A Turnaround In The Debate Over Service Payments To Treaty Countries

Brazil's Federal Revenue Attorney General's Office (PGFN) has reversed its position on the taxation of service payments to providers in treaty-partner countries, recommending the revocation of Normative Act 01/2000, which classifies such payments as ''other earnings'' that are subject to Brazil's 15 percent withholding tax.

The PGFN previously sided with the Federal Revenue Department (FRD) in its defense of the normative act but now maintains that the payments should fall under the definition of (exempt) business profits as established in the OECD model income tax treaty and in many income tax treaties signed by Brazil.

PGFN Legal Opinion 2363/20131 resulted from a notice sent by the government of Finland that threatened to terminate the Brazil-Finland income tax treaty if Brazil continues to ignore the treaty provisions by imposing a 15 percent withholding tax on technical service fees paid to Finnish companies.

The legal opinion reexamines an issue that has been a point of dispute between the FRD and taxpayers for more than a decade. In particular, Opinion 2363/2013 reviews the FRD's official position, established in Normative Act 01/2000, in relation to the 2012 decision of the Superior Court of Justice (STJ) in the COPESUL case.

Background

During the 1990s, some regional offices of the FRD issued contradictory private letter rulings (PLRs) about the application of treaty provisions to remittances of service payments abroad. Some PLRs agree with taxpayers that service payments should be categorized as business profits under some tax treaties, and therefore, should be subject to taxation only in the home country of the service provider, and not in Brazil.

Other PLRs reject that view, holding that the Brazilian withholding tax should apply to all service payments abroad, including those to providers in treatypartner countries.

In January 2000 the FRD's Department of General Coordination of Taxation (COSIT) sought to resolve the issue with a controversial ruling, Normative Act 01/2000, which states that service payments remitted abroad should be governed by the treaty article dealing with ''other earnings,'' which are subject to Brazil's 15 percent withholding tax. Further, COSIT said a 25 percent withholding tax applies to payments abroad for any service agreement under which technical assistance or technical services are provided without the transfer of technology to the Brazilian party, and for which no registration is required with the...