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7TH LATIN AMERICAN TAX UPDATE WEBINARFOCUS – BRAZIL TAX REFORM
*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.
7TH LATIN AMERICAN TAX UPDATE WEBINAR
AGENDA
Regional update
Regional and tax trends
Argentina/Tax audit regulations
Chile/P. Bachelet’s proposed tax reform package
Colombia/tax regulations of the 2012 tax reform package
Mexico
2014’s tax reform package: regulations issued to date and additional key industry provisions
Tax audit scenario
Brazil
Tax legislative update/Law 12,973, 2014
Adoption of IFRS standards for income tax
Restrictions on amortization of goodwill
Changes to the CFC regime
Reopening of tax amnesty programs
Tax litigation update
Advantages for companies that litigate on taxes in Brazil: what you need to know
CFC rules: Vale case decision and implications in light of Law 12,973, 2014
Application of Article 7 under DTT
Q&A
June 2014 2
Presenters
June, 2014 3
Alex JorgeTax Partner*
Campos Mello Advogados, São Paulo, [email protected]
(55-11) -3077-3500
Manuel RajunovCo-Managing Partner
DLA Piper, Mexico [email protected]
(214) 743-4550
John GuarinLatin American Project Manager
DLA Piper, New [email protected]
(212)776.3877
Ana Luiza MartinsTax Litigation Partner*
Campos Mello Advogados, São Paulo, [email protected]
(55-11) -3077-3500
**Alex Jorge and Ana Luiza Martinz are partners in the Tax Practice of Campos Mello Advogados, an independent Brazilian law firm.
7TH LATIN AMERICAN TAX UPDATE WEBINARREGIONAL UPDATE
John Guarin – Latin American Project ManagerInternational Tx Practice, DLA Piper, New York
*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.
Regional update - trends
Regional trends
Growth rates / increase in individuals tax base
Social demand for additional/better programs
Political swing towards the left / larger governments andcorresponding additional funding requirements
Revenue increase via:
Rate increase
Additional taxes
Incorporation of CFC provisions (as capital exporters)
Audit strengthening
Denouncing/renegotiating abusive tax treaties
Expropriation of key target companies
June 2014 5
Regional update - tax trends
Tax regional trends
Hefty audits on cross border transactions
Proper documentation
Proper WHT
Tax residency certificate +
Expense relationship with generation of taxable income
Operating substance of payment recipient
BEPs effects / tax substance of payment recipient
“Triangular” transactions
Tax amnesties
Electronic tax audit surveillance
CFC provisions
June 2014 6
Regional update - Argentina
Argentina:
2013 tax reform
Capital gains tax at 15% on net gain or 90% of gross
Dividend WHT tax at 10% (+35% equalization)
Extended application of 0.6% bank credit/debit tax thru end of 2015
2014 audit/regulations
Triangular transaction penalty
Invoice destination v. delivery destination
0.5% WHT (2% if invoice destination is not in the white list)
Blocks speedy VAT recovery opportunities to exporters
Registry affiliated parties (within 10 days from incorporation/dissolution)
Deadline April/July 1
Whitewash bill/tax amnesty
Extension to 06/30/2014 (federal tax only)
June 2014 7
Regional update - Chile
Chile/P. Bachelet’s proposed tax reform package (highlights)
CIT 1st level rate increases from 20% to 25%
2014: 21%; 2015: 22.5%; 2016: 24%; and 2017: 25%
Shareholders liability switches from cash to accrual basis FY2017
No deferral of 2nd level rate tax of 35% (1st level rate is still creditable)
Profits are deemed distributed in year of generation
WHT does not apply if all shareholders are individuals resident in Chile
but… Since ChileCo must pay WHT upfront, cash flow speaking, the CITburden seems to be really going up to 35%
Capitalization of interest on shares acquisitions ChileHoldCo/ChileOpco structure/ i’s will be no longer deductible as an
expense)
June 2014 8
Latin America tax update - Chile
Chile/P. Bachelet’s proposed tax reform package (highlights) Contd.
Thin Cap
As of FY2015
3:1 ratio or if financial expenses exceed 50% of net taxable income
Debt includes interest and any other expense related thereto
Capital gains
For non-residents will be taxed at 35% in all instances (currently at 20%providing certain requirements are met)
CFC provisions
FY2015 in respect of passive income (dividend, withdrawal of profits, interest,capital gains and royalties) and tax haven income
June 2014 9
Latin America tax update - Chile
Chile/P. Bachelet’s proposed tax reform package (highlights) Contd.
GAAR provisions
Re-characterization authority if legal form is abused
Abuse includes: avoidance, reduction or deferral
Electronic audit provisions
Access to electronic files of the taxpayer
Access to taxpayers’ financial institutions (credit and debit card payments)
Tax consultants penalties
Transfer pricing tax penalty on disallowed expenses and TPadjustments goes from 35% to 40% FY2017
June 2014 10
Latin America tax update - Chile
Chile/ P. Bachelet’s proposed tax reform package/Contd.
Other taxes
VAT on real estate transactions
Carbon Tax (Annual tax) CH$0.1 to CH$5 per ton emitted FY2016
Stamp duty increase from 0.033% and 0.4% to 0.66% and 0.8%
Chile/US tax treaty (02.04.2010)
Next to go to the Senate Floor
June 2014 11
Latin America tax update - Colombia
Colombia
December 26, 2012 tax reform included:
CIT (33to 25%) and KG (33 to 10%) rate reductions
Introduction of:
Social contribution surtax “CREE” (FY2014 to 2016: 9% and 8% thereafter)
Permanent establishment
Tax residency via effective management
Thin capitalization provisions
GAAR provisions
Restriction to tax free reorganizations
BEPS component re/ taxation on transfer of assets/risk/functions abroad
June 2014 12
Latin America tax update - Colombia
Colombia/ Regulations issued in 2013 include:
Social contribution surtax – “CREE”
Applies to Colombian incorporated entities and also to Colombian PE
Tax base is in line with CIT (net taxable income and exempt income; minimumpresumptive income CIT basis (3% net equity); limit on expenses paid abroad notsubject to WHT)
Permanent Establishment
Fixed place of business refers to “space” (not premises, facilities installation)
No 6 months minimum time presence criterion
Agency follows OECD definition
Compliance requirements:
Functional analysis of PE (separate per PE or branch and kept for 5 years)
Separate Colombian F/S using Colombian GAAP (FY2015 IFRS)
25% WHT on remittance of untaxed profits
June 2014 13
Latin America tax update - Colombia
Colombia/ Regulations issued in 2013 include / Contd.
Tax residency
Individuals
> 183 days within 365-day period; >50% assets held or administered inColombia; or no residency in another country; or resident in a tax haven
Mind and management
OECD criteria (key decisions, BOD meetings, senior management)
Colombian GAAP
Thin cap
Debt to equity ratio is 3:1
No definition of debt but reference to anything that generates interestpayment (conceptually may captures lease, factoring, other)
Debt is not restricted to related party debt
Does not apply to public infrastructure projects
June 2014 14
Latin America tax update - Colombia
Colombia/Regulations issued in 2013 include/Contd.
BEPS provision
Taxation on transfer of assets/risk/functions abroad / FMV must be determined andsupported with dedicated TP study
Tax havens list issued, main negative tax effects:
October list to be reviewed annually
Related/unrelated party TP compliance
Fall under the scope of Colombian general anti-avoidance provisions
Overall 33% WHT on all other payments
Portfolio investment proceeds 25% v 14%
Non deductibility of payments made with no WHT
… effect on payment of imports - DIAN’s opinion on 03.20.2014 v. 05.26.2014
June 2014 15
1. Andorra
2. Angola
3. Anguilla
4. Antigua and Barbuda
5. Bahamas
6. Bahrain
7. BVI
8. Brunei
9. Cape Verde
10. Cayman Islands
11. Cook Islands
12. Cyprus
13. Dominica
14. Grenada
15. Guyana
16. Hong Kong
17. Isle of Man
18. Jersey
19. Jordan
20. Labuan
21. Lebanon
22. Liberia
11/20/2012Foreign Tax Update Webinar 16
22. Liberia
23. Lichtenstein
24. Macau
25. Maldives
26. Marshall Islands
27. Mauritius
28. Monaco
29. Nauru
30. Oman
31. Pitcairn, Henderson, Ducie andOeno Islands
32. Qeshm
33. ST Helena, Ascension andTristan da Cunha
34. Saint Kitts and Nevis
35. Saint Lucia
36. Saint Pierre and Miquelon
37. Saint Vincent and the Grenadines
38. Samoa
39. Seychelles
1. Barbados
2. Bermuda
3. Guernsey
4. Kuwait
5. Panama
6. Qatar
7. United Arab Emirates
Tax Havens List
39. Seychelles
40. Solomon Islands
41. Svalbard
42. Trinidad and Tobago
43. Vanuatu
44. Yemen
Latin America tax update - Colombia
Transitory List
Negative effect onimports
Negative effect on privateequity funds structures
Colombia
Post 2014 re-election(?) reform
WHT on dividends
Reintroduction of equity tax
June 2014 17
Regional update - Colombia
7TH LATIN AMERICAN TAX UPDATE WEBINARMEXICO – 2014 TAX REFORM PACKAGE
Manuel Rajunov, Tax Partner – DLA Piper, Mexico City
*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.
Mexico 2014’s tax reform package
Mexico: 2014 tax reform
For complete coverage please check:
http://www.dlapiper.com/en/us/insights/events/2013/11/sixth-foreign-tax-update-webinarbrfocus-on-latin__/19-nov-2013--webinars/
DLA Piper Mexico: [email protected]
IETU repealed
Substance testing for deductibility of related party transactions (testthat it be part of taxable base of recipient)
Elimination of consolidation regime
Elimination of installment sale option (ability to defer 65% income)
Introduction of 10% withholding on dividends payable to individualsand foreign shareholders (should not affect US tax residents/MFN)
June 2014 19
Mexico 2014’s tax reform package
Mexico: 2014 tax reform / Contd.
New regime for IMMEX companies imposing more stringentsubstance requirements (transformation and 70% assets tests)
Preferential VAT rates for border and tourist areas repealed andstandardized at national 16% rate
Imposition of 16% VAT on temporary importations by IMMEXcompanies unless IMMEX is certified with SAT
New excise taxes on mining activities
June 2014 20
Mexico 2014’s tax reform package
Mexico: 2014 tax reform / Contd.
Regulations issued to date
Tax audit scenario
June 2014 21
7TH LATIN AMERICAN TAX UPDATE WEBINAR
BRAZILTAX LEGISLATIVE UPDATE
Alex Jorge*, Tax Partner – Campos Mello Advogados, São Paulo
TAX JUDICIAL UPDATEAna Luiza Martinz*, Tax Litigation Partner – Campos Mello Advogados,
São Paulo
*Alex Jorge and Ana Luiza Martinz are partners in the Tax practice of Campos Mello Advogados, an independent law firm,and are based in São Paulo
7th Annual Latin American Tax Update Webinar 23
Law 12,973 of May 13, 2014: landmark legislation
Brazil has enacted corporate tax reform, Law 12.973 of 13 May 2014 (the “New Law”),which is the broadest and deepest reform to Brazil’s corporate income tax system since theenactment of Decree-Law 1,598 of December, 26, 1977
Timeline
December 28, 2007: Law 11,638/2007– Convergence of Brazilian Accounting Rules intoInternational Financial Reporting Standards (IFRS)
December 03, 2008: Provisional Measure (MP) no. 449/08 - Enactment of a temporaryregime called Transitory Tax Regime (RTT) later converted into law on May 27, 2009
February 07, 2013: Treasury-Attorney Ruling No. 202/13: Dividends distributed in excess ofthe profits calculated by RTT Accounting are taxable
September 16, 2013: Brazilian IRS Rev. Proc. IN no. 1,397/2013 – unfavorable regulations
November 11, 2013: Provisional Measure no. 627/13 – Supersedes RTT and promotechanges to the Brazilian tax law in compliance with IFRS requirements
May 13, 2014: Conversion of MP 627 into Law 12,793/14
06.04.2014
Brazil: Adopting IFRS for income taxes
(Law 12,973)
7th Annual Latin American Tax Update Webinar 24
Brazil: Adopting IFRS for income taxes
(Law 12,973) – Contd.
Law 11,638/2007: adoption of IFRS for accounting purposes only
Under IFRS Regime, some revenues, costs and expenses that were not booked under theprevious Brazilian GAAP standard as of December 31, 2007 (2007 Standard Accounting)
There are differences between the two regimes regarding assets, liabilities and profitsmeasurements and net equity items.
Under the IFRS Regime, net profits subject to dividend distribution could be higher or lowerthan the amount calculated based on 2007 Standard Accounting.
RTT Regime: neutrality regime for corporate income taxes
Created on a temporary basis until new rules to adjust the IFRS to the tax rules (corporateincome tax – IRPJ, tax on net profits – CSLL, tax on gross revenues – PIS/COFINS)
Under the RTT, any changes in the measurement of revenues, costs and expenses shouldbe neutral for purposes of determining the taxable basis of IRPJ, CSLL, PIS/COFINS
While RTT was only applicable to revenues, costs and expenses, other accounting itemssuch as assets, liabilities, profits and dividends should be calculated under the IFRS regime
Law 12,973/2014 : conversion of accounting and income taxes to IFRS (end of RTT)
RTT is superseded and IFRS is now the starting point for tax computation
Some adjustments are yet required to arrive at taxable income
06.04.2014
7th Annual Latin American Tax Update Webinar 2506.04.2014
Net Profits beforeTaxes
(2007 AccountingStandard)
(+)(-)
Adjustments(temporary and
permanentdeductions/additions)
________________
Taxable Income
Until 12.31.2007Net Profits before Taxes
(IFRS standard)(+)(-)
RTT adjustments (2007Standard)
________________Net Profits before taxes
(2007 Standard)(+)(-)
Adjustments (temporaryand permanent
deductions/additions________________
Taxable Income
“RTT”Net Profits before
Taxes (IFRS)(+)(-)
Adjustments(temporary and
permanentdeductions/additions)
______________Taxable Income
Law 12,973
D
i
v
i
d
e
n
d
s
Brazil: adopting IFRS for income taxes
(Law 12,973) – Contd.
7th Annual Latin American Tax Update Webinar 26
Brazil: adopting IFRS for income taxes
(Law 12,973) – Contd.
New Law will be in effect as of January 1, 2015
However, companies may elect to elect the adoption of the new law as of January 2014
IRS Rev. Proc. IN no. 1,397/2013 was revoked by Law 12, 973/2014?
Earnings and dividends calculated between 2008 and 2014
Profits and dividends in excess of the amounts calculated based on the accounting criteria in force inDecember 31, 2007 (“RTT Accounting”) shall not be subject to the IRPJ and CSLL, except if election is madefor application as of 2014
Interest on own equity ("JCP") calculated Between 2008 and 2014
It was ensured that the calculation of the limits for the JCP payments between 2008 and 2014 may be basedon equity calculated under IFRS standard, even if it exceeds calculations made under the RTT Accounting
If the company elects to anticipate the end of the RTT already in 2014, it must calculate the JCP based onthe new rules, which restricted the accounts that can be used to the following:
Social capital
Capital reserves
Revenue reserves
Treasury stock and
Accumulated losses
06.04.2014
7th Annual Latin American Tax Update Webinar 27
Brazil: adopting IFRS for income taxes
(Law 12,973) – Contd.
Net equity pick up method (MEP)
Similarly to the JCP, for calendar years of 2008 to 2014, companies may value theirinvestment in other companies based on the net assets of the affiliate or subsidiaryaccording to the IFRS standard
Exception is made for companies which elects the end of the RTT in 2014, which may notuse this evaluation method as of 2014
The net assets of branches, subsidiaries and affiliates domiciled abroad shall be calculatedbased on the standards of the relevant legislation in the country of domicile
Fair value measurement (FVM)
It was made clear that any gain arising from the FVM should also be computed intransactions involving the exchange of assets or liabilities
However, these FVM adjustments should not result in any tax impact until the disposition,sale or liquidation of the assets or liabilities occurs, as along as the taxpayer has specificcontrols in their books and records for such adjustments
Pending regulations from the tax authorities
06.04.2014
7th Annual Latin American Tax Update Webinar 2806.04.2014
IFRS AccountingStandards
Adjustmentsmade by law
Substance prevails over form, unless the law provides adjustments
Brazil: adopting IFRS for income taxes
(Law 12,973) – Contd.
Substance Form
7th Annual Latin American Tax Update Webinar 29
Brazil: goodwill amortization
New rules on goodwill amortization may impact future M&A tax planning structures
Definition of cost of investment (equity value)
Appraisal Report
Evaluates the surplus (or deficit) of each asset and not the profitability of the enterprise
Must be prepared by a third-party expert and filed with the Brazilian IRS or Public Registryuntil the 13th month after the reorganization
Report disregarded by tax authorities: wrongful information or relevant error
06.04.2014
Previous Definition New Rule
Equity value Equity Value
Goodwill – Asset Value
Surplus or deficitGoodwill – Other EconomicReasons (intangible)
Goodwill – Future Profitability Goodwill
7th Annual Latin American Tax Update Webinar 30
Corporate income tax deductions
Pros and cons
06.04.2014
Previous Definition New Rule
Goodwill – Asset Value:depreciation and amortization
Tangible Assets surplus ordeficit: depreciation
Goodwill – Other EconomicReasons (intangible): non-
deductible
Intangible Assets surplus ordeficit: depreciation
Goodwill – Future Profitability:deductible (60-month minimum)
Goodwill – residual: deductible(60-month minimum)
Previous Definition New Rule
Pros: possibility to fully allocated tofuture profitability
Pros: single appraisal and intangiblegoodwill amortization
Cons: risks if there are 2 appraisalsand intangible amortization
Cons: allocation 100% to futureprofitability no longer possible
Brazil: goodwill amortization (Contd.)
7th Annual Latin American Tax Update Webinar 31
Grandfathering provision: the former 2007 Accounting Standard Rule will remain in force for
reorganizations made until December 31, 2017
However, the acquisition must take place until December 31, 2014
Goodwill must be recorded by this date and supported by an appraisal report
Exception for governmental approval (i.e., antitrust): if the reorganization depends on
approval by governmental agencies or bodies, the old rules will remain in force if the
reorganization takes place until 12 months after approval
06.04.2014
Brazil: goodwill amortization (Contd.)
7th Annual Latin American Tax Update Webinar 32
Brazil: changes in CFC Rules
Current rules
Controlled and affiliated companies:taxation of profits earned abroad in thedate of accrual, regardless of effectivedistribution to shareholders
06.04.2014
New rule
Affiliated companies: cash basis
Controlled companies: taxation of thevariation on the value of the investmentin controlled company (directly orindirectly owned) that is equivalent to itsprofits before income taxes, exceptforeign exchange variation.Parent
Direct CFC
IndirectCFC
Parent
Direct CFCIndirect
CFC
7th Annual Latin American Tax Update Webinar 33
Brazil: changes in CFC rules
control defined
Controlling company: holds, directly or throughout other controlled companies, ownershiprights that assure, permanently, majority on social decisions and the power to elect the majorityof managers
Affiliated company: significant influence, without control. A 20% voting capital participation isdeemed an affiliation (if no control is verified)
Deemed control: company that holds more than 50% of the voting capital of an affiliatedcompany in connection with other related companies or individuals, either residents or non-residents in Brazil
Deemed affiliation: enterprises (?) jointly controlled with unrelated parties
Cash basis for affiliated companies – only if the affiliated company is not :
located in Favorable Tax Jurisdiction (FTJ) or subject to Privileged Fiscal Regime (PFR)
controlled (directly or indirectly) by legal entity located in PFR or FTJ
subject to a sub-taxation regime (STF has not analyzed such restriction)
deemed as a controlled company (STF has not analyzed such restriction)
06.04.2014
7th Annual Latin American Tax Update Webinar 34
Brazil: changes in CFC rules
consolidation for controlled companies
General rule:
Allows offset of profits and losses of foreign companies until the year 2022
Offset of Losses: no time limitation, provided that previous losses are reported to theBrazilian IRS
Exceptions – controlled companies:
Located in FTJ, subject to RFP or sub-taxation
Controlled by companies located in FTJ, subject to RFP or sub-taxation
Located in country without agreement or treaty with clause for exchange of tax information(unless its accounting books are delivered to the Brazilian IRS electronically and thesupporting documents are made available)
That earns active income lower than 80% of total income
Active income defined as income of active business, except:
Royalties, interest, dividends, shares/stock, leasing income, capital gains (unless sale ofshares or assets acquired over 2 years), financial gains, gains on financial commissions
06.04.2014
7th Annual Latin American Tax Update Webinar 35
Brazil: changes in CFC Rules
deferral of payment
Law grants an 8-year installment deferral of payment as of the year of theforeign profits are accrued, as follows:
1st year: distribution of at least 12.5% of the profits
8th year: distribution of the remaining profits
Conditions:
For the controlling (holding) company (and deemed controlled)
LIBOR interest rate for 12 months, plus US$ FX variation
Voluntary disclosure of the taxes due
For the controlled company (directly or indirectly)
Not located in FTJ, subject to RFP or sub-taxation
Not controlled (directly or indirectly) by company located in FTJ, subject to RFP or sub-taxation
Active income over 80%
06.04.2014
7th Annual Latin American Tax Update Webinar 36
Brazil: changes in CFC rules
foreign tax credit
Offset of income tax paid abroad up to the limit of the income tax paid in Brazil
Profit consolidation = Income Tax Consolidation
Withholding income tax (WHT):
Credit for WHT withheld in Brazil and abroad
Credit for WHT outside Brazil only if the country of residence of the beneficiary of theincome allows a deduction in calculating the taxable basis of the controlled company
Deduction (in the profits of the controlled company or affiliated company) of its profitson shares of controlled or affiliated companies in Brazil
Deduction of transfer pricing adjustments and thin capitalization (excess interestexpense)
Accumulated foreign tax credits: law is silent, but current regulations allow offset of excesstax credits in following years
06.04.2014
7th Annual Latin American Tax Update Webinar 37
Brazil: changes in CFC rules
exemption and stimulus credit
Oil and gas activities
Concessionaires, companies holding a permit, companies under the production sharingregime, holding an onerous assignment
Companies who are hired by these companies are also entitled to the benefit.
Revenues derived from time charter contracts, bareboat contracts, operating lease, rent andloans and other services directly related to oil and gas activities are excluded from taxation
Stimulus deemed credit: 9% for Income Tax until 2022
Food and beverage industries
Construction – buildings and infrastructure works
Government may increase the list of industries
06.04.2014
7th Annual Latin American Tax Update Webinar 38
Brazil: CFC rules – main issues
Tax treaty supremacy over Brazilian CFC rules
The Brazilian tax authorities are likely to take the position that the New Law is only taxingthe controlled company variation on its investment in the controlled companies
The courts will need to address the new rules
Affiliated companies
A number of new rules and restrictions narrows down the definition
Consolidation issues
The new consolidation rules ignore any holding structure (i.e., vertical consolidation)
It is only applicable to a number of cases and will expire in 2022
Tax deferral
It is equivalent to an installment agreement, and only applicable to specific cases
Excessive FTC could be generated in Brazil
06.04.2014
7th Annual Latin American Tax Update Webinar 39
Brazil: tax amnesty programs in effect
Deadline for installment/amnesty applications: July 31, 2014
Tax on gross revenues (PIS/COFINS) – banks, insurance companies and other
financial institutions
Taxable events until December, 31, 2013
Corporate income tax (IRPJ /CSLL) – Profits earned by CFCs
Taxable events until December, 31, 2013
Other federal taxes (REFIS)
Taxable events until December 31, 2008
Congress extended it until June 2013, but President vetoed
This will be re-included in another bill that was just approved by the Congress
06.04.2014
Brazil - tax judicial update
Advantages for companies that litigate tax in Brazil: what you need to know
Defensive litigation to be made at administrative level
Administrative Court (CARF) composed by representatives of both tax authorities andtaxpayers
History of positive administrative decisions on relevant tax disputes (e.g. premiumamortization – “Gerdau” leading case)
Administrative discussion of a debt to be made regardless of any guarantee (e.g. depositor pledge)
Administrative discussion to suspend tax credit enforceability and allow tax clearances tobe issued
Final administrative decisions favorable to taxpayers cannot be brought to the judiciary.
Proactive litigation
Brazilian government not rarely enacts illegal and/or unconstitutional laws
Taxpayers to challenge illegal/unconstitutional taxes (future and past)
Supreme Court may limit recovery of the past to ongoing lawsuits or lawsuits filed up to acertain date – prospective effects (political issue)
4006.04.2014
7th Annual Latin American Tax Update Webinar 41
Brazil: CFC rules (Vale case)
Treaty Supremacy over Brazilian CFC Rules
The Brazilian Supreme Court has not yet analyzed the issue involving CFC rules
The Superior Court of Justice (STJ), on a non-binding decision (REsp 1.325.709/RJ), hasruled that:
Art. VII of OECD’s Model Convention, adopted by most of the western countries, includingBrazil (not an OECD member) conflicts with Brazilian CFC Rules
Under the Vienna Convention on the Law of Treaties, a party may not invoke the provisionsof its internal law as justification for its failure to perform a treaty (art. 27), in observance tothe principle of good faith
With regard to non-treaty countries located in FTJs (Bermuda), the court determinedimmediate taxation of undistributed profits
In the Vale Case, the DTT countries were: Belgium, Luxemburg and Denmark, all protectedagainst the “old version” of Brazilian CFC rules (MP 2.158/01)
On the other hand, the entity located in Bermuda (tax haven/ without a DTT with Brazil) wassubject to the “old version” of Brazilian CFC rules (MP 2.158/01)
Implications in light of Law 12,793/2014
New definition of foreign profits will reopen discussion at the court level
06.04.2014
Brazil - application of article 7 under
DTT
STJ has ruled favorably to the taxpayer in cases involving the supremacy ofArticle 7 of the OECD Model over domestic law
Special Appeal 1.161.467 / RS – 05.17.2012 – COPESUL Case
Germany and Canada DTTs
Brazilian Company hired foreign companies to provide services in Brazil
Article 7 “profits” are more comprehensive that “actual profits” concept
lex specialis derrogat generalis
Brazilian IRS – Ruling 1/2000 (“ADI 1/2000”)
Tax treatment for remittances abroad in consideration for technical assistanceservices without transfer of technology
General rule: subject to WHT – 25%
If the payment is remitted to treaty countries: treated as “other income” (Article 21),and subject to 25% WHT
Agreements which are not required to be filed with the Brazilian PTO are deemed tobe technical and assistance services
427th Annual Latin American Tax Update Webinar 06.04.2014
DLA PIPER’S
7TH LATIN AMERICAN TAX UPDATE WEBINAR
Q&A
Thank you for your participation.
June 2014 43