In December 2013, the Attorney General of the National Treasury (PGFN) released the Opinion PGFN / CAT No. 2,363/2013, recommending repeal of the previous Opinion forming the basis for the controversial, long-standing view of the Brazilian tax authority that withholding tax should be applied to certain payments that relate to the provision of service contracts and that such payments should not be afforded the protection of the ‘Business Profits’ article (generally Article 7) of executed international double taxation treaties (DTTs).
According to the Opinion released in December 2013, payments made abroad in respect of technical assistance and service contracts where no technology is transferred, should be afforded protection from Brazilian withholding tax under the Business Profits article unless:
Previously, in accordance with Normative Act COSIT No. 1/2000, subsequently reinforced by Opinion PGFN/CAT No. 776/2011, the Brazilian tax authorities applied a literal interpretation to the term ‘profit’ referred to in the Business Profits article. Accordingly, the Brazilian tax authorities viewed payments abroad in relation to the provision of technical assistance and service contracts where no technology is transferred, as outside of the scope of the Business Profits article. On this basis, the Brazilian tax authorities treated the payments under the ‘Other Income’ article (generally Article 21 or 22) and therefore subject to Brazilian withholding tax according to Brazilian domestic tax law.
This controversial view sparked judicial consideration on a number of occasions, most notably in the High Court of Justice (Superior Tribunal de Justicia), where it was expressly determined that the payment of services and technical assistance fees in these circumstances should fall under the protection of the Business Profits article.
In view of this, the PGFN reassessed its previous interpretation on the matter and issued this new Opinion, substantially grounded in the STJ decision, which adopts a wider view of the term ‘business profits’ and recommends the Brazilian tax authorities review their official position.
The definition of ‘royalty’ in many of the Brazilian DTTs includes payment for provision of technical assistance and services. Although the Opinion explored the view of the OECD and a leading Brazilian tax academic, broadly which look to the character of the technical assistance and service contracts and whether the assistance or service is for the purpose of enabling a transfer of technology, it did not adopt this view. Rather, the PGFN considered that payments made in respect of technical assistance and service contracts have the capability of being considered ‘royalties’ irrespective of whether they are characterized as ‘principal or accessory’ to the transfer of technology. The uncertainty as to which services fees fall within the scope of Article 12 may present a practical limitation to the protection afforded by the Business Profits article as discussed in the Opinion.
The Opinion released by the PGFN provides helpful guidance on how the law is expected to be interpreted and applied by the Brazilian tax authorities’ going forward, although is not strictly binding. Uncertainty remains in respect of how the Brazilian tax authorities will apply its express taxing rights and the debate now may move to whether or not the service fees paid to the non-resident fall within the scope of Article 12.
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