CC BY
18Information for citation:
Tavares, R. J. S. (2020) Cross-border services and royalties taxation in Brazil. European and Asian Law Review. 3 (2), 19-28.
UDC 336.2
BISAC LAW 086000 / Taxation DOI: 10.34076/27821668_2020_3_2_19
Research Article
CROSS-BORDER SERVICES AND ROYALTIES TAXATION IN BRAZIL
ROMERO J. S. TAVARES
Vienna University of Economics and Business ORCID: 0000-0002-6837-2359
The analysis of Brazil's position on the cross-border taxation of services and royalties may be particularly telling of the role of BRICS countries in the forming of a new legal order1. Brazilian tax policy (Ferreira, 2014; Ferreira, 2015; Furtado, Verboom & Lutter, 2015; Schoueri & Ribeiro, 2004; Calazans, 2005) in this respect does not much differ from India's (Sanghvi & Shaktawat, 2012; Chishty & Chakalabbi, 2009; Bhatiaet & Sharma, 2011), even though each country historically used a different approach to enforce such policy. Most importantly, Brazil's and India's policies in this respect seem to be influencing the drafting of a new article in the UN Model Convention which would expressly authorize the taxation of cross-border services through withholding taxation at the source of payment (Moreno, 2015). This report describes the leading Brazilian cases on this matter.
Keywords: UN model, OECD model, case law, cross-border services, royalties, cross-border taxation
Introduction
Brazil's tax administration developed overriding interpretations of standard OECD tax treaty clauses and terms, and established enforcement practices based upon their unique interpretation of such rules; however, the approach adopted by the tax administration was repeatedly ruled to be unlawful by Brazil's Superior Court of Justice (Tribunal Superior de Justi£a, henceforth referred to as 'STJ'). Whereas, instead, the terms and context of India's treaties can be more supportive of a broader interpretation favoring the allocation of taxing rights to the Republic of India; and, accordingly, interpretative stances that are widely adopted by the Indian tax administration in its enforcement practices are often applications of India's uniquely rich case law (Susarla & Krishnan, 2014).
Following in India's footsteps, however, Brazil's tax administration has adopted a new approach that focuses on the peculiarities of terms found in Brazil's treaties and protocols which may support a broader interpretation of certain articles and arguably permit the taxation of 'technical services' under Article 12 even in cases where there is no transfer of intangibles (Ferreira, 2015; Moreno, 2015)2. The new Brazilian
1 This was the overriding theme of the 10th Session of the European-Asian Law Congress held in Ekaterinburg, Russia, in June, 2016. The Congress was promoted by the BRICS Law Institute, the Russian Association of Legal Experts, the International Bureau of Fiscal Documentation (IBFD), and Ural State University. This study comprises the "National Report" delivered by the author through his lecture on Topic 5 of the Congress.
2 If the terms and context of Brazil's existing treaties and protocols are not consistent with OECD standards, and instead indicate a broader scope of Articles 12 or 14, and if Brazil's future treaties adopt the new UN Model article referenced here,
Copyright© 2020. The Authors. Published by Ural State Law University.
This is an open access article distributed under the CC BY-NC 4.0. license http:llcreativecommons.orglllicenselby-ncl4.0l
approach may potentially be upheld as lawful in domestic courts and therefore enable the taxation of certain service fees in a manner that is inconsistent with OECD standards and practice (except in tax treaties where OECD terms are used)1. This new reality most likely aligned with the rationale of the new UN article, which itself is modeled after India's treaty practice (Devereux, Fuest & Lockwood, 2015: 83).
Aside from the specific substantive issue being litigated (i. e., the interpretation of standard terms under Article 7), nonetheless, two other features of Brazil's case law on the matter deserve further commentary. First and foremost, the cases surely serve to demonstrate that, also in Brazil, unilateral administrative practices cannot override tax treaties - interpretative overrides imposed by the tax administration were deemed unlawful. Secondly, an important matter of procedural law concerning taxpayers' rights is worthy of note. The plaintiff in the leading case that finally settled the matter was a Spanish resident company, which filed a Writ of Mandamus (Mandado de Seguranga) petition in its own name, seeking remedy to prevent Brazil from imposing a withholding tax on service fees paid from Brazil. The federal first-instance judge ruled that the Spanish resident company had no standing in a Brazilian court. The Spanish taxpayer would, therefore, be exposed to double-taxation, in spite of the Brazil-Spain Treaty2. Ultimately, the right of foreign taxpayers to stand in Brazilian courts seeking legal remedy against double-taxation under treaty law was duly recognized in higher instances of dispute, as discussed below. As such, from a taxpayers' rights (and rule of law) perspective, the case at hand is also quite relevant.
Materials and methods
The author used general scientific methods (analysis, synthesis) and special scientific (formal legal and comparative legal) methods.
Results
The results of the author's research are stated in conclusions.
Discussion
Iberdrola Spain3
Iberdrola S. A., a Spanish resident company, entered into a contract in the year 2000 aiming to render technical services to Termopernambuco S. A., a power generation company resident in Brazil. Termopernambuco S.A. is controlled by Grupo Neoenergia, a privately-owned holding company resident in Brazil, in which Iberdrola S.A. holds a 39 % stake (the remaining shares are owned by institutional investors, i. e. Banco do Brasil S.A. with 11,99 % and its employees' pension fund 'Previ' with 49 %). Iberdrola S.A. would render its services by performing activities within Spanish territory and/or through temporary technical visits to Termopernambuco's facilities. In fact, the service rendering activities were not found by the Brazilian tax administration to constitute a permanent establishment in Brazil (Merz, Overesch & Wamser, 2017: 14).
Still, the Brazilian tax authorities would claim a 15 % withholding tax4 on technical service fees paid from Brazil, in accordance with their own Declaratory Act COSIT 01/2000 (an interpretative ruling issued by the tax administration itself in order to prevent conflicting interpretations by regional branches of the
public international law could support the view that Brazil is allowed to impose such withholding taxation, and that the origin state would be required to eliminate double taxation under Article 23 of the treaty.
1 The terms of Article 12 of Brazil's tax treaties with Austria, Finland, France, Japan and Sweden are consistent with OECD standards and would, as such, limit Brazil's interpretation, permitting withholding taxation only in cases where there exists an underlying license of intangibles (i.e. when services are akin or accessory to royalties).
2 Brazil-Spain Treaty (1976), enacted in Brazil through Decree 76.975/76.
3 Iberdrola Energia S.A. vs. Fazenda Nacional (2015) STJ REsp 1.272.897 - PE (2011/0196684-9). Available from: http:// stj.jusbrasil.com.br/jurisprudencia/266847261/recurso-especial-resp-1272897-pe-2011-0196684-9/inteiro-teor-266847266 [Accessed 10 September 2020].
4 Under Brazilian law, service fees are subject to either a 15 % withholding tax (and a 10 % excise tax or CIDE) in cases of technical services, or a 25 % withholding tax (and no CIDE) where the services are not deemed 'technical' or do not involve a 'technology transfer', or if the fees are paid to a low-tax jurisdiction. See Article 2-A of Law 10.168/00 (as amended by Law 10.332/01), cited in Furtado, Verboom & Lütter (2015).
I
revenue service)1. Of note, the Brazilian tax administration did not suggest that the services rendered by Iberdrola to Termopernambuco would be conduits to an underlying intangible transfer, and, accordingly, Article 12 of the Brazil-Spain treaty was not invoked. Under their interpretative ruling AD-01/2000, Brazil's tax administration posited that Article 21 of the treaties would apply to technical service fees (Ferreira, 2014, 2015)2. Moreover, the administration argued that Article 7 would not apply because the technical service fees were gross payments that could not be interpreted as 'business profits'; and in their view, under local law, such payments would not be classified as 'taxable income' but as 'other income' or even as revenues.
In light of the established position of the Brazilian tax administration on the matter, Iberdrola filed a private ruling request with the competent branch of the Brazilian revenue authority, certainly expecting to confirm that a withholding tax would be imposed. Said confirmation would serve as grounds to demonstrate the prerequisites for the filing of a Writ of Mandamus with a Preliminary Injunction petition3. Upon notification of the negative private ruling, Iberdrola had further evidence of its cause to file suit.
Iberdrola's plea for a Preliminary Injunction under the Writ of Mandamus (that would suspend the collection of a 25 % withholding tax) was denied by the first-instance federal judge, based on the view that a Spanish resident company, without a subsidiary, branch, or permanent establishment in Brazil, would not have a standing in Brazilian courts. Upon appeal to the Regional Federal Court4 (hereinafter 'TRF'), the Spanish resident's right to stand in Brazil under a Writ of Mandamus seeking the domestic judiciary to prevent double-taxation was duly protected, and ruled to be a matter of Constitutional Law5. The Writ proceeding in question serves to protect infringements to 'fundamental rights' that are protected by the Brazilian Constitution of 1988, and Constitutional Law on such fundamental rights does not discriminate against third-country nationals or foreign residents.
The TRF ruling, however, cited Article 3 of the Brazil-Spain treaty in order to ascertain that the term 'business profits' could be interpreted and defined unilaterally under Brazilian domestic law, and as intended by the Brazilian tax administration, as it is a term that is not defined in the treaty. As such, the TRF ruled in favor of the tax administration and recognized Brazil's right to impose the 25 % withholding tax - even citing Article 23 of the treaty to suggest that Spain should grant relief from double-taxation and hence the taxpayer's rights should not be viewed as under threat. Iberdrola appealed to the STJ, not only on the merits of the case itself, but also in light of a conflicting STJ precedent from 2012 referenced here as the COPESUL case6 (Schoueri & Barbosa, 2013) (briefly noted under section III below)7. If the STJ reaffirmed its 2012 position, the technical issue in question would be expressly acquiesced by the tax administration (as discussed in section IV below), and the Article 7 v. Article 21 controversy would end in Brazil. The precedent-setting force of the Iberdrola case was therefore greater than COPESUL (Hines, 2015: 946).
1 At the time, some regional branches of the tax administration had issued private rulings on cases in which Article 7 was interpreted so as to limit the imposition of Brazilian withholding taxes, whereas some other branches of the revenue cases (or in some other cases under different treaties) different interpretations and different rulings were issued.
2 Under AD-01/2000 the tax administration interpreted that Article 21 would apply to technical fees irrespective of whether or not an underlying intangible transfer would occur. Brazil's treaties follow the UN Model Convention in this respect. As such, the administration understood that Article 12 would not apply to fee payments discriminated as 'technical services'. It is assumed, however, that Article 12 would instead apply in their view in cases of payments formally discriminated and registered as 'royalties' that nonetheless required the performance of services.
3 This judicial remedy requires the plaintiff to demonstrate the need for immediate protection (periculum in mora) in order to safeguard what would appear to be a legitimate claim (fumus boni iuris).
4 Tribunal Regional Federal, 5a Regido (5th Region), had jurisdiction to serve as the second instance of judicial dispute in this case.
5 Constituifao da República Federativa do Brasil of 1988, Articles 5 and 50 [Constitution of the Federative Republic of Brazil, articles 5 and 50].
6 BR: Copesul-CIA/Petroquímica do Sul vs. Federal Union (National Treasury) (2012) STJ REsp 1.161.467-RS, Tax Treaty Case Law IBFD.
7 Rulings issued by the highest courts in Brazil (STF and STJ) are not generally enforceable erga omnes, i.e. do not become binding precedents that command the interpretation of subsequent cases. Repeated rulings by the same court can, nonetheless, motivate the issuance of synthetic guidelines (i.e. súmulas) which in effect recognize that precedents have essentially been set. Repeated rulings, nonetheless, do guide decisions by lower instances of the judiciary and in essence represent precedents. Exceptionally, certain proceedings (particularly under public law) can produce generally enforceable rulings.
EUROPEAN AND ASIAN LAW REVIEW
This is the first reason why the Iberdrola case is worthy of note. It was decided by the First Chamber of the STJ's First Section on Public Law, whereas the COPESUL case was decided by the Second Chamber. Uniform decisions by the First and Second Chambers limit instances of procedural appeals grounded on inconsistency of rulings, and hence have a greater precedent-setting effect. Therefore, any STJ pronouncements in Iberdrola Case that reaffirm earlier statements from the COPESUL Case are particularly relevant, not only in respect to the incidence of a withholding tax on technical fees but on the validity and general interpretation of tax treaty law.
Accordingly, it is worthy of praise that the STJ reaffirmed its position concerning the legitimacy of tax treaty law. The prevailing view in Brazil is that a later-in-time ordinary law cannot modify tax treaties; that is, not even domestic tax laws can override Brazil's tax treaties, let alone administrative rulings or interpretative positions by the tax administration. While the STJ acknowledges that certain commentators defend that such result is grounded on the principle lex specialis derogat legi generali1 (i.e. residents of a treaty partner or transactions involving a treaty partner are afforded special treatment), the STJ ruling goes beyond to acknowledge a matter of hierarchy, in recognizing the broader function2 of Article 98 of the National Tax Code3 ('CTN'), which expressly states that later-in-time laws shall not alter or limit the scope of application of tax treaties.
'CTN, Art. 98. International treaties and conventions revoke internal tax legislation and shall be observed by prospective legislation4'.
Brazil's National Tax Code is not an ordinary federal law but a law of higher status, 'complementary' to the Federal Constitution (Concei£ao, Saraiva & Tulio, 2017: 1). As such, from a domestic perspective, a tax treaty override could only be deemed lawful if enacted via Constitutional amendment or through the enactment of a Complementary Law5 (which require greater legislative quorum and a special legislative rite). Under the lex specialis principle, a later-in-time ordinary law that expressly changes tax treaties with the necessary degree of specificity in terms could hypothetically be deemed 'valid' in Brazilian courts. The STJ went further to acknowledge not only the higher stance of treaties vis-a-vis ordinary laws through systematic interpretation of domestic laws, but also to acknowledge the validity of public international law and the Vienna Convention on the Law of Treaties ('VCLT')6, referencing the terms of Articles 27:
'VCLT, Art. 27. Internal Law and Observance of Treaties. A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article 46.'
In referencing the good faith of the parties that enter into a treaty, as well as the relevant context of tax treaties that adopt the highly specific terms of the OECD Model Convention, the STJ also references the principles of Article 31 of the Vienna Convention, which establishes as follows:
'VCLT, Section 3. Interpretation of Treaties Art. 31. General Rule of Interpretation: 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
1 Iberdrola Energia S.A. ra. Fazenda Nacional (2015) STJ REsp 1.272.897 - PE (2011/0196684-9). Available from: http:// stj.jusbrasil.com.br/jurisprudencia/266847261/recurso-especial-resp-1272897-pe-2011-0196684-9/inteiro-teor-266847266 [Accessed 10 September 2020].
2 Iberdrola Energia S.A. vs. Fazenda Nacional (2015 ) STJ REsp 1.272.897 - PE (2011/0196684-9). Available from: http:// stj.jusbrasil.com.br/jurisprudencia/266847261/recurso-especial-resp-1272897-pe-2011-0196684-9/inteiro-teor-266847266 [Accessed 10 September 2020].
3 Cydigo Tributário Nacional, Law 5.172/66 [National Tax Code, Law 5.172/66]
4 Ibid., 'Art. 98. Os tratados e as convengxes internacionais revogam ou modificam a legislagäo tributária interna, e seräo observados pela que lhes sobrevenha'.
5 Iberdrola Energia S.A. vs. Fazenda Nacional (2015 ) STJ REsp 1.272.897 - PE (2011/0196684-9). Available from: http:// stj.jusbrasil.com.br/jurisprudencia/266847261/recurso-especial-resp-1272897-pe-2011-0196684-9/inteiro-teor-266847266 [Accessed 10 September 2020].
6 BR: Copesul-CIA/Petroquímica do Sul vs. Federal Union (National Treasury) (2012) STJ REsp 1.161.467-RS, Tax Treaty Case Law IBFD. The VCLT was concluded in 1969 and became effective in 1980, and has been ratified by 114 countries. It is often viewed as an expression of customary international law and as such the principles contained it its terms would be binding to nations before and after the VCLT signing (i.e., reaching non-signatories). Brazil, nonetheless, is a signatory of the VCLT, which has been ratified and enacted into domestic law in 2009 through Legislative Decree 496/09, and Presidential Decree 7.030/09.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
(b) Any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) Any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended'.
Indeed, Article 98 of the 1966 CTN may well serve as evidence of context1 within the meaning of VCLT
Articles 31(1) and 31(2). And the STJ acknowledged the vast treaty context within which the standard terms of Article 7 must be interpreted, even referencing the importance of the OECD Commentary in this respect.
Consequently, the STJ reaffirmed in Iberdrola its reading of Article 7 expressed in COPESUL, which acknowledges that service fees paid from Brazil to a foreign resident can only be taxed in Brazil if the services are rendered through a permanent establishment, as defined under Article 5. Accordingly, in the absence of such permanent establishment the service fees in question must be interpreted as 'items of income' comprised within the meaning of the term 'business profits' earned by a foreign resident, while such 'business profits' could not be subject to tax in Brazil as 'other income' under Article 21. Interestingly enough, one of the STJ Justices, Min. Regina Helena Costa, elaborated an additional argument reinforcing vote, exploring the notion that allowing the taxpayer to carry the burden of double taxation would be contrary to the ability to pay principle - which can be derived from Brazil's CTN and grounded on the fundamental rights afforded by the Federal Constitution of 1988 (Arts. 5 and 7). The Iberdrola case was ruled unanimously by the STJ, with no dissenting votes, which makes the statements and findings of this STJ ruling even more relevant.
The view that treaty law prevails over domestic laws, and that double-taxation must be prevented, must have driven the tax administration to attempt an interpretative (Santos, 2015) override through AD-01/2000, a guideline which misinterpreted treaty terms, instead of a more explicit overriding rule denying the prevalence of treaty terms. As referenced in the second instance (TRF) ruling, if the hypothesis of the Brazilian tax administration were correct, it could allow double-taxation relief in Spain. The blatant misinterpretation of the terms, scope, object and purpose of Articles 7 and 21, inadequately excluding technical fees from the term 'business profits' whilst including such fees under the term 'other income' (which even under the UN Model2 should not encompass such fees), had the same practical effect of a treaty override; and as such it was ruled by the STJ as illegitimate.
After the COPESUL decision was issued in 2012 by the Second Chamber of STJ's First Section, as it became clear that a myriad of similar cases would eventually reach the same conclusion and crystalize a uniform STJ position, and after Finland officially notified Brazil3 in February of 2013 that it would denounce and terminate its 1996 treaty if Brazil insisted on its taxation of service fees as per AD-01/2000, the Brazilian tax administration decided to change its position concerning Articles 7 and 21. As discussed in Section IV below, new interpretative guidelines were issued in 2013 and in 2014 (Ferreira, 2014)4 by
1 VLCT Arts. 31(1), 31(2).
2 UN Model - fees.
3 The Office of the Federal Tax Attorney-General (Procuradoria Geralda Fazenda Nacionalor 'PGFN') issued Normative-Opinion (Parecer) CAT 2.363/13 in direct response to the Finnish notification, and finally supported the restatement of Brazilian tax policy concerning the taxation of service fees. As recently as 2011, the PGFN still argued in favor of Article 21 (and the denial of Article 7) as expressed in their earlier Parecer PGFN CAT 776/11 and hence continued to litigate this matter, until it later acquiesced its defeat in COPESUL and Iberdrola.
4 Motivated by the COPESUL decision, PGFN/CAT 2.363/13 considered earlier studies developed in 2013 by the Coordination of International Relations (Coordenagao de Relagoes Internacionais or 'CORIN') and General-Coordination
EUROPEAN AND ASIAN LAW REVIEW
different divisions within the tax administration, unifying their interpretation and effectively revoking AD-01/2000 to reshape Brazilian tax policy concerning the taxation of cross-border service fees. Accordingly, the Iberdrola decision of 2015, which reaffirmed COPESUL by unanimous vote, included a formal acquiescence by the Office of the Federal Attorney-General that the taxpayer's appeal had legitimate grounds.
The COPESUL Case
COPESUL, a Brazilian resident company, acquired technical services 'without a transfer of know-how' from Canadian and German tax residents. As in the Iberdrola case, the services were rendered by the foreign residents without constituting any permanent establishments in Brazil, and the Brazilian tax authorities did not view the services as a conduits for an intangible transfer. Instead, the RFB agents followed the interpretative guidelines of AD-01/2000 of the RFB and PGFN-CAT-Parecer 776/11, seeking to impose a 15 % withholding tax on the payment of such service fees by COPESUL.
In COPESUL, the PGFN first tested with the STJ the administration's interpretation that Article 7 would not be applicable because the term 'business profits' would be defined by domestic law, using Article 3(2) of the Canadian and German treaties1 in isolation from the remaining terms, object, purpose and context of these treaties. The PGFN argued that Brazil's domestic law definition of 'technical service fees' would equate 'revenues', whereas 'business profits' would be defined as 'taxable income' (i.e. net income subject to tax adjustments). Consequently, the PGFN argued that the fees would be regarded as 'other income' under domestic law as no underlying intangible transfer had been ascertained (i.e. meaning of the local term 'services without a transfer of know-how' or 'services without a transfer of technology') which would otherwise permit the allocation rule of Article 12 of the treaties.
By unanimous decision, the STJ ruled in 2012 that the Brazilian tax administration misinterpreted the Canadian and German tax treaties, and that such misinterpretation would be equivalent to an unlawful override (Santos, 2015) of Article 7 of the treaties. The prevalence of tax treaties over domestic tax law was affirmed, albeit with a greater emphasis on the lex specialis principle.
Administrative Practices and Treaty Law in Brazil: More (and Less) Like India
The Brazilian tax authorities adopted the controversial position expressed in AD-01/2000 because numerous private rulings had been issued by regional branches of the RFB with conflicting views in the late 1990s, yet often recognizing taxpayers' rights not to collect a Brazilian withholding tax of 15 % or 25 % on cross-border service payments where the recipient was a resident of a tax treaty jurisdiction. One notorious case involved technical services related to the installation of an automotive plant owned by French manufacturer Renault S. A., and the private ruling issued by the Rio de Janeiro branch of the RFB, recognizing the application of Article 7 and non-application of Article 12 under the Brazil-France tax treaty, was emblematic2 and provoked several taxpayers to pursue the same route.
of Taxation (Coordenagäo-Geral de Tributagäo or 'COSIT'), of the Federal Revenue of Brazil (RFB). See Technical Memorandum (Memorando) 64/2013/SUARI/C0RIN/DATIN of 19 April 2013, and Technical Note (Nota Técnica) COSIT 23/2013 of 30 August 2013. These studies were triggered by the Finnish notification and developed in light of the COPESUL decision, although Ferreira (2014) notes that CORIN had already reached the same conclusion since 2006. It would seem that no consensus existed within the tax administration (between the PGFN and RFB) until COPESUL was finally decided (and until Finland blew the whistle). Accordingly, RFB issued Interpretative-Declaratory Act 5/2014 delineating Brazil's new policy.
1 Brazil-Canada Treaty (1984); Brazil-Germany Treaty (1975) enacted through Decree 76.988/76, denounced and terminated by Germany in 2005 (revoked in Brazil through Decree 5.654/05), mainly because of Brazil's interpretative overrides, not only on the matter of cross-border service fees under Article 7 (including not only the matter of withholding taxation but the imposition of ancillary taxes such as CIDE), but also on transfer pricing under Article 9, coupled with the historical inefficacy of mutual agreement procedures involving Brazil. The Finnish threat of 2013 was, therefore, taken seriously; but still the COPESUL decision was more determinative of Brazil's policy shift.
2 Private Ruling 336/99 (Processo de Consulta 336/99, 7a Regiäo Fiscal), under the Brazil-France Treaty. The Rio de Janeiro branch of the RFB had issued similar rulings in 1998, under the Brazil-Canada Treaty and under the Brazil-Spain Treaty. See, respectively, Private Ruling 247/98 (Processo de Consulta 247/98, 7a Regiäo Fiscal), and Private Ruling 369/98 (Processo de Consulta 369/98, 7a Regiäo Fiscal). These favorable 1998 rulings under the Canadian and Spanish treaties were later revised, and the authorities in Rio de Janeiro interpreted that the technical service fees should be re-classified under Article 12 of the respective treaties, in the case of Spain making specific reference to the Brazil-Spain treaty protocol. See, respectively, Private Ruling 124/98 (Processo de Consulta 124/98, 7a Regiäo Fiscal), and Private Ruling 148/99 (Processo
If the authorities were to carefully analyze and reconsider such rulings, within the proper context of the specific tax treaties invoked, perhaps a broader interpretation of Article 121 or even of Article 14 (Ferreira, 2015: 256-257, 260-261) would be conceivable under most of Brazil's limited network of 31 tax treaties, as proposed in the post-2013 acts2 of the tax administration, and as discussed below. That position would be more consistent with Article 31 of the VCLT, as it would not meddle with interpretation of standard terms of Article 7 of the OECD and UN Model Conventions. With that approach, Brazil could even try to expand its treaty network, as did India, and attempt to negotiate specific terms under Article 12 (and corresponding treaty protocols) as did India and as it can be derived from some of Brazil's existing treaties, attempting to recognize Brazil's taxing rights over a broader range of cross-order service fees.
Instead, the authorities chose to follow a seemingly simpler path - to innovate and to override through unilateral interpretation the standard terms of Articles 3 and 7 of the OECD Model Convention, and also to misinterpret and over-expand Article 21 of the UN Model Convention. With that position, the international tax community would view Brazil as a rogue country, and not only new treaties would be harder to negotiate but existing treaties would be terminated, such as Germany's in 2005 and such as threatened by Finland in 2013. The international division of the RFB (CORIN) was aware of Brazil's predicament, and defended the revision of AD-01/2000 since 2006, along the lines of what was ultimately done only after 2013. Nonetheless, administrative and judicial disputes started to pile up with varying results, pro fiscum results (such as the TRF ruling in Iberdrola and a handful of administrative disputes) may have encouraged the PGFN to keep pursuing the matter, while the RFB debated the issue internally considering CORIN's position yet without revoking AD-01/2000 or ceasing enforcement activities through its audit and collections divisions3. Moreover, the unfortunate misinterpretation of AD-01/2000 was then reaffirmed in 2011 by PGFN-CAT-Parecer 776/114.
The new position expressed by the tax administration, in sum, introduces the following approach:
'Interpretative-Declaratory Act RFB 5/2014:
Art. 1. The tax treatment applicable to income paid, credited, delivered, used or remitted by sources located in Brazil to individuals or legal entities resident abroad for the provision of technical services and technical assistance with or without transfer of technology, in case of a tax treaty signed by Brazil, is the one foreseen in the:
(i) royalties article, whenever the corresponding protocol establishes that technical services and technical assistance are subject to the same tax treatment as royalties;
de Consulta 148/99, 7a Regiao Fiscal), while Private Ruling 119/99 (Processo de Consulta 119/99, 7a Regiao Fiscal) reaffirms the reference to the Brazil-Spain treaty protocol. A similar position had been expressed earlier in 1997 by Rio de Janeiro, under the Brazil-Sweden tax treaty. See Private Ruling 147/97 (Processo de Consulta 147/97, 7a Regiao Fiscal). The Paraná branch of the RFB interpreted in 1997, as Rio de Janeiro in 1999, that technical service fees would not be subject to Brazilian tax under the Brazil-France treaty; whereas in 1998 the Sro Paulo branch of the RFB understood withholding taxation would apply under the same treaty. See, respectively, Private Ruling 101/97 (Processo de Consulta 101/97, 9a Regiao Fiscal), and Private Ruling 426/98 (Processo de Consulta 426/98, 8a Regiao Fiscal).
1 This is the approach used by Rio de Janeiro to revise its rulings, as demonstrated above.
2 The Office of the Federal Tax Attorney-General (Procuradoria Geral da Fazenda Nacional or 'PGFN') issued Normative-Opinion (Parecer) CAT 2.363/13 in direct response to the Finnish notification, and finally supported the restatement of Brazilian tax policy concerning the taxation of service fees. As recently as 2011, the PGFN still argued in favor of Article 21 (and the denial of Article 7) as expressed in their earlier Parecer PGFN CAT 776/11 and hence continued to litigate this matter, until it later acquiesced its defeat in COPESUL and Iberdrola.
3 RFB's Undersecretariat of Tax Audits (Subsecretaria de Fiscalizando da Receita Federal) is a division that reports to the RFB Secretary, and along with the Undersecretariat of Taxation and Litigation (Subsecretaria de Tributaqao e Contencioso) and both supported the interpretation of AD-01/2000, along with the PGFN. As the matter pertains to the interpretation of tax treaties, however, the RFB and the National Treasury would have been better served by relying on the views and concerns expressed by the international taxation specialists of RFB's CORIN.
4 Somewhat similar to the situation noted by Lang Op. Cit. n. supra concerning the OECD Commentaries to the Model Convention, the PGFN's enactment of a normative opinion in 2011 reaffirming AD-01/2000 almost at the dawn of STJ's COPESUL decision, resembles the 'Baron of Munchausen predicament' of trying to pull oneself out from the swamp by pulling one's own hair.
EUROPEAN AND ASIAN LAW REVIEW
(ii) independent professional, professional services or independent personal services article, whenever technical services and technical assistance involve technical skills of a person or group of persons, except when item (i) applies; or
(iii) business profit article, except when item (i) or (ii) applies (Ferreira, 2015)1.'
Using this framework of interpretation the RFB and the PGFN may, indeed, argue (without offense to the VCLT Art. 31 )2 that most of Brazil's tax treaties might authorize the imposition of withholding taxes on technical service fees - including consulting fees and other services for which the classification as 'technical' would seem counterintuitive from a OECD perspective. This new approach and the expanded application of Article 12 in light of non-standard terms used in Brazil's tax treaties (and protocols) very much resembles the administrative practices and court rulings observed in India (Sanghvi & Shaktawat, 2012; Chishty & Chakalabbi, 2009; Bhatiaet & Sharma, 2011).
Brazil could go beyond India to the extent it also foresees the use of Article 14 for transactions involving 'companies'(Ferreira, 2015: 256-257, 260-261) (and not only individuals, whether or not organized through partnerships or other non-corporate firms). Engineering services, for example, rendered by a foreign manufacturing entity which, nonetheless, functions as an engineering services provider (or a consultancy) while supporting a Brazilian subsidiary, might conceivably fit the specific terms and context of Article 14 under some of Brazil's tax treaties. Brazil's approach, broadening its taxing rights over what would otherwise fall outside the scope of Article 12 even under India's treaties, might not differ much from the allocation rule intended by the new UN article on cross-border service fees (Moreno, 2015).
In light of the change in administrative practices, taxpayers or commentators (Ferreira, 2015: 259-260)3 might be tempted to apply overlook the context and specific terms of Article 12 in most Brazilian treaties and reach the conclusion that Article 12 would never allow the taxation of services that are not ancillary to an explicit license agreement or intangible transfer. It is conceivable that the nature of the services classified as 'technical' under some of Brazil's treaties would necessarily imply a transfer of know-how, even when no specific license agreement or property rights can be associated with such know-how transfer (Presbitero, Sacchi & Zazzaro, 2014: 428). This would not much differ from what can be observed in some of India's cases (Sanghvi & Shaktawat, 2012; Chishty & Chakalabbi, 2009; Bhatiaet & Sharma, 2011; Santos, 2015) and it is not necessarily inconsistent with Article 31 of the VCLT - that is, if the standard Article 12 language is not used and if no reference to mixed contracts or to the services being ancillary to an underlying license is observed in Brazil's treaty protocols.
Taxpayers and commentators that overlook the potential reach of Article 12 under Brazil's treaties may also be tempted to overemphasize Brazil systematic disregard for Articles 12 and 14 during the lapse of time (from 2000 through 2013) when Brazil expressly interpreted that all service fees paid abroad would fall under Article 21 of the treaties, alleging that in that time period, the reiterated administrative practice of Brazil would require the interpretation of the Brazil's tax treaties and prohibiting the application of Articles 12 or 14 during that period4. This line of argumentation based on 'subsequent practice' would be inspired by VCLT Article 31(3). However, a systematic interpretation of that Article would require the reiterated practice to demonstrate 'an agreement' between the parties concerning the interpretation of tax treaties. It is in the least doubtful that any of Brazil's treaty partners would demonstrate agreement with the classification of service fees under Article 21 of the tax treaties. The administrative practices of
1 See ADI 5/2014. The Office of the Federal Tax Attorney-General (Procuradoria Geral da Fazenda Nacional or 'PGFN') issued Normative-Opinion (Parecer) CAT 2.363/13 in direct response to the Finnish notification, and finally supported the restatement of Brazilian tax policy concerning the taxation of service fees. As recently as 2011, the PGFN still argued in favor of Article 21 (and the denial of Article 7) as expressed in their earlier Parecer PGFN CAT 776/11 and hence continued to litigate this matter, until it later acquiesced its defeat in COPESUL and Iberdrola.
2 VLCT Arts. 31(1), 31(2).
3 Ferreira suggests that if the 'intention of treaty negotiators' with respect to Article 12 indicates that the terms 'technical service and technical assistance' in Brazil's treaties and protocols would necessarily imply mixed contracts and an underlying license agreement (wherein the use of a specific intangible property is transferred to a Brazilian resident), even for Brazilian treaties that make no reference to 'mixed contracts' or to services being ancillary to an underlying license agreement. Aside from inverting the relevance of Articles 31 and 32 of the VLCT (Article 32 relates to supplementary means of evidence -and should encompass references as to the intent of treaty negotiators whereas Article 31 takes precedence), that position seems to overemphasize the contractual form (i.e. license) and intangible definition (i.e. intangible property), and to underplay the potential reach of the term 'intangibles' (i.e. know-how, knowledge-based capital).
4 Ibid.
Brazil concerning service fees were clearly not agreed by Germany and Finland, for instance. Further, an agreement in this regard (through the granting of foreign tax credits for the Brazilian withholding tax) would mean the recognition of Brazil's right to tax the service fees in question be it under Article 12 or Article 21, and not necessarily a disagreement with the potential application of Article 12.
It remains to be seen whether Brazilian courts will uphold the new approach of the Brazilian tax administration concerning the extended interpretation of Articles 12 or 14. This is where Brazil might be less like India. As evidenced in COPESUL and particularly in Iberdrola, the rulings unanimously issued by Brazil's STJ appear to be more conservative, and more aligned with standard OECD standards of interpretation, as compared to India.
Conclusions
The Iberdrola decision of 2015, which reaffirms the COPESUL decision of 2012, not only redefined Brazil's position on the cross-border taxation of service fees. These decisions also affirmed the validity and hierarchy of tax treaty law from a Brazilian perspective as quasi-constitutional, and thus prevailing over Brazil's later-in-time ordinary federal laws. Iberdrola also demonstrates an important procedural law matter concerning the protection of taxpayers' rights, as a company that is not a resident of Brazil (and that did not have a local permanent establishment) was allowed to stand in Brazilian courts under a Writ of Mandamus proceeding, seeking to avoid double-taxation as a matter of fundamental rights under the Brazilian Constitution of 1988.
The STJ rulings were quite conservative, and very much aligned with international standards concerning the interpretation of tax treaties under the VCLT of 1969, as well as under the OECD Model Convention. This is in spite of the unorthodox views and interpretation adopted over the years by the Brazilian tax administration concerning the taxation of service fees paid out of Brazil. The new approach adopted by the Brazilian tax authorities since 2013 is motivated by such case law, and yet continues to seek a broader application of Article 12 under Brazil's tax treaties to reach technical services that are not ancillary to an intangible transfer. This is where Brazilian and Indian tax policies remain quite similar, and seem to have inspired the new UN Model article on the taxation of cross-border service fees. It remains to be seen whether the extended interpretation of Articles 12 (and of Article 14) sought by the Brazilian tax administration will be ultimately upheld by Brazil's highest courts.
References
Bhatiaet, P. & Sharma, A. (2011) Taxation of Foreign Service Providers. Asia-Pacific Tax Bulletin. 17 (2).
Calazans, F. J. (2005) Treaty Treatment of Offshore Remittances of Consideration for Technical Services. International Transfer Pricing Journal. 12 (5), 235-244.
Chishty, M. M. & Chakalabbi, S. A. (2009) Royalties and fees for technical services in international trade. Asia-Pacific Tax Bulletin. 15(1), 145-163.
Concei?ao, O. C., Saraiva, M. V., Fochezatto, A. & Fran£a, M. T. A. (2017) Brazil's Simplified Tax Regime and the longevity of Brazilian manufacturing companies: A survival analysis based on RAIS microdata. EconomiA. 19 (2), 164-186.
Devereux, M. P., Fuest, C. & Lockwood, B. (2015) The taxation of foreign profits: A unified view. Journal of Public Economics. 125 (C), 83-97.
Ferreira, V. A. (2014) Service Income under Brazilian Tax Treaties: The Possible End of the Article 7 v. Article 21 Battle, but the Start of a New Old One? Intertax. 46 (6 and 7), 427-432.
Ferreira, V.A. (2015) The New Brazilian Position on Service Income and Tax Treaties: If you can't Beat 'em, Join ' em. Intertax. 43 (3), 255-262.
Furtado, M. F., Verboom, H. & Lutter, C. (2015) No Brazilian Witholding Taxes for Technical Service? Bulletin for International Taxation. 69(10), 558-562.
Hines, J. R. (2015) Corporate Taxation. In: Wright, J. D. (ed.) International Encyclopedia of the Social and Behavioral Sciences. (2nd ed.) Oxford, Elsevier, pp. 946-948. https://doi.org/10.1016/B978-0-08-097086-8.10548-3
Merz, J., Overesch, M. & Wamser, G. (2017) The location of financial sector FDI: Tax and regulation policy. Journal of Banking and Finance. 78 (C), 14-26.
Moreno, A. B. (2015) The Taxation of Technical Services under the United Nations Model Double Taxation Convention A Rushed - Yet Appropriate - Proposal for (Developing) Countries? World Tax Journal, 7 (3). Available from: https://www.ibfd.org/sites/ibfd.org/files/content/pdf/wtj_2015_03_int_2. pdf [Accessed 15 September 2020].
Presbitero, A. F., Sacchi, A. & Zazzaro, A. (2014) Property tax and fiscal discipline in OECD countries. Economics Letters. 124 (3), 428-433.
Sanghvi, S. & Shaktawat, R. (2012) Taxation of Fees for Technical Services and Royalties. Asia-Pacific Tax Bulletin. 18(6), 452-459.
Santos, J. V. G. (2015) Interpretative Treaty Override, Breach of Confidence and the Gradual Erosion of the Importance of Tax Treaties. Bulletin for International Taxation. 69 (1).
Schoueri, L. E. & Ribeiro, R. P. (2004) New Withholding Taxes on Imported Services. International Transfer Pricing Journal. 11 (5), 196-205.
Schoueri, L. E. & Barbosa, M. (2013) Brazil: Technical Services and the Application of Article 7 under Brazilian Treaty Practice - A Case Study, Business Profits and Associated Enterprises (Art. 7 and Art. 9 OECD Model). In: Lang, M. et al. (eds.) Tax Treaty Case Law around the Globe 2013. Amsterdam, Online Books IBFD.
Susarla, K. & Krishnan, C. (2014) India - Casenote - Delhi High Court Decision on Taxability of Offshore Supply and Services. Asia-Pacific Tax Bulletin. 20 (6), 50-83.
Information about the author
Romero J. S. Tavares - researcher and lecturer at the Global Tax Policy Center and Transfer Pricing Center of the Institute for Austrian and International Tax Law at Wirtschaftsuniversitflt Wien (WU); International Tax Policy Advisor to the National Confederation of Industry of Brazil (CNI) and to other countries (Building D3, 2nd floor, Welthandelsplatz 1, Vienna, 1020, Austria; e-mail: romero.tavares@wu.ac.at).
© R.J.S. Tavares, 2020
Date of Paper Receipt: September 14, 2020
Date of Paper Approval: November 14, 2020
Date of Paper Acceptance for Publishing: December 1, 2020
