Reduction in maximum income tax rate for inclusion in Brazil’s black and grey lists

The Brazilian Ministry of Finance has issued Portaria MF no. 488/2014, on December 1, which reduced the maximum income tax rate from 20% to 17% for the purposes of applying the concepts of tax havens and privileged tax regimes.

The reduction is an important move because it demonstrates a change in the tax authorities’ interpretation of the minimum effective tax rate under which a country, dependency or regime, is treated as a tax haven or a privileged tax regime.

Article 24 of Law 9,430/1996 defines the criterion to characterise a tax haven for Brazilian tax purposes as any country that that does not tax income or any country that taxes income at less than 20%.

Article 24-A, in its sole paragraph, has defined the concept of a privileged tax regime as being a country or dependency that presents one or more of the following characteristics:

·      It does not tax income or taxes income at a maximum rate under 20%;

·      It grants advantages of a fiscal nature to non-resident individuals or legal entities:

a)     it is without a requirement to engage in substantive economic activity in the country or dependency; and

b)      conditional on not engaging in substantive economic activity in the country or dependency;

·      It does not tax income earned outside its territory or taxes income at a maximum rate under 20%; and

·      It does not permit access to information on the composition, ownership of assets or rights or economic operations carried out.

Reducing the maximum income tax rate has been talked about since 2008 but this is the first time it has been changed.

Also, article 26 of Law 12,249/2010 should be highlighted because it restricts deductions in the income tax – and social contribution tax – calculation in Brazil, of the amounts paid, credited, delivered, offset or remitted, for any kind, directly or indirectly, to individuals or entities resident or domiciled abroad and subject to a favourable tax regime, as set forth in articles 24 and 24-A of Law 9,430/96.

However, in case the following items are cumulatively proved, the company will be able to deduct:

§  definition of the beneficial owner;

§  proof of the operational capability of the individual or entity abroad to perform the operation; and

§  documentation supporting the payment of the corresponding price and receipt of goods or fruition of the service.

However, it is expected that this alteration will lead to changes to the Brazilian black list of countries (countries with favoured taxation or dependencies) and grey lists (privileged tax regimes), defined in the Normative Instruction (NI) 1,037/2010, resulting in consequences such as determination of the higher income withholding tax rates on remittances abroad (upon payments to blacklisted countries), the automatic application of transfer pricing rules, the application of the Brazilian CFC rules and the application of the thin-capitalisation rules (2:1 ratio as opposed to the 0.3:1 ratio when dealing with a tax haven or a privileged tax regime).