Brazil: Inbound Cross-Border Tax Issues

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1 Brazil: Inbound Cross-Border Tax Issues ABA Section of Taxation 2009 May Meeting Ana Cláudia Akie Utumi

2 Ana Claudia Akie Utumi Professional experience: Head of Tax Area at TozziniFreire Advogados, with over 17 years of experience in Tax Practice, including Tax Consulting Area of a former Big Six auditing firm, and another large Brazilian firm. Education: Doctor of Laws degree in Economic Financial Law from the Law School of Universidade de São Paulo (USP) in LL.M. in Tax Law from the Law School of São Paulo Catholic University (PUC- SP) in MBA in Finance and Capital Markets from IBMEC Business School in Graduation: Law (USP Law School, 1994) and Business Administration (Getulio Vargas Foundation, 1992) Other Professional Activities: Member: International Fiscal Association (IFA) and Director of Brazilian IFA Branch (Brazilian Association of Financial Law - ABDF); Brazilian Institute of Tax Law (IBDT); Brazilian Association of Tax Law (ABRADT); Brazilian Institute of Tax Researches (IPT); Brazilian Institute of Tax Studies (IBET); International Center of Tax Studies (CIEST); Brazilian Institute of Financial Professionals Certification (IBCPF) and IBCPF Certification Committee ( ) Academic Activities: Assistant Professor for International Tax Law in the Postgraduate Law Program at PUC/SP (2000/2005). Visiting Professor: Postgraduate Program of the Law School of Fundação Getúlio Vargas (FGV/RJ 2002/2005); Risk Management MBA Program at the USP School of Economy and Administration (USP/FIPECAFI); International Business MBA Program at Fundação Instituto de Pesquisas Econômicas, in association with USP (USP/FIPE); Corporate Management MBA Program at Fundação Instituto de Administração, in association with USP (USP/FIA); among other important post-graduation courses in Brazil Publications: Author of several articles related to Tax Area, and lecturer in various seminars and conferences, local and international Awards and Recognitions: Included by Latin Lawyer Magazine, in August/September 2002 edition, among 40 under 40 Brazil s Raising Stars (40 leading Brazilian lawyers under 40 years old); in August/September 2003 edition among Latin America s Top Tax Lawyers (Fiscal Responsibility Latin America s top tax lawyers); in June 2006 edition among the 40 of the Latin America's women lawyers who have excelled in their chosen area of practice ( The Glass Ceiling ). Frequently ranked among the most recognized tax lawyers in Brazil, by different companies and publications.

3 Summary: Structuring the investment Inflow of funds Purchase of existing company Current scenario of tax planning in Brazil Operating a Brazilian business Permanent establishment Transfer pricing Brazil and Treaties to Avoid Double Taxation Interpretation of article 7 Corporate Income Taxes Place of payment

4 Current situation of Brazilian economy Strong internal market Example: car sales in March 2009 all times record of sales due to temporary excise tax exemption Strong financial and capital markets Inflation under control (estimated in 4% for 2009) Decreasing interest rates Maintenance of Investment grade status Exporters affected with the decrease of commodities prices Lay-offs: unemployment is at the same level as end of 2007 Legal market: reduction of M&A and IPO s; increase of restructuring of companies and debts

5 Structuring the investment Inflow of funds All foreign currency transactions should be performed by means of Central Bank, through financial institutions Foreign direct investments obtain a registration with the Central Bank, assuring the repatriation of the amount originally invested basis for capital gains calculation Tax on foreign exchange transactions (IOF/FX): 0.38% No rules against thin capitalization Dividends: exempt and payable out of accounting profits Money borrowed must be used in a company's operational activities for the interest to be deductible Possibility of paying interest on equity, which is a deemed interest calculated on net equity Deductible for corporate income tax purposes and subject to withholding tax of 15%

6 Structuring the investment Purchase of existing company or business Purchase of shares outside Brazil: existing registration is only transferred to the new owner Buyer is obliged to calculate and collect Brazilian withholding tax on capital gains obtained by a non-resident seller Buyer may not have the full amount paid registered with the Central Bank Purchase via a Brazilian holding company permits: registration with the Central Bank of the amount invested; recognition and future use of goodwill (difference between purchase price and net equity value, considering assets and liabilities at market price) Asset x company purchase: in both cases there is labor and tax succession. In an asset purchase buyer is secondarily liable for taxes if the seller continues to exist and develop other businesses, except for VAT/Excise tax

7 Structuring the investment Possibility of structuring exempt or low-tax investments Special tax regime 2,689 Investors not residing in tax haven jurisdictions Benefits: exemption of income tax on capital gains obtained in stock exchange or organized over-the-counter market; zero withholding income tax rate on governmental bonds and income arising from Private Equity Funds (other conditions to be observed); 10% withholding tax on stock funds and swaps; 15% withholding tax on any other income

8 Current scenario of tax planning in Brazil Substance over form x form over substance Historically Brazilian courts used to adopt form over substance Objectives and economic implications were not important to the courts analysis In the last 5 years, Brazilian Administrative Court started to care about substance over form and business purposes tests without significant change of laws This discussion has not reached the judiciary courts yet

9 Operating a Brazilian business Permanent establishment No clear concept of permanent establishment OECD definition of permanent establishment exists only in treaties to avoid double taxation Brazilian Civil Code forbids foreign companies to operate without Presidential authorization Branches of foreign companies in Brazil must be authorized by the Executive Power Brazilian corporate income tax code deems corporate taxpayer (a) branches of foreign companies; (b) foreign company with a Brazilian attorney-in-fact with power to do businesses in Brazil on behalf of such company Brazilian VAT legislations define establishment as a physical place of business with storage or manufacturing of goods No precedent in Brazilian judiciary courts

10 Transfer pricing Brazil adopts only comparison, resale less mark-up and cost plus methods Resale and cost methods: fixed profit margins defined by the law Importation: (a) Re-sale method: Resale price (-) 20% or 60% of margin; (b) Cost method: Cost + 20% Exportation: (a) Re-sale method: Resale price (-) 30% or 15% of margin; (b) Cost method: Cost + 15% Permitted to request a change of percentage in practice, unlike to be approved Adoption of other methods: no legal provision Janssen-Cilag case attempt to use transactional net margin method rejected by Brazilian administrative court in 2005 Inexistence of Advanced Pricing Agreements exception: conquer of new markets by Brazilian exporters for a maximum of 12 months

11 Transfer pricing Broad concept of related parties for the purposes of transfer pricing, which includes contractual and personal relationships Control of any transactions involving residents in tax haven jurisdictions, or subject to special tax regime in the country of residence Taxation at a rate lower than 20% Jurisdiction in which the law assures secrecy of ownership and/or beneficial owners Special tax regime new concept, introduced in 2008 and valid as of 2009

12 Brazil and Treaties to Avoid Double Taxation Existing treaties: Africa: South Africa Americas: Argentina, Canada, Chile, Ecuador, Mexico Asia: China, India, Israel, Japan, Korea, Philippines Europe: Austria, Belgium, Czech Republic, Denmark, Finland, France, Hungary, Italy, Luxembourg, Netherlands, Norway, Portugal, Slovak Republic, Spain, Sweden, Ukraine Treaties follow OECD model in most of its articles Main difference: capital gains are taxable in Brazil, and not only in residence country Treaties with most European countries, Canada and Japan have unilateral grant of tax sparing credits on withholding tax levied in Brazil

13 Brazil and Treaties to Avoid Double Taxation Interpretation of article 7 Brazilian tax authorities do not admit to release withholding tax on ordinary services or any other business income that do not follow under the scope of the other articles Ruling 01/2000: II - In the Conventions to Avoid Double Income Taxation that Brazil has signed, these income are classified under the article Other Income and, consequently, taxed as established in item I, which will happen even if the Convention does not contemplate this article Business profits: understood by the Brazilian authorities as the final result of a company, not as the income or revenues that will form the business profits Interpretation of article 9 Tax authorities and Administrative courts understand that transfer pricing rules shall apply even in cases of transactions with related parties or parties that are deemed as related only for the purposes of transfer pricing residing in a treaty country - no contradiction exists

14 Brazil and Treaties to Avoid Double Taxation Corporate Income Tax Brazil has 2 different taxes Corporate Income Tax ( IRPJ ) and Social Contribution on Profits ( CSLL ) CSLL was created in 1988 at that time, IRPJ rate was decreased from 43% to 35%, and CSLL initial rate was 8% Brazilian tax authorities understand that treaties signed before 1988 do not apply for CSLL contribution x tax Example: Brazil-Denmark Treaty (1974) provides for exemption on interest paid by Governmental bank recent ruling from tax authorities recognizes the exemption of IRPJ and not CSLL The Convention signed between Brazil and Denmark to avoid double taxation on income does not apply to Social Contribution on Profits (CSLL), which was created after (Lei nº 7.689, December 15, 1988) and does not qualify under Paragraph 2nd, Art. 2nd, of the referred convention. Thus, interest received from the purchase of bonds issued by KommuneKredit (Credit Association of Municipalities and Regions of Denmark) shall be taxable by CSLL (...).

15 Brazil and Treaties to Avoid Double Taxation Place of payment Brazilian tax authorities require the payments to be performed to the country that signed the treaty to entitle parties to benefit from such treaty Case Volvo payment to Panama Branch of Itochu Corporation Superior Court of Justice: The Decree no. 61,899, of December 14, 2967, that enacted the Convention to avoid double taxation signed by Brazil and Japan establishes that interest paid by company in Brazil to company headquartered in Japan are taxable in Brazil at a rate of 12.5% of the gross amount of interest. In the case under discussion, the remittance of interest was performed to a company located in Panama. The fact of the Panamanian company is a branch of the Japanese company does not eliminate its legal personality. That one is subject to rights and obligations in Panama. The finance granted to the defendant was obtained with the company headquartered in Panama, and the interest was transferred to such country. To the Panamanian company Japanese laws do not apply. The Republic is a sovereign State, and the companies domiciled therein must observe national laws. Recommendation: to avoid disputes against tax authorities, make the payment directly to the country that has a treaty with Brazil

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