*Leandra Guimarães and Luiza Vidal
From 2017 (regarding the fiscal year of 2016) on, all legal entities resident in Brazil for tax purposes which are members of multinational enterprise (MNE) groups must be aware of a new tax obligation. It consists of the Country by Country Report (CbC Report), introduced by Brazilian IRS Normative Ruling n. 1.681/2016 (IRS NR #1.681/2016). The CbC Report must be filed through the Brazilian Corporate Income Tax Return.
The creation of the CbC Report results directly from the access of Brazil to international initiatives arising from the BEPS Project, headed by the Organization for Economic Cooperation and Development – OECD and by the G20 (the 20 major economies in the world).
The BEPS Project began when, following the release of the “Addressing Base Erosion and Profit Shifting – BEPS” Report by the OECD, members of the organization and of G20 joined forces to create a 15-point Action Plan to address BEPS and risks associated to it.
Amongst 15-point Action Plan, we emphasize the importance of point 13 of the Action Plan which addressed: (i) the creation of a standardized approach to transfer pricing documentation, and (ii) the creation of the CbC Report, to be implemented in local jurisdictions and to be used for the automatic exchange of information for tax purposes between signatory countries of an International Agreement containing that provision.
The automatic exchange of information for tax purposes should include the overall income allocation of the MNE group, taxes due and paid together with certain indicators of the location of economic activity within the MNE group.
In January/2016, 31 countries ratified the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (MCAA) which addressed the implementation of CbC Report and the automatic exchange of its information between the Parties. However, the MCAA expressly provided as a previous condition to the beginning of the automatic exchange of information that its Parties should also ratify the Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”) and that the Convention should be in force and in full effect in relation to them.
In July 2016, Brazil ratified the Convention, initiating procedures for the implementation of the CbC Report and the automatic exchange of its information with other Parties to the MCAA.
The Convention came into force in Brazil on October 2016. However, specifically regarding administrative assistance, which includes automatic exchange of information for tax purposes, in accordance with the its dispositions, the Convention will produce effects in Brazil only in 2018 regarding information of the fiscal year of 2017.
Nonetheless, on a national level, IRS NR #1.681/2016 stated that the obligation to forward the CbC Report begins in 2017, regarding the fiscal year of 2016. Considering that the automatic exchange of information contained on the CbC Report with other jurisdictions will begin only in 2018 (regarding fiscal year of 2017), it’s safe to conclude that the information contained on CbC Reports of fiscal year of 2016 will be of Brazilian tax authorities’ exclusive knowledge.
As a general rule, according to the IRS NR #1.681/2016, a Brazilian entity resident in Brazil for tax purposes which is a member of a MNE group and that is the ultimate parent entity of that group or has been assigned as a substitute entity is bound to fill the CbC Report.
Exceptionally, a Brazilian entity resident in Brazil for tax purposes member of a MNE group, although not its ultimate parent entity neither the substitute entity is obliged to fill the CbC Report: (i) in case the ultimate parent entity of the MNE group is not obliged by its jurisdiction; (ii) in case the jurisdiction of residency of the ultimate parent entity is a Party to an International Agreement along with Brazil, but not the MCAA or; (iii) in case of a systemic failure in the automatic exchange of information of the CbC Report.
For instance, the U.S is not a member of the MCAA. Thus, if the ultimate parent entity of the MNE group is resident for tax purposes in the U.S, the Brazilian entity may be enforced to fill the CbC Report or at least to indicate to Brazilian authorities which will be the substitute entity to do so.
An entity that is a Brazilian resident for tax purposes and member of an MNE group is exempt from filling the CbC Report if the total consolidated revenue of the MNE group of the previous fiscal year is less than BRL 2.260.000.000,00, if the ultimate parent entity is a Brazilian tax resident or, EUR 750.000.000,00, if otherwise.
At least, CbC Report shall be filled annually, on a specific section of the Brazilian Corporate Income Tax Return created for that purpose. The first CbC Report, regarding fiscal year of 2016, must be filled until 07/31/2017.
As the case may be, the required information for the CbC Report can involve a certain level of complexity.
If the legal entity resident in Brazil for tax purposes and member of a MNE group is not the ultimate parent entity neither the designed substitute entity, it must inform the name and the jurisdiction of residency for tax purposes of its ultimate parent entity and which entity of the MNE group will be responsible for filling the CbC Report. On the other hand, if the Brazilian entity is the ultimate parent entity or the substitute entity designated, detailed and numerous information should be provided, such as income received from related and non-related parties, earned profit, accumulated profit and due and paid taxes. This information should be provided in the currency of the ultimate parent entity of the MNE group and in accordance with its fiscal year, which might be different from the Brazilian one.
In this new context, it is worth pointing out that information to be provided through the CbC Report will demand compliance with new controls to be developed by the taxpayers. Furthermore, the information is complex and may be different from the standards of currency and periodicity of the rest of the information included on the Tax Return, demanding special attention from taxpayers.
*Leandra Guimarães is partner and Luiza Vidal is associate lawyer in Tax Department.