BRAZILIAN TAX REVIEW – July 2017

Brazilian Federal Revenue Office Reviews its Transfer Pricing Guidelines on International Cost-Sharing Agreements

The Federal Revenue Office has issued Private Letter Ruling 99,069/2017, which states, among other things, that transfer pricing rules apply to international cost-sharing agreements related to non-core activities. However, the ruling does not mention which arm's length method applies to this type of transaction.

The new ruling represents a change in the tax authorities' position on this matter. Previously, Private Letter Ruling 8/2012 stated that cost-sharing agreements were not subject to transfer pricing rules as long as the involved companies: (i) set forth reasonable and clear criteria for allocation of the expenses; and (ii) the amounts reimbursed did not include a profit margin.

New Interpretation on the Taxation of Remittances Abroad: Marketing and Distribution Rights Related to Software

The Federal Revenue Office has issued Private Letter Rulings 18/2017, 342/2017 and 7,014/2017, stating that the acquisition of marketing and distribution rights for software generates the payment of royalties to the extent that it involves the resale of software licenses.

Therefore, the payments for such rights from a Brazilian resident to a non-resident must be subject to a 15% withholding income tax. Moreover, if the transaction entails the transfer of technology (i.e., the source code is given to the final customer), the CIDE-Royalties tax is also levied at a 10% rate.

Brazilian Court Analyzes the Classification of Services in the DTC between Brazil and Belgium

The Federal Court for the 3rd Region has recently issued a decision favorable to a taxpayer on the classification of services in the Convention for Avoidance of Double Taxation ("DTC") entered into between Brazil and Belgium.

The classification of services in DTCs has always been a controversial matter in Brazil since the local tax authorities refuse to adopt the OECD guidelines and impose the source state taxation.

In this case, a Belgium-based entity provided technical services to a Brazilian resident and the Brazilian tax authorities classified the services as royalties (Article 12), based on item 6 of the DTC's protocol, in order to apply the Brazilian withholding income tax on the remittances.

However, the Federal Court held that only services strictly connected to the transfer of technology should be classified as royalties. Therefore, in line with OECD guidelines, the...