International Tax Planning and Transfer Pricing Planning: Brasil from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:May 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The high tax country Brazil in the OECD context
    • 2.3 Transfer pricing rules of Brazil
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Definition of related companies
      • 2.3.6 Reporting requirements
      • 2.3.7 Documentation requirements
      • 2.3.8 Cost sharing
      • 2.3.9 Business restructuring
      • 2.3.10 Interaction between customs valuation and transfer pricing
      • 2.3.11 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Brazil and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Brazil-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Brazil in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Brazil to the US
      • 2.4.8 Case study 2: Interests from Brazil to the US
      • 2.4.9 Case study 3: Royalties from Brazil to the US
      • 2.4.10 Case study 4: Management and technical service fees from Brazil to the US
      • 2.4.11 Case study 5: Capital gains with Brazil as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Brazil
      • 2.4.13 Case study 7: Interests from the US to Brazil
      • 2.4.14 Case study 8: Royalties from the US to Brazil
      • 2.4.15 Case study 9: Management and technical service fees from the US to Brazil
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Brazil as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, [1] Brazil has in 2016 a gross domestic product (GDP) of US$ 1,769,601 million. In Brazil, the basic corporate income tax (CIT) is imposed at a flat rate of 15.00%. In addition to this, the corporate income surtax (AIR) and the social contribution on profits (CSL) must be taken into account. The AIR is levied at a rate of 10,00% on any portion of the annual taxable book income that exceeds BRL 240,000. The CSL is assessed at a rate of 9.00% on the adjusted net income of companies. Thus, a combined corporate income tax rate of 34.00% results. Thus, Brazil is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Brazil has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, the Brazilian economy is emerging from a severe and protracted recession. Political uncertainty has diminished, consumer and business confidence are rising and investment has strengthened. However, unemployment is projected to continue rising until 2017 and decline only gradually thereafter. Inflation will gradually return into the target range. The fiscal stance is mildly contractionary over the projection period, which strikes an adequate balance between macroeconomic stability requirements and the need to restore the sustainability of public finances through a credible medium-term consolidation path. An effective fiscal adjustment would allow monetary policy to loosen further and support a recovery of investment. Raising productivity will depend on strengthening competition, including through lower trade barriers, fewer administrative burdens and improvements in infrastructure. Public expenditures have been outgrowing GDP for many years and public debt has increased. A new fiscal rule is being implemented and, in combination with a planned reform of pensions and social benefits, it should strengthen fiscal sustainability. These reforms could simultaneously lead to stronger declines in income inequality. This chapter provides a survey on the actual tax law frame conditions in Brazil and provides practical support in international tax planning and transfer pricing planning between Brazil and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Brazil applies the arm’s length principle, various types of transactions require specific transfer pricing methods. A detailed definition of related companies for transfer pricing purposes can be found in the tax law. In general, related companies are controlled, controlling or associated companies. A voting right that gives the power to vote in corporate decisions or to elect a majority of the directors constitutes control of a company. Associated companies are two companies of which one is significantly influenced by the other. Further, transactions with companies in low-tax jurisdictions are regarded as transactions between related parties for transfer pricing purposes. There are specific reporting requirements and documentation requirements. A cost sharing agreement, CCA, must be a formal contract that determines the costs to be shared and the services to be produced. General transfer pricing rules apply to business restructurings. Transfer pricing and customs valuation are matters regarded separately. Transfer pricing adjustments do not affect the customs value of goods. If the income tax has been lower than it should have been because of transactions not made in line with the arm's length principle, the taxable base will be adjusted and the amount will be increased by general penalties for underpayment. The limitation on transfer pricing adjustments by the tax authorities is five years from the beginning of the following fiscal year. Advance pricing agreements are not available.

Introduction

International tax planning and transfer pricing planning between Brazil, the largest national economy in Latin America, the world's eight largest economy at market exchange rates and the seventh largest in purchasing power parity (PPP), which has according to the International Monetary Fund and the World Bank a mixed economy with abundant natural resources, but after rapid growth in preceding decades, entered an ongoing recession in 2014 amid a political corruption scandal and nationwide protests, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [2] Brazil has in 2016 a gross domestic product (GDP) of US$ 1,769,601 million. In Brazil, the basic corporate income tax (CIT) is imposed at a flat rate of 15.00%. In addition to this, the corporate income surtax (AIR) and the social contribution on profits (CSL) must be taken into account. The AIR is levied at a rate of 10,00% on any portion of the annual taxable book income that exceeds BRL 240,000. The CSL is assessed at a rate of 9.00% on the adjusted net income of companies. Thus, a combined corporate income tax rate of 34.00% results. Thus, Brazil is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Brazil has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [3] the Brazilian economy is emerging from a severe and protracted recession. Political uncertainty has diminished, consumer and business confidence are rising and investment has strengthened. However, unemployment is projected to continue rising until 2017 and decline only gradually thereafter. Inflation will gradually return into the target range. The fiscal stance is mildly contractionary over the projection period, which strikes an adequate balance between macroeconomic stability requirements and the need to restore the sustainability of public finances through a credible medium-term consolidation path. An effective fiscal adjustment would allow monetary policy to loosen further and support a recovery of investment. Raising productivity will depend on strengthening competition, including through lower trade barriers, fewer administrative burdens and improvements in infrastructure. Public expenditures have been outgrowing GDP for many years and public debt has increased. A new fiscal rule is being implemented and, in combination with a planned reform of pensions and social benefits, it should strengthen fiscal sustainability. These reforms could simultaneously lead to stronger declines in income inequality. On the revenue side, there is substantial scope to reduce complexity and compliance costs, including by consolidating indirect taxes at the state and federal levels into one broad-based value added tax.

According to Orbitax, [4] (Daily Tax News Digest of 14 April 2017),

Brazil's Federal Revenue Department (RFB) has issued Ruling No. 18 of 27 March 2017[5] concerning withholding tax on payments for rights to market or resale software to final consumers in Brazil that will receive a license to use the software. According to the ruling, payments for such rights fall within the scope royalties, and are therefore subject to withholding tax at the standard rate of 15.00% at source. This position is changed from a 2008 ruling that such payments are considered payments for the purchase of goods and only subject to state value added tax (ICMS).

According to Orbitax, [6] (Daily Tax News Digest of 13 April 2017), Brazil has published Normative Opinion No. 1 of 31 March 2017[7] concerning the refund of excess social security contributions (PIS/COFINS) paid on imports where state value added tax (ICMS) was included in the tax base. The inclusion of ICMS in the basis for calculating PIS/COFINS on imports was ruled unconstitutional in 2013. Where excess PIS/COFINS has been unduly paid, taxpayers operating under the non-cumulative regime may obtain a credit to offset against PIS/COFINS due on imports, or in accordance with certain conditions, may generate a credit that can be repaid or offset against other taxes administered by the Federal Revenue Department...

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