No Tax Credits for Acquisition of Copyrights, Brazil's Revenue Department Says
Originally published in the July 21 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Federal Revenue Department (FRD) has published a clarification denying tax credits for the Program for Social Integration contribution (P.I.S.) and Contribution for the Financing of Social Security (COFINS) on acquisitions of copyrights by companies, such as record companies, that use them in their business activities.
Private Letter Ruling (PLR) 60/2010, issued by the FRD Superintendence for the Seventh Fiscal Region (with jurisdiction over the state of Rio de Janeiro), is dated May 31 but was published in Brazil’s official gazette of June 29. It says the taxpayer cannot consider copyrights paid to third parties when calculating P.I.S. and COFINS credits because those rights cannot be considered as consumables that give rise to tax credits.
PLR 60/2010 is binding only on the filing taxpayer and does not immediately affect other taxpayers in similar situations, but it may serve as a precedent to tax agents. Although the complete facts and circumstances of the relevant case are unknown, it is clear that the taxpayer sought confirmation that copyrights paid by a taxpayer that needs them for its business should generate P.I.S./COFINS credits when applicable.
A translation of the summary of PLR 60/2010 reads:
The assignment of copyrights does not represent acquisition of goods or services; therefore, amounts paid for copyrights cannot be considered as consumables for purposes to calculate COFINS [and P.I.S.] tax credits.
PLR 60/2010 contradicts prior rulings from other sections of the Federal Revenue Department, in particular PLR 33/2005, which interprets copyrights as consumables:
As long as previously subject to the contribution [COFINS], amounts paid to foreign or domestic legal entities for use of copyrights entitle one to COFINS credits because they are consumables used in the production of goods destined for sale.
PLR 33/2005 was issued by the FRD Superintendence for the Second Fiscal Region with jurisdiction over the northern states of Acre, Amapá, Amazonas, Pará, Rondônia, and Roraima.
PLR 60/2010 is especially interesting considering that it was issued by the FRD Superintendence in Rio de Janeiro, where payments of copyrights are vital for the record business. Rio is home to record companies like Sony Music, EMI Music, and Warner Music and to the Brazilian Association of Record Producers (Associação Brasileira de Produtores de Discos, or ABPD). Prohibiting P.I.S. and COFINS tax credits on copyright payments would certainly increase the tax costs for a business sector that has to contend with music piracy on a daily basis.
The contradiction between the two letter rulings will certainly be addressed by the General Coordination for the Tax System (COSIT), the FRD body responsible for making FRD positions uniform for the entire federal tax administration.
The issue is important to all businesses where copyrights and other intangibles play a significant role in the cost structure, such as the video, movie, and software industries. Assuming that COSIT confirms the position of PLR 60/2010, the tax authorities could challenge any P.I.S. and COFINS credits taken based on copyrights paid to third parties (legal entities only, as payments to individuals are expressly excluded from generating P.I.S./COFINS tax credits).
The dispute may eventually reach the courts because there are legal grounds to support the taxpayers’ position that copyrights are consumables to certain businesses, similar to tangible items used in a regular manufacturing process.
David Roberto R. Soares da Silva
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