Brazilian tax system is very complex as it encompasses several taxes in different levels: Federal, State and Municipal. Additionally, tax authorities also created many ancillary obligations, what brings more complexity to the whole tax system in Brazil.
Moreover, the number of taxes also adds costs to certain transactions that, in some cases, gives rise to adjustment of prices or even implementation of alternative structures. One good example of high tax burden is import of services from Brazil.
The import of services from Brazil – with or without transference of technology – will trigger 5 different taxes, as follows:
1 – WHT (Withholding Income Tax): it is a Federal tax due on remittances of funds regarding the payment of imported services. The general WHT rate is 15% which is increased to 25% if the beneficiary is situated in a tax haven jurisdiction. The goal to fix a standard minimum rate and inhibit granting tax exemptions and benefits is to avoid the dispute of tax collection among Municipalities.
It is also important to verify if the cross border transaction will be in the context of a Tax Treaty to Avoid Double Taxation (Tax Treaty) signed between Brazil and the jurisdiction that the service is situated, as the tax treaty may provide for a different WHT rate.
The WHT rate applicable to service providers situated in Germany is 15%, as the Tax Treaty signed between Brazil and Germany ceased its effects in 2006.
Additionally, the Brazilian tax authorities understand that in transactions involving Brazil and some specific jurisdictions the remittance of funds regarding services should fall into article 7 of the Tax Treaty and, thus, should not be subject to WHT. The Tax Treaty that falls into the WHT ex emption based on the interpretation abovementioned is Austria, for example.
2- CIDE (Contribution for the Intervention in the Economic Domain): it is a Federal Contribution due on amounts remitted abroad in relation to technical services, administrative, assistance and similar services at a 10% rate and represent a cost for the Brazilian importer. Brazilian tax authorities tend to classify almost all kind of services as technical, despite the fact mthere is – or not – transference of technology;
3- PIS on imports and COFINS on imports: these two Federal taxes have the same triggering even: import of services and the combined rate is 9.25% The basis of calculation is obtained using one formula defined by law, but it represents, generally speaking, the service imported before ISS and WHT;
4- ISS (Service Tax): it is a Municipal tax due on imported service and the applicable rate varies from 2% up to 5%, depending on the service rendered and the Municipality that the Brazilian importer is situated.
5- IOF (Financial Transaction Tax): it is due on the foreign exchange transaction involving the remittance of funds regarding the payment of the imported services and the rate applicable nowadays is 0.38%. Such tax federal tax shall be calculated and collected by the financial institution responsible for the foreign exchange transaction and shall represent a cost of the transaction for the Brazilian company.
The total tax burden, as a consequence, may vary from 21.63% (WHT exempt, CIDE, PIS Import, COFINS Import, ISS at 2% and IOF) up to 49.63% (WHT at 25%, CIDE, PIS Import, COFINS Import, ISS at 5% and IOF).
Besides the abovementioned taxes, the Brazilian importer would also need to comply with other tax rules, such as limits involving deductibility of service expenses for corporate income taxes which differ depending on the service imported and also involving transfer pricing rules, for example.
Additionally, the parties involved in the rendering of services will also need to verify if the registration of the service agreement with the Brazilian Patent and Trademark Office (INPI) is needed.
International cost sharing agreements are generally treated, for tax purposes, as an international service agreement, subject to some of the tax impacts abovementioned.
As a conclusion, before implementing services agreements or even cost sharing agreements having a Brazilian party involved, it is recommendable to analyze and measure the Brazilian tax impacts in order to avoid unforeseen economic impacts.
* Originally published in Recht & Steuern issue 1/2018
Marília Pukenis Tubelis was associate at Pacheco Neto Sanden Teisseire Law Firm.