 Under the business profits clause, service income should be considered as business income and taxable only in the country where the recipient is located (if no permanent establishment is created). The tax authorities (based on Normative Act 01 of 5 January 2000) claim that service payments remitted abroad should be classified as Other Income and, as a result, Brazil should be entitled to tax.
This issue remained at the administrative court level for years. The first ruling at the judicial appellate level was issued in June 2009, when the Regional Federal Court (TRF4) ruled in favor of the taxpayer in a case involving payments remitted to Canada and Germany.4 Some years later, the case was argued before the STJ, which ruled on 17 May 2012, that the payments are not subject to WHT, and confirmed that Brazil has no right to tax services without the transfer of know-how under most Brazilian tax treaties. Notwithstanding the positive outcome, these are not binding decisions.
Opinion No. 2363
The PGFN recently published Opinion No. 2363 and classified payments received for services without transfer of know-how as business profits under Article 7, except for those cases in which a treaty treats payments related to technical services as royalties (usually Article 12 of Brazilian treaty). In other words, although it is not crystal clear in the Opinion, Brazilian tax authorities may still tax payments for technical services under treaties with protocols that treat such payments as royalties.5
It is important to mention that the PGFN's opinion is more restrictive than the STJ decision because the application of Article 7 is limited to treaties in which the service payments are not treated as royalties. The STJ decision goes further because it applies Article 7 to all service payments, regardless of whether those payments are treated as royalties in a treaty.
The Opinion confirms that Brazil has no right to tax services without the transfer of know-how to residents in which the service payments are not treated as royalties (e.g., Austria, France, Finland and Sweden). Moreover, the Opinion is significant because it confirms that tax treaty provisions should prevail over domestic tax legislation. However, for service payments to residents where the tax treaty treats certain service payments as royalties, the controversy remains.
A case by case analysis of service payments made from Brazil to residents in treaty jurisdictions should be conducted to determine whether the withholding tax on service payments can be mitigated. Notwithstanding, as immediate alternatives, the taxpayer may (i) file a petition to the Brazilian Federal Revenue (administrative level) asking for a private letter ruling or (ii) seek judicial protection6 to avoid the risk of penalties, withhold on subsequent remittances, and request the WHT paid on the last five years (Brazilian statute of limitation).
2. Generally, other taxes such as PIS, COFINS, Tax on Services – ISS, CIDE and IOF are also levied on import of services. However, these taxes are not covered by the tax treaties.
3. Although Brazil is not a member of the OECD, most of its treaties are based on the OECD model and Brazil relies on the Commentary to the model treaty (although with certain reservations).
4. Action brought by Copesul – Companhia Petroquímica do Sul.
5. The same outcome may result if the service payment falls under Article 14 – Independent Personal Services.
6. For instance, by means of writ of mandamus.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Serviços Tributários S.S., Business Tax Services, Sao Paulo
- • Eliezer Serafini
+55 11 2573-3704
- • Eneas Moreira
+55 11 2573-3117
Ernst & Young Serviços Tributários S.S., Global Compliance and Reporting, Sao Paulo
- • Ricardo Gomes
+55 11 2573-3348
- • Claudio Yano
+55 11 2573-3310
Ernst & Young Serviços Tributários S.S., International Tax Services, Sao Paulo
- • Luiz Sergio F. Vieira
+55 11 2573 3571
Ernst & Young Serviços Tributários S.S., International Tax Services, Rio de Janeiro
- • Serge Huysmans
+55 21 3263 7236
Ernst & Young LLP, Brazilian Tax Desk, New York
- • Ingrid Berner
+1 212 773 2539
Ernst & Young LLP (United Kingdom), Brazilian Tax Desk, London
- • Felipe Bastos Fortes
+44 20 7806 9054
EYG no. CM4198