Brazil updates international treaties to avoid double taxation

International treaties to avoid double taxation are getting a new design. The most recent agreements signed by Brazil with Singapore, Switzerland, and the United Arab Emirates, bring changes that, according to experts, align the country to BEPS (Base Erosion and Profit Shifting), a plan of the Organization for Economic Cooperation and Development (OECD) with the support of the G20 to prevent the transfer of profits to low tax countries.

Tax experts said that the changes adapt Brazil to international tax cooperation and increase predictability and legal security for investors.

The changes include the classification of Interest on Equity (IoC), defined as interest and not dividends, and who is entitled to the benefits provided in the treaty, providing for the exclusion of companies if it is concluded that the main objective of a business arrangement or transaction was to obtain a tax benefit.

On the other hand, another change, which is the definition of what can be classified as technical service, does not follow the OECD Model Convention but the UN Model Convention for international treaties to avoid double taxation.

According to experts, the change tends to reduce tax litigation in Brazil but does not bring the country closer to the rules adopted by the OECD since the group’s member countries do not tax technical services.

The three agreements were signed in 2018. The treaties with the United Arab Emirates and Switzerland were internalized (incorporated into Brazilian law) in 2021, and with Singapore, in 2022, after approval by the Senate and sanctioned by the President of the Republic, Jair Bolsonaro.

According to Daniel Franco Clarke, from Mannrich e Vasconcelos’ tax area, there is a tendency for Brazil to revise the treaties to suit BEPS. “[Brazil] is effectively renegotiating [treaties] to revise the points within this BEPS context,” he says.

In addition to the agreements with the Arab Emirates, Switzerland, and Singapore, he says that the treaty with Uruguay, signed in 2019 but not yet internalized, followed the same orientation.

For Marcos Matsunaga, partner at Ferraz de Camargo e Matsunaga, the updates have to do with Brazil’s adaptation to international tax cooperation measures.

“Brazil has a relatively small and old network of treaties. We can insert these last three within a change in the last 10, 15 years, in which the country is trying to insert itself more and more in this movement of cooperation among the world’s fiscal authorities.”

The lawyer notes that Brazil should promote more changes in the network of treaties due to the intention of becoming a member of the OECD and also to the BEPS 2.0, a new phase of discussions of the BEPS project.

“BEPS 2.0 has two pillars. The first is about how to tax the digital economy, especially the big techs, and the second is about the 15% minimum, i.e., no company will have an income tax burden higher than 15%,” he comments.

JCP AND THE RIGHT TO BENEFITS

According to Georgios Theodoros Anastassiadis, partner at Gaia Silva Gaede’s tax practice, the changes related to JCP and to who can be contemplated by the benefits of the treaty seek to curb tax evasion through aggressive tax planning.

In the case of JCP, according to him, by making it clear that it is about interest, the treaties seek to avoid a situation of double no-taxation, i.e., that the amounts escape taxation in Brazil and abroad.

“Brazil considers interest and deducts it [from the IRPJ calculation basis], but abroad, dividends were considered dividends and did not pay [tax] either. The parent company that invests in the Brazilian subsidiary and receives JCP could treat it as a dividend, but, with the treaty, it must also treat it as interest. [The other country] is bound, the treaty is a law for both countries,” he observes.

Marcos Matsunaga makes a similar assessment. “The JCP deals with what people call hybrid instruments. It would be that figure in which one country treats it in one way and another in another. Brazil treats it as interest, and many countries treat it as dividends. It could lead to double non-taxation, most of the time, and eventually double taxation,” he says.

In the case of the definition of who is entitled to the benefits foreseen in the treaty, with the possibility of excluding companies if it is concluded that a certain arrangement or transaction has the objective of taking advantage of the tax benefit, Georgios Anastassiadis says it is a compliance instrument.

“It’s telling who is entitled to the benefit so that no one can irregularly use the treaty,” he comments.

Daniel Clarke says that the change brings Brazil closer to the BEPS requirements. “It is a benefit limitation clause. It gives a margin of discretion for the tax authority to analyze and conclude if the transaction was only done to benefit from a particular treaty article. It conforms to the minimum BEPS rules. Brazil fits into a less distorted international investment environment.”

TECHNICAL SERVICES

The specialists also point out that the definition of what would fall under the category of technical services, present in the new treaties, seeks to end the dispute between the tax authorities and taxpayers over which expenses would be deductible from company profits, whose taxation is regulated in article 7 of the international treaties.

Thus, in practice, the definition is unfavorable to taxpayers, who argue over the taxation of technical services in the courts and the Administrative Council of Tax Appeals (Carf).

Daniel Clarke notes that the inclusion of a specific provision on the taxation of technical services is in line with article 12-A of the UN Model Convention on international treaties to avoid double taxation.

According to the lawyer, the definition incorporated into the treaties aligns with the Internal Revenue Service’s understanding of the subject.

“It is a broad definition, which covers any payment for services of a managerial, technical, and consulting nature. We do not have a definition of what technical services are in law. The taxpayers sustain that, if the treaty does not say what technical service is, even if there is an equation [of the services] to royalties, there should only be taxation if there is a transfer of technology,” he says.

Georgios Anastassiadis, of Gaia Silva Gaede, also considers the definition broad. “In the old [treaties], there was a protocol equating technical services to royalties. The newer ones are bringing this article 13, saying that when a country pays for technical service, it can withhold in Brazil up to the limit of 10% [referring to income tax]. The Brazilian tax rate is 15%. Practically every service you pay for will fall under this article 13,” he says.

With information from Jota