Brazil on June 24 expanded its definition of low-tax jurisdictions, a move that will affect transactions with Delaware companies; Uruguayan investment companies; and other countries, locations, and corporations that did not previously fall under the definition.
Brazil on June 24 expanded its definition of low-tax jurisdictions, a move that will affect transactions with Delaware companies; Uruguayan investment companies; and other countries, locations, and corporations that did not previously fall under the definition.
The changes were made as congressional amendments to Provisional Measure 413 of January 3, the final version of which was published in Brazil’s official gazette as Law 11,727/2008. The changes are effective as of January 1, 2009.
Article 22 of Law No. 11,727/2008 adds paragraph 4 to article 24 of Law 9,430/1996, which introduced transfer pricing rules into Brazilian legislation. The new paragraph extends the definition of low-tax jurisdiction to include countries and locations with legislation that does not allow access to information concerning the corporate structure of legal entities, their ownership, or identification of the beneficial owner attributed to nonresidents.
However, the application of the new definition is not immediate. The Federal Revenue Department must first expressly list the new collection of low-tax jurisdictions. The last list, which included 53 jurisdictions, was issued in 2002 through Normative Instruction 188 of the Federal Revenue Department.
Article 23 of Law 11,727/2008 introduces another major change to transfer pricing and low-tax jurisdictions with the addition of article 24-A of Law 9,430/1996. Article 24-A subjects to transfer pricing rules any transaction subject to a special tax regime in its home country, even if the parties are unrelated. The following factors characterize a tax regime as a special tax regime sufficient to trigger transfer pricing rules:
- it does not tax income, or taxes it at a maximum rate of 20 percent;
- it grants tax breaks to nonresident individuals or companies;
- it does not require substantial economic activity in that country or location;
- it does not apply in some jurisdictions if there is no substantial economic activity in that country or location;
- it does not tax foreign-source income, or taxes it at a maximum rate of 20 percent; and
- it does not allow access to information about the corporate structure of legal entities, the ownership of assets or rights, or economic transactions.
This change will substantially affect transactions with many countries and locations that are not on Brazil’s current list of low-tax jurisdictions. Examples may include Delaware companies, Uruguayan investment companies, and Swiss and Dutch tax regimes. To include those countries, locations, or tax regimes as subject to transfer pricing, the Federal Revenue Department will need only to issue a new regulation.
Law 11,727/2008 also adds article 24-B to Law 9,430/1996, which delegates to the executive branch the powers to increase or decrease the 20 percent income tax rate for purposes of defining a low-tax jurisdiction. It also provides that the executive branch may make exceptions to the 20 percent income tax rate to countries that form an economic community with which Brazil participates (such as Mercosur, with Argentina, Uruguay, and Paraguay).
The new low-tax jurisdiction rule will radically change the way Brazil treats transactions that fit that classification. However, the new rule is not completely clear, which may make its application more difficult.
Taxpayers still have six months to consult with their tax advisers to review the changes and further regulations and eventually restructure their transactions with locations that may be considered low-tax jurisdictions and/or subject to transfer pricing.
Provisional Measure 413 originally had 19 articles and was enacted primarily to increase from 9 percent to 15 percent the social contribution on net income (CSL) of financial institutions. It also changed the treatment of ethanol and sugar cane producers, tourism industry tax incentives, and cash refunds of P.I.S. (Program for Social Integration contribution) and COFINS (the Contribution for the Financing of Social Security) withheld from service providers. The final version has been expanded to 42 articles.
In addition to the expanded definition of low-tax jurisdictions, Law 11,727/2008 introduces P.I.S. and COFINS for vehicles used in school transport; changes to the Special Incentive Regime for Infrastructure Development (REIDI); import tax, corporate income tax, and CSL to holding companies; taxation of some beverages; and administrative appeals concerning social security taxes.