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By Ed Taylor
Brazil’s federal revenue service upheld a law exempting some payments to countries with so-called privileged fiscal regimes from withholding taxes.
In a May 9 private request ruling (No. 217), the revenue service’s Tax System Coordination Office (Cosit) confirmed that funds sent, paid, delivered or credited as “demurrage to a beneficiary of a privileged fiscal regime not domiciled in a low tax jurisdiction” are subject to a zero withholding tax, according to a 1997 law (law 9,481).
For transfer pricing purposes, Brazil has two lists of countries—those considered tax havens and those placed in what is considered the gray area of privileged fiscal regimes. The concept “privileged fiscal regime” includes countries, or states within countries, that don’t require companies to make public their corporate structure, including through a breakdown of ownership.
Under Brazil’s transfer pricing rules, the taxation on capital gains and remittances increases from 15 percent to 25 percent for companies operating within tax havens. In November 2010, a tax department clarification stated that the higher transfer pricing rates apply only to tax havens and not to privileged tax regimes.
Companies in privileged fiscal regimes have a limited ability to deduct interest payments, with the relationship of debt to net equity reduced from 2-1 to 0.3-1. Companies dealing with entities in privileged fiscal regimes also can’t include profits and losses from these countries in their consolidation of profits and losses to determine corporate income taxes.
According to attorney Juliana Assis of the law firm Trench Rossi Watanabe, by confirming the 1997 law, the Cosit ruling “is favorable to taxpayers and may serve as analogy for interpretation in other similar cases or in case of remittances related to other transactions with beneficiaries of a privileged fiscal regime. However, it is not a change in law or change in the most common line of reasoning adopted by the tax experts on the matter.”
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