The RFB previously had addressed the “foreign income taxes paid offset” issue in two conflicting formal consultations.
- Concerning formal consultation # 429/2004—the position of the RFB was that companies taxed under the “presumed profit method” could not offset income tax withheld by other countries against the amount of income tax due in Brazil. This position was based on the claim that under Brazilian tax law, a requirement for such foreign tax offset was that the company must be taxed under the “actual profit method.”
- Concerning formal consultation # 159/2013—the position of the RFB was that companies taxed under the “presumed profit method” could offset income tax withheld abroad against the amount of income tax due in Brazil.
With the recent guidance, the RFB clarified that companies taxed under the “presumed profit method” are not allowed to offset income tax withheld abroad against income tax due in Brazil.
The policy behind this position is that under Brazilian domestic tax law, an offset for foreign taxes paid would only be available for companies taxed under the “actual profit method.”
The RFB recognized, however, that there could be a possibility for companies taxed under the “presumed profit method” to offset income tax withheld abroad in instances when there is an income tax treaty for the avoidance of double taxation in effect between Brazil and the jurisdiction where the services were rendered.
New interpretation on income tax treaties and cross-border payments
The RFB also issued Interpretative Ruling # 5/2014 stating the position of the tax authorities that payments made by Brazilian residents to foreign residents for the provision of services and technical assistance from abroad into Brazil, whether or not involving the transfer of technology, would be subject to income tax treaties to which Brazil is a treaty-partner, as follows:
- Technical services and/or technical assistance that are considered royalty payments under a specific treaty provision were subject to the “royalties article” (generally, Article 12) of the treaty, and thus allowing the withholding of income tax in Brazil
- Payments made for the provision of independent personal services (i.e., technical services and/or technical assistance involving technical skills of a person or a group) were to be characterized as “independent personal services” (generally, under Article 14), and thus allowing the withholding of income tax in Brazil
- Payments remitted abroad that are neither characterized as royalties nor independent personal services, but as payments of service fees made abroad, were to be treated as “business profits” (generally, Article 7) and, thus not subject to withholding of income tax in Brazil
This new position of the RFB is viewed as a major shift in interpretation from that of the nation’s chief tax enforcement agency. Previously, the RFB took a very narrow interpretation, in the sense that service fees were subject to treatment under the treaty article for “other income” (generally, Article 21). The prior interpretation meant that service fees paid abroad could be subject to withholding income tax of up to 25% in Brazil.
The RFB’s opinion comes after the Office of Attorney General of the National Treasury (PGFN) issued its own opinion in December 2013 that also addressed the tax treatment of technical services rendered when there was no transfer or provision of technology, and that such were not subject to withholding of income tax in Brazil under the treaty article for “business profits.” However, the PGFN opinion was not binding on either taxpayers or the RFB.
Given this new position, taxpayers potentially affected by this guidance would want to consider a case-by-case analysis of applicable treaties in order to understand what taxation could be triggered on payments of service fees made abroad and whether such payments may not be subject to withholding of income tax in Brazil pursuant to Article 7 of the applicable tax treaties.
Read an August 2014 report (English) prepared by the KPMG member firm in Brazil: Brazilian Companies under Presumed Profit Method