Cross-Border Buy-and-Sell Transactions - Argentina - Martin J. Barreiro - 11th Annual Latin American Tax Conference
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11th Annual Latin American Tax Conference The Biltmore Hotel, Coral Gables, FL March 10-11, 2010 Cross-Border Buy-and-Sell Transactions Argentina Martin J. Barreiro
Contents
I. Case 1 (Distribution)...............................................................................................................1
A. Background........................................................................................................................1
B. Questions ...........................................................................................................................2
C. “red” Channel with Guarantee:............................................................................................5
D. Referential Values: .............................................................................................................5
E. Disagreement of the Customs Agent: ...................................................................................5
II. Case 2....................................................................................................................................7
A. Background........................................................................................................................7
B. Questions ...........................................................................................................................7I. Case 1 (Distribution)
A. Background
Hardware & Software, Inc. (HSI) is a US Company that designs and manufactures computer workstations
and servers that are sold to customers in the United States and abroad.
Through January 2004, Hardware & Software Distributors, Inc . (“1-1S1)1”) wholly-owned US subsidiary
of HSI, contracted with customers in Argentina and sold HSI products to such customers with shipping
terms ex-works California . As such, the customer was the importer of record and was responsible for all
costs of importation.
HSI is planning to incorporate subsidiaries in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.
The subsidiary would serve as a link between HSI and the clients in each jurisdiction. For operating
purposes, HSI would like that the local subsidiaries consider the two alternatives outlined below:
1. Commission structure
The local subsidiaries would provide HSI with marketing and technical services to HSI. The local
subsidiaries have no authority to conclude contracts on behalf of HSI. The costs related to those services
should be billed to HSI with a markup of 10%. The clients would import the products into their
respective countries and pay the purchase price to HSI.
2. Buy-sell structure
The local subsidiaries would act as buy-sell distributors for HSI, entering consequently into contracts with
the customers in their own name. HSI would sell to the local subsidiaries at US list price less a discount
of 49%, and the local subsidiaries act as the importer of record of the products.
HSI’s preference would be that 100% of sales in Argentina be made to the local subsidiary on a buy-sell
basis rather than directly to the Argentina customers.
However, in certain situations it may be advantageous, from a business point of view, for customers to
contract with HSI directly, for example:
a) Where there are special rules allowing customers that are exempt from duties and taxes, such as
government agencies or universities, to import without duty or taxes (in which case direct sales
from a US company to the customer would reduce the cost that the local subsidiaries would
otherwise need to pass to the end customer).
b) Where the customer has secured favorable financing arrangements for goods that they import-buy
directly from a US company.
c) Where the customer would like goods shipped to a location within the US for software integration
before ultimate export to their country.
d) Where the local government has created tax and other incentives to companies under certain
circumstances.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 1Therefore, HSI would like to offer customers in the local jurisdictions a choice of either buying products
that have been imported by the local subsidiary or of buying the products outside of the country and
importing the products themselves, provided that it can do so without creating significant tax or customs
exposures. It is thought that these situations could account for up to 10% of the local subsidiary customer
revenue and that in some cases refusing to sell from the US Company could mean HSI looses the
business.
HSI has considered meeting those customer objectives by having a US company sell the products directly
to the customer, which then imports the products into Argentina . In this case it is assumed that the price
that HSI would charge to its clients for the products would be higher than the price that it usually charges
to the local subsidiaries for the same products.
B. Questions
1. Commission Structure
a) What are the tax consequences for HSI under the commission structure? (Income tax, value added
tax. gross turnover taxes, stamp tax, etc.)
There will be no tax consequences for HSI under the commission structure.
However, it is worth adding that dividends exceeding the taxable income of the Argentine paying
subsidiary will subject to withholding. Any excess to be distributed over the above mentioned
limit is subject to a 35% withholding and final payment.
For example: If the taxable income of the Argentine subsidiary were of USS 100, and the
dividends to be distributed were of USS 150; USS 100 may be remitted freely, and USS 50 shall
be subject to a 35% withholding.
b) What are the tax consequences for the local subsidiary under the commission structure? (Income
tax, value added tax, gross turnover taxes, stamp tax, etc.)1
Assuming that the reimbursement of the costs plus a 10% is arm’s length, the local subsidiary
will be subject to a 35% income tax on its net income; to an approximately, 4.9% gross receipts
tax on the reimbursement of the costs plus the 10%.
On the other hand, in accordance with case law’, the marketing and technical services rendered
by the Argentine subsidiary will not he subject to VAT. This is so due to the fact that while the
Argentine subsidiary shall neither be a party in the sales agreements to be entered into between
HSI and the Argentine customers nor assume any liability for such agreements, HSI shall not
perform direct activities within the Argentine territory.
Stamp tax will not apply if there is no contractual document instrumenting it.
1
Federal Tax Court, in re: “Tecnopel SA vs Federal Tax Bureau ”, December 6, 1999; “Uniquim SA vs
Federal Tax Bureau”, March 15, 2002; and “Codipa SA vs Federal Tax Bureau”, September 12, 2003.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 2c) Are there any permanent establishment issues that the client should be aware of’?
There is no permanent establishment issue.
d) Are there any customs duties or customs valuation issues that the client should be aware of’?
There are no customs duties or customs valuation issue for the client if the transaction is arm’s
length. Since the local subsidiary would not be importing the products (Which would be
imported by the clients), no customs issues shall arise under this scenario.
e) Are there any transfer pricing issues that the client should be aware of?
The arm’s length principle is applicable to the reimbursement of the costs plus a markup of 10%
paid by HSI to its local subsidiary. Therefore, in order to demonstrate that the transaction is at
arm’s length, the local subsidiary must prepare transfer pricing studies and submit them,
together with information returns, to the Federal Tax Bureau annually.
2. Buy-sell structure
a) What are the tax consequences for HSI under the buy-sell structure? (Income tax, value added
tax, gross turnover taxes, stamp tax, etc.)
There will be no tax consequences for HSI under the buy-sell structure. However, please note
that dividends to be paid will be subject to the tax treatment described in I. B. 1. a. above.
b) What are the tax consequences for the local subsidiary under the buy-sell structure? (Income tax,
value added tax, gross turnover taxes, stamp tax, etc.)
The local subsidiary will be subject to a 35% income tax on its net income; to an approximately
3% gross receipts tax on the gross profits arising from the sale of the products, and to a 1%
minimum presumed income tax on the value of the products owned as of December 31 of each
year. In addition, the local subsidiary will be responsible for the payment of import duties and
taxes. In this sense please note that a 21% VAT applies, in general, to the definitive imports of
goods into Argentina.
In that respect, please note that the importation of goods to be resold within Argentina by the
local subsidiary is subject to and additional 10% VAT and 3% advance income tax. These rates
might he 20% and 6%, respectively, if the local subsidiary does not have the Certificate of Import
Data Validation (CVDI). which is issued bi- the Federal Tax Bureau. Such additional taxes may
create ((financial problem for the local’ subsidiary if the amounts to be collected for the .vale of
the products are not sufficient to offset such additional taxes.
Such financial problem may be even increased if the local subsidiary sells the products to
Argentine customers categorized by the Argentine Tax Authority as VAT withholding agent
(“Agent ‘).
If the Argentine customer is an Agent, it will not pay 100% of the VAT invoiced by the local
subsidiary but 50% thereof
Such VAT adverse effects do not apply if the local subsidiary is an Agent or if the local subsidiary
obtains the appropriate exemptions.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 3With respect to stamp tax, please refer to I. B.1.b.
c) Are there any permanent establishment issues that the client should be aware or?
There is no permanent establishment issue.
d) Are there any transfer pricing issues that the client should be aware of?
There are no transfer pricing issues as long as the transaction is arm’s length.
However, importation of products into Argentina is always subject to transfer pricing rules,
irrespective of whether the parties are related. Therefore, we are hereby making some brief
comments regarding the treatmen t applicable in the case of imports made by both independent
parties (Argentine customers) and related parties (local subsidiary) in order to draw some
conclusions in relation with a normal market price.
(i) Sales made to independent parties
Income derived for the mere importation of goods into Argentina is foreign source
income for the foreign exporters.
Section 8 of the income lax law, which refers to income derived from the import of goods,
constitutes a guideline for the determination of the normal market price among
independent parties. According to this regulation, were international prices - of public
and notorious knowledge - exists for the imported goods, that may be established through
transparent markets, commercial exchange markets or similar, said prices - absent
evidence to the contrary - shall be used in determining the net income of argentine
source.
Additionally, Section 8 of the income tax law states that were import operations made
between independent parties exceeds the annual amount of AR$ 1,000,000, the importer
shall submit the necessary information to the Federal Tax Bureau in order to
demonstrate that the declared prices are adjusted to market prices, including assignment
of costs, profit margins and any other relevant information that the Federal Tax Bureau
may consider necessary for the audit of such import operations
(ii) Sales made to a related party
In the scenario were the analyzed transaction is entered into between related companies,
the arm’s length principle shall apply . This principle is defined in the income tax law as
conditions adjusted to the normal practices of the market between independent entities.
In order to demonstrate that the transactions are at arm’s length, the taxpayer must
prepare transfer pricing studies and submit them, together with information returns, to
the Federal Tax Bureau annually,
The transfer pricing provisions of the Argentine income tax law generally follows the
OECD guidelines for Multinational Enterprises and Tax Administrations.
Where import operations are entered into between related parties and the prices and
conditions of such transactions are not adjusted to normal practices of the market
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 4between independent entities, said operations shall be adjusted in accordance with
Section 15 of the income tax law.
Transfer pricing rules are applicable not only in the case of companies which are related
by means of a capital interest but when any other form of control not necessarily
involving capital, such as an operative, contractual or management control exists.
Also, if the import operations are entered into with companies with domiciled in, or
constituted in accordance with, or located at low tax jurisdictions, said operations shall
not be considered entered into market conditions and, thus, transfer pricing rules will
apply.
e) Are there any customs duties or customs valuation issues that the client should be aware of?
A customs valuation issue might arise from the existence of importations to unrelated parties
where the transaction value (“Reference Value’) is higher than the transaction value of
importations carried out between HSI and the local subsidiary (“Transaction Value’). The
difference between the Reference Value and the Transaction Value should be justified by the local
subsidiary, in order to demonstrate that the relationship has not influenced the Transaction
Value.
In this sense, Resolution 1907/2005 issued by the Federal Tax Authority established a control
regime for the selection of cases were the declared value of the imported goods differs from the
referential prices published by the Customs Service. The purpose of this regime is to verify
whether the declared transaction value is real and accurate.
Basically, this regime selects the importations or home use and determines the control
procedures to be followed. Such control procedures are as follows:
C. “red” Channel with Guarantee:
A guarantee must be provided to the Customs Service prior to the release of the imported goods when
their declared value differs from the referential prices published by the Customs Service. The importer
and/or the customs broker may be subject to inspection by the Customs Service and/or the Tax Authority.
In this case, the importer will have to submit within 15 days from the release of the imported goods
complementary explanations and elements of judgment related to the total amount effectively paid or to
be paid for such goods, justifying the declared value as a market price.
D. Referential Values:
The customs declaration is not selected under “Purple Cha nnel”. However, due to the existence of
referential values, the customs agent will request the provision of a guarantee.
E. Disagreement of the Customs Agent:
Even though, in this case, the importation for home use is not subject to Purple Channel or to the
provision of guarantee, the customs agent may disagree with the declared value and, thus, notify the
Customs Valuation Agents in order to initiate an investigation.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 5The importation for home use will be selected upon the following procedures:
a) “Sistema Informático Maria ”: The customs automated system will automatically determine the
control procedure to be followed and may liquidate a guarantee.
b) Verification by the Customs Agents, through a control on the declared value.
In addition, we remark that pursuant to the GATT/WTO Customs Valuation Agreement (the “Valuation
Agreement”) the relationship does not influence the price, whenever the importer demonstrates that the
Transaction Value closely approximates to one of the following “Test Values” occurring at or about the
same time:
(i) the transaction value in sales to unrelated buyers of identical or similar goods for export
to the same country of importation;
(ii) the customs value of identical or similar goods as determined under provisions of Article
5 of the Valuation Agreement;
(iii) the customs value of identical or similar goods as determined under the provisions of
Article 6 of the Valuation Agreement.
The applicability of the methods described in (ii) and (iii) is extremely difficult, since in practice,
information regarding that type of values is not available.
To apply the foregoing methods, the differences in commercial levels, quantity levels and costs incurred
by the seller in sales to unrelated purchasers and that are not incurred by the seller in sales to related
parties, should be taken into account.
Therefore, we should apply the method described in (i) in order to demonstrate that the Transaction Value
agreed between HSI and the local subsidiary is acceptable for customs valuation purposes.
If the local subsidiary does not justify the difference between the Transaction Value and the Reference
Value as explained above, the Customs Office would consider the Reference Value as the customs k a lue
of the product and, thus, may claim the local subsidiary the owed amounts in consideration for import
duties.
c) Which of the proposed structures would better suit the interests of our client from a tax
perspective?
That will depend on the factual circumstances q each .specific case, each of them has advantages
and disadvantages that should be reviewed from a business stand point on a case by case basis.
d) Are there any alternatives that would meet the needs of the client and solve any tax or customs
issues that you have identified? Is there any alternative that you could propose that may bring
additional tax benefits for our client?
There are no other alternatives that have been tested with the Argentine authorities.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 6II. Case 2
A. Background
1. Current commission structure
Computer Software, Inc. (“CSI”), a US company that designs and licenses software programs, has a local
subsidiary incorporated in each of your jurisdictions . The main activity of these local subsidiaries is to
identify potential clients and to make all the efforts that are required for marketing CSI’s software
products.
The license agreements are entered into between CSI and the customers. The software programs are
imported directly by the customers. Once the business is closed, CSl pays its local subsidiaries a
commission equivalent to a certain percentage of the license fee charged to the client.
2. Alternative sublicensing structure
CSI is interested in identifying the tax consequences of an alternative structure. The relevant
characteristics of the alternative structure are as follows:
a) A software distribution agreement is executed between CSI and its local subsidiaries. The
agreement allows the local subsidiaries to license CSI’s software products to local clients. In
exchange, they pay a royalty fee to CSI equivalent to a certain percentage of the pric e of the
sublicense agreements.
b) The local subsidiary imports the software, and pays the relevant customs duties and VAT
c) The local subsidiary enters into license agreements with the clients. The clients pay the price of
the licenses to the local subsidiary, and the local subsidiary pays the relevant royalties to CSI.
B. Questions
1. Commission structure
a) What are the tax consequences for CSI under the commission structure? (Income tax, value added
tax, gross turnover taxes, stamp tax, etc.)
Under the commission structure, payments to be made by the customers to CSI are subject to a
31.5%.
As a general rule, all payments of Argentine source income made to beneficiaries residing
outside of Argentina are subject to a 35% Income Tax withholding on the irrefutably net taxable
income presumed by the Income
Tax Law (which for general payments is 90% of the amount paid, thus resulting in a 35% over
90% = 31.5% withholding on the gross payment).
b) What are the tax consequences for the local subsidiary under the commission structure? (Income
tax, value added tax, gross turnover taxes, stamp tax, etc.)
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 7Assuming that the local subsidiary receives an arm’s length commission, it shall be subject to the
same tax treatment explained in I.B.1.b. The tax impact on the Argentine subsidiary can be
summarized as follows:
Income Tax: 35% on the net income.
VAT: services provided by the local subsidiary would not be subject to VAT provided the
requirements’ mentioned above in point I.B.1.b. are met.
Gross Turnover Tax: 4.9% approximately (depending on the activity fulfilled and the jurisdiction)
Stamp Tax: Only applicable if agreements are instrumented
c) Are there any permanent establishment issues that the client should be aware of?
There is no permanent establishment issue.
d) Are there any customs duties or customs valuation issues that the client should be aware of?
The need to differentiate in the commercial invoice between the value of the carrier media and
the value of the intellectual property, Decision 4.1, dated May 12, 1995, of the Customs Valuation
Committee, establishes that the custom value of the software shall only include the value of the
carrier media.
It shall not include the value of the data or instructions contained in the carrier media, as long as
the value of the data or instructions is differentiated from the cost or value of the carrier media.
This principle has been repeated by Resolution 856/1995 of Argentina’s Ministry of Economy.
According to such resolution, software classified in tariff classification number 8524 of the
Mercosur Common Nomenclature (N.C.M.), that corresponds to the physical media, shall be
subject to import duties only upon the invoice value of such physical media.
In order to be exempted from import duties, the values corresponding to the software and its
physical media shall be clearly specified from the invoice total amount.
The remaining goods classified in tariff classification number 8524 of the N.C.M. that do not
constitute software, such as digital recordings, are subject to the general valuation criteria and,
thus, excluded from this exemption.
e) Are there any transfer pricing issues that the client should be aware of?
The arm’s length principle is applicable to the commission paid by CSI to its local subsidiary.
Therefore, in order to demonstrate that the transaction is at arm’s length, the local subsidiary
must prepare transfer pricing studies and submit them, together with information returns, to the
Federal Tax Bureau annually.
2. Sublicensing Structure
a) What are the tax consequences for CSI under this structure? (Income tax, value added tax. gross
turnover taxes, stamp tax, etc.)
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 8The tax consequence for CSI under the sublicensing structure will be the following: income tax
withholding shall be applicable at a 31.5%, in accordance with the comments made in I.B.1.a.
above.
Please note that dividend payments to be made by the Argentine subsidiary shall be subject to the
withholding treatment described in point I. B. 1. a, above.
VAT shall be levied on the imports of software programs at a 21% rate and shall be due by the
Argentine subsidiary as explained in point II.B.2.b. below.
b) What are the tax consequences for the local subsidiary under this structure? (Income tax, value
added tax, gross turnover taxes, stamp tax, etc.)
The local s ubsidiary will be subject to a 35% income tax on its net income; to an approximately
3% gross receipts tax on the gross profits arising from the sale of the products and to a 21% VAT
on the sublicense of software.
In addition, the local subsidiary will be responsible for the payment of import duties and taxes.
In this sense please note that a 21% VAT applies, in general, to the definitive imports of goods
into Argentina. In the case of software imports, Federal Tax Bureau’s Ruling N° 97195, stated
that VAT shall be levied not only on the ruler of the physical media and of the software contained
therein, but also on the value attributable to the licenses of “use” of such software granted by the
exporter to the importer. This interpretation maybe regarded as inconsistent with the Valuation
Agreement which clearly states that in order to determine the customs value of imported goods
payments made in consideration for the reproduction of software shall not he added to the price
actually, paid or payable.
Moreover, please note that the importation of goods to be resold within Argentina by the local
subsidiary is subject to and additional 10% VAT and 3% advance income tax . These rates might
be 20% and 6%, respectively, if the local subsidiary does not have the Certificate of Import Data
Validation (CVDI), which is issued by the Federal Tax Bureau. Such additional taxes may create
a financial problem for the local subsidiary if the amounts to be collected for the sale of the
products are not sufficient to offset such additional taxes.
Such financial problem may be even increased if the local subsidiary sells the products to
Argentine customers categorized by the Argentine Tax Authority as VAT withholding agent
(“Agent”).
If the Argentine customer is an Agent, it will not pay 100% of the VAT invoiced by the local
subsidiary but 50% thereof.
Such VAT adverse effects do not apply if the local subsidiary is an Agent or if the local subsidiary
obtains the appropriate exemptions.
c) Are there any permanent establishment issues that CSI should be aware of?
There is no permanent establishment issue.
d) Are there any transfer pricing issues that the client should be aware of?
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 9There are no transfer pricing issues as long as the transaction is arm’s length.
e) Are there any customs duties or customs valuation issues that the client should be aware of?
There are no customs duties or customs valuation issues as long as the transaction is arm’s
length. In addition, please refer to answer I.B.2.e. above.
f) Which of the proposed structures would better suit the interests of our client from a tax
perspective?
That will depend on the factual circumstances of each specific case, each of them has advantages
and disadvantages that should be reviewed from a business stand point on a case by case basis.
g) Are there any alternatives that would meet the needs of the client and solve any tax or customs
issues that you have identified? Is there any alternative that you could propose that may bring
additional tax benefits for our client?
There are no other alternatives that have been tested with the Argentine authorities.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Argentina 10www.bakermckenzie.com Baker & McKenzie has been global since our inception. It is part of our DNA. Our difference is the way we think, work and behave – we combine an instinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. With 3,900 lawyers in 39 countries, we have deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. © 2010 Baker & McKenzie All rights reserved.
2010 Latin American Tax Conference The Biltmore Hotel, Coral Gables, Miami • March 11-13, 2009 Cross-Border Buy-and-Sell Transactions Brazil
Contents
Selling into Brazil...............................................................................................................................1
I. General Description of Applicable Taxes .................................................................................1
1. Income Tax........................................................................................................................1
2. Value Added Taxes ............................................................................................................1
3. Other Taxes........................................................................................................................2
4. Customs Duties and Taxes ..................................................................................................2
5. CIDE on Importation of Services, Technology Trans fers and Software Licenses.....................3
II. CASE 1 - Direct Sales from Outside Brazil ..............................................................................4
2. Second Scenario. ................................................................................................................5
III. Case 2 - Sales Licenses of Software Products ...........................................................................7Selling into Brazil
There are a number of alternatives available for non-resident manufacturers and distributors planning to structure sales operations in the Brazilian market. Below we provide an overview of the main taxes applicable and a discussion of specific tax aspects related to the most common structures. I. General Description of Applicable Taxes 1. Income Tax In general, Brazilian income tax law adopts the principle of the paying source of income, i.e., withholding tax is due whenever income is paid, credited, delivered or remitted by Brazilian sources to non-residents (whenever the non-resident payee acquires legal or economic availability of income), exception made to the capital gains tax levied upon the sale of assets located in Brazil between non-resident parties. The withholding income tax rate applicable to payments to non-residents is 15% for most transactions, but in certain cases the applicable rate is zero (e.g., payments for lease of aircraft and vessels) or 25% (e.g., payments for services in general, and payments of any nature remitted to entities located in low-tax jurisdictions). Payment of dividends from Brazilian entities to non-resident shareholders or quotaholders are not subject to withholding income tax. From a corporate income tax perspective, Article 539 of the Brazilian Income Tax Code provides that a foreign resident is subject to income tax in Brazil if (i) it sells in Brazil through an agent, and (ii) it directly invoices the buyer. The Sole Paragraph of Article 539 further provides that: (i) income tax will be imputed only if the agent in Brazil has powers to contractually bind the seller before the purchaser in Brazil; (ii) income tax shall not be imputed over sales in which the agent acts simply as a business intermediary, collecting and placing orders or proposals, or performing other acts necessary to commercial mediation, even if these services are compensated with commissions or other types of compensation, provided the agent does not have powers to contractually bind the seller; (iii) the fact that the seller participates in the capital of the agent in Brazil does not cause the agent to have powers to contractually bind the seller; (iv) the fact that the legal representative or attorney-in-fact of the seller signs agreements in Brazil in the name of the seller, on a non-regular basis, is not enough to determine the application of the provisions set forth in this Article. Therefore, in principle no permanent establishment issue should arise provided that there is no agent in Brazil with powers to bind the non-resident entity before the Brazilian customers. The statutory corporate income tax rate in Brazil is 34% (corporate income tax rate of 15%, plus a 10% surtax for income exceeding R$ 240,000 per year, plus a social contribution on adjusted earnings at a rate of 9%). The tax basis generally is the book profit adjusted by permanent and timing differences set forth in tax law. Companies with annual gross income below certain limits (currently R$ 48 Million; approximately USD$ 24 Million) can pay income taxes based in an elective system that deems the profit to be 32% of gross income. 2. Value Added Taxes The IPI is a federal value added tax that is levied on imports, sale and transfer of manufactured products. The tax paid upon the acquisition or importation of raw materials and intermediary products, parts Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 1
components, etc., for the production of the manufacture and it can offset the tax due on the subsequent sale to non-industrial entities or to individuals. The net effect is a tax on the value added at each stage of production. IPI rates vary depending on the tariff classification of the product. The ICMS is a state value added tax on sales of goods and certain services. It is levied on imports, sale and transfer of any goods, and on transport and communication services. The Brazilian taxpayer is allowed to credit the ICMS it pays to third-party suppliers against the ICMS it receives from sales of goods to its customers. The difference is the amount owed to the state government. The ICMS general rate is 18% in the States of Sao Paulo and Rio de Janeiro but the State of Rio de Janeiro also demands the payment of an additional of 1% destined to the Fund to Struggle against Poverty (“Fundo Estadual de Combate à Pobreza - FECP”) over the 18% general ICMS rate. 3. Other Taxes Brazilian entities are subject to gross revenue taxes on monthly gross receipts. These taxes are federal. There are specific provisions excluding export revenues from the tax basis of PIS and COFINS. Imports however are subject to these taxes. There are two regimens for these taxes. One regimen is cumulative with cascading effects and the other is non-cumulative, allowing tax credits to offset the tax due on subsequent transactions. For most taxpayers, the PIS and COFINS apply under the non-cumulative system at total aggregate rate of 9,25% over gross billings. Certain specific activities, such as banks, financial institutions and companies engaged in the development of software products in Brazil, as well as companies electing to pay corporate income taxes under the presumed profit method, are still subject to the PIS and COFINS under the cumulative system but at lower rates (i.e. 4,65% total, for financial institutions, and 3,65% for other entities). Brazilian taxpayers and foreign residents providing services locally may also be subject to Municipal Service Tax (“Imposto sobre Serviços de Qualquer Natureza – ISS”), at rates that generally vary from 2% to 5%, depending on the type of service and the particular municipality in which the party rendering the services is located. 4. Customs Duties and Taxes The resident importer of record is subject to the payment of the following taxes upon importation of goods into Brazil: import duty over the CIF value of the goods; federal excise tax (IPI) over the CIF value plus the import duty; and state value added tax (ICMS) over the CIF value plus import duty and IPI. PIS & Cofins are also charged at the combined rate of 9,25% upon the grossed up CIF value plus ICMS. The IPI, ICMS and PIS and COFINS levied over imports may generate credits to be offset against outputs in the domestic market. The import duty rates and the IPI rates vary depending on the tariff classification of the imported products. The general ICMS rates over imports carried out by taxpayers established in the States of Sao Paulo and Rio de Janeiro are 18% and 16% for most products. Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 2
5. CIDE on Importation of Services, Technology Transfers and Software
Licenses
CIDE at the rate of 10% and is due on amounts paid, credited, delivered used on behalf or remitted to
non-residents as remuneration for use of rights or technology transfers or any agreement for the rendering
of technical services, administrative assistance and other similar services, as well as on payments, credit,
delivery, use or remittance for royalties at any title.
A Governmental Decree of 2001 (Decree # 3,949, dated as of October 3, 2001), listed as subject to the tax
contracts for: (i) supply of technology; (ii) technical assistance (technical assistance services and
specialized technical services); (iii) technical services, administrative assistance and other similar
services; (iv) trademark license and assignment; and (v) patent license and assignment.
On February 27, 2007, after a long debate between the Brazilian Government and the software industry,
Federal Law # 11,452 established that the CIDE should not be levied over amounts paid in consideration
for the licensing of rights to use, commercialize or distribute software programs, except if such programs
involve the transfer of the correspondent know-how.
Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 3II. CASE 1 - Direct Sales from Outside Brazil 1.1 First Scenario. A U.S. seller sells computer workstations and servers from its domicile in the U.S. The goods are shipped from the U.S. to the buyer in Brazil. A local subsidiary of the U.S. seller provides marketing and technical services to the parent company, which are remunerated at cost plus 10%. The local subsidiary places orders for the products to the parent. 1.1.1 Effects for the Non-resident Seller The non-resident seller is not subject to taxes in Brazil under this scenario . This is because the foreign resident should not have a taxable presence provided the agent does not have the powers to legally oblige the foreign resident seller. 1.1.2 Effects for the Local Subsidiary (Agent) From a federal taxes standpoint, the local subsidiary will be only subject to corporate income taxes to the extent its sole activity is the exportation of services to the parent company. This is because the gross income taxes, PIS and COFINS with combined rates of 9,25%, do not apply to exports of services. The Brazilian Constitution states that a Complementary Law also shall exempt exports of services from the ISS. Along with such constitutional provision, Complementary Law # 116/03 provided general rules on the ISS levy, stating that exports of services shall be deemed exempt provided that the result of the services occur abroad. Based on a restrictive interpretation of Complementary Law # 116/03, the 1st Panel of the Brazilian Superior Court of Appeals decided, while ruling on Special Appeal # 831124/RJ, that services performed within the Brazilian territory would necessary produce results herein and, therefore, would not qualify as services exports. In view of the above, assuming that the local subsidiary would perform the agency services within the Brazilian territory, Brazilian tax authorities would most likely require the payment of the ISS. In the Municipalities of Rio de Janeiro and São Paulo, the ISS rate over agency services is 5%. As mentioned above, a permanent establishme nt may be characterized when a dependent agent has, and habitually exercises, the authority to conclude contracts in the name of the non-resident principal, regardless of a controlled/controller relationship. On the other hand, such issue will not arise in case of business carried out though a broker, general commission agent or any other independent agent. Whenever the Brazilian agent has authority to conclude contracts on behalf of the U.S. seller, the U.S. seller may be deemed to have a permanent establishment in Brazil pursuant to Article 539 of the Brazilian Income Tax Regulations . The U.S. seller in this hypothesis is subject to have locally taxable profit imputed calculated as a percentage of the gross revenues generated by the agent (the percentage to calculate the taxable income is currently of 58.4%). Corporate income tax rates would apply to the taxable income (15% corporate income tax rate, plus 10% surtax for income exceeding R$ 240.000 per year, plus 9% social contribution on adjusted earnings). Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 4
1.1.3 Transfer pricing aspects if the agent is a related party to the U.S. seller If the Brazilian agent is a related party to the U.S. seller, the amounts of commissions received by the Brazilian agent may be subject to adjustments for income tax purposes. According to Brazilian Transfer Pricing Regulations, approved by Law No. 9,430/96, upon exports of services, goods or rights to related parties, taxpayers have to verify if transfer pricing adjustments to taxable income are applicable whenever the average sales price in such transactions is lower than 90% of the average sales price in the Brazilian market to unrelated parties during the same period and under similar payment conditions. If the average price with related parties is lower than 90% of that used with unrelated parties, the export income can be adjusted according to one of the following methods: (i) Average Price of Export Sales; (ii) Wholesale Price in the Destination Country Less Profits; (iii) Retail Price in the Destination Country Less Profits, and (iv) Acquisition or Production Cost Plus Taxes and Profits. The methods mentioned in items (ii) and (iii) above do not apply to the exportation of services. If comparables were not available, the applicable method would be the Acquisition or Production Cost Plus Taxes and Profits. This is an authentic cost plus method. Such method requires the Brazilian seller to recognize, at least, a gross profit margin of 15% (plus the costs incurred) for income tax purposes. There are regulations that allow a minimum 5% margin, which is not applicable to transactions with listed low tax jurisdictions. In fact provided the exports to related parties result in a net profit of at least 5% when the results of three years in a roll are taken in consideration, the taxpayer may not apply transfer- pricing methods to adjust its income . This is viewed as a safe harbor regulation, although not biding to the tax authorities that may reject this approach in cases it considers not adequate a 5% margin. 2. Second Scenario. A U.S. seller sells computer workstations and servers from its domicile in the U.S. The goods are shipped from the U.S. to the local subsidiary in Brazil that resells to the end customer. The local subsidiary would acquire the products with a 49% discount over the US list price. A. Effects for the Buyer/Importer From a Brazilian legal perspective, title to the goods will necessarily transfer to the Brazilian importer upon customs clearance. In order to clear the products from customs, the importer will have to pay import duty, IPI, ICMS, PIS and COFINS as described in item 1.4 above. The IPI, the ICMS, PIS and COFINS may be recovered from the subsequent sale of the imported products in the internal market. In the State of São Paulo, listed hardware products qualify for a 12% ICMS rate reduction. In the State of Rio de Janeiro, hardware manufacturers qualifying for the IPI rate reduction provided by Federal Law # 10,176/01 may also qualify for a 7% ICMS rate reduction. The local subsidiary is subject to corporate income taxes on its adjusted net profits unless it elects to pay taxes under the deemed profit system. As mentioned this system is only applicable to companies with gross income below a certain limit and is only advantageous if the net profit margin of the activity is in excess to 32%. Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 5
Customs valuation adjustments may also be necessary. For goods imported from a related party, the taxpayer might be required to demonstrate that the importation value meets the “fair” value determined by one of the customs valuation regulations. Otherwise, the tax authorities the might challenge the import value, charging import duty, IPI, ICMS, PIS and COFINS differences. Recently, there was a change in one of the Brazilian Transfer Pricing methods available on the importation of imports of goods and services. Provisional Measure n. 478/09 revoked the “Resale Price Less Profit Method” and created the “Purchase Price Less Profit Method” (PVL), which provides a minimum markup of 35% in case of importation of goods, services and rights used as raw material or to be resold. In addition, the PVL method provides that the calculation of the parameter price must cumulatively respect the following requirements: (i) be supported by purchase and sale transactions exclusively performed between unrelated parties; and (ii) the transactions utilized for purposes of the calculation must represent ate least 10% of the amount of the import transactions subject to transfer pricing rules performed by the taxpayer, in the relevante year, with respect to the imported goods, rights or services, in case the information used for calculation purposes refers to its own transactions. Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 6
III. Case 2 - Sales Licenses of Software Products The tax regime in Brazil applicable to software transactions is very complex. The classification and taxation of payments for software and related services under Brazil’s domestic laws can vary depending upon whether the transaction is treated as the license of a copyright, the sale of merchandise, or the provision of services. The classification can differ according to the tax under consideration, whether the government permits a different interpretation through the ruling process, and whether the courts have ruled on the issue. The payment of fees for software programs and software related services can be treated under domestic law as payments for the use of or for the right to use copyrights, payments for goods or merchandise, or payments for services. Such payments may be subject to the following taxes withheld on payments to the nonresident: (1) income tax; (2) municipal services tax (ISS) and (3) federal social contributions (PIS and COFINS). Where the resident entity importing the software obtains a ruling from the Income Tax Authorities to the effect that imported software is standardized and mass marketed (i.e., similar to goods or merchandise), no income tax is due; in this case however, the importation of software is subject to (1) import tax (II), (2) federal excise tax (IPI), (3) the state VAT (ICMS) and (4) federal social contributions (PIS and COFINS imposed on the full value of the software. In the absence of such a ruling, these taxes are only imposed on the media value of the software. These import duties generally do not apply to payme nts for software copyrights (e.g., reproduction royalty) or for software services (e.g., installation) unless carrier media is also transferred. With the exception of non-standardized software that can be characterized as a service provided to the custome r, in general software has been commercialized as distribution of a license of use and Case 2, under discussion is based on this assumption. Payments for both physically and electronically delivered software are subject to 15% income withholding tax. The party liable for the tax is the non-resident supplier of software (although the tax is collected and remitted by the Brazilian resident). The 15% withholding tax rate can, in theory, be lowered under an applicable tax treaty. The 2%-5% ISS also applies to payments for software programs regardless of whether provided physically or electronically. The non-resident supplier of software is liable for the ISS on the gross payment (although the tax is collected and remitted by the Brazilian resident). Also a 9.25% combined rate for PIS and COFINS is levied upon importation of software programs. The imposition of PIS and COFINS does not depend on whether the software is provided physically or electronically. Where the software is delivered physically, an 16% import duty (II), the 15% federal VAT tax (IPI), and the 18/19% state VAT ICMS generally apply to the media value of the imported software . The only difference in the case of electronic delivery is that none of the three import taxes (i.e., the 16% import duty (II), the 15% federal VAT tax (IPI), and 18/19% state VAT ICMS apply the “media value” of the software because there is no carrier media. Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 7
2.1 First Scenario - Current Commission Structure Under this scenario, the main activity of the local subsidiary is to identify potential clients and to market the parent’s software products. The software is imported directly by the customers and the local subsidiary receives a commission equivalent to a percentage of the license fee charged to the customer. 2.1.1 Effects for the Seller The Ministry of Finance Ordinance No. 181/89 expressly recognizes that payment of software license to nonresidents is deemed to be payments of copyrights. Upon remittance of the software fees to Seller, the Brazilian customer shall withhold a 15% income tax. The parties may agree that the Brazilian customer supports the tax burden, through a gross-up (by applying a 17.64% rate). In addition as mentioned above, municipal services taxes may apply depending on the laws of the specific Municipality. The non-resident supplier of software is liable for the ISS on the gross payment although the tax normally should be collected and remitted by the Brazilian resident customer. 2.1.2 Effects for the Local Subsidiary (Agent) The tax consequences for the local subsidiary receiving the commission are the same as discussed above in the case of sale of hardware under item 1.1.2. The local subsidiary is subject only to income taxes to the extent its activity is an exportation of services, because the gross income taxes, PIS and Cofins with combined rates of 9,25% do not apply to exports of services. Since the agent will perform the services locally, this may not be considered a service exported, which result is produced abroad and accordingly, the local services tax (ISS) may apply at a 5% rate in the cities of Sao Paulo and Rio de Janeiro on the amounts of commissions received. Whenever the Brazilian agent has authority to conclude contracts on behalf of the U.S. seller, the U.S. seller may be deemed to have a permanent establishment and pay taxes in Brazil. A permanent establishment may be characterized when a dependent agent has, and habitually exercises, the authority to conclude contracts in the name of the non-resident principal, regardless of a controlled/controller relationship. On the other hand, such issue will not arise in case of business carried out though a broker, general commission agent or any other independent agent. In the case at hand, transfer pricing applies to the commission received for the local distribution of the software sold directly to the customer by the parent company as commented above. Here also if comparables were not available, the applicable method would be the Acquisition or Production Cost Plus Taxes and Profits requiring the Brazilian seller to recognize a gross profit margin of 15%. In addition, in this case the safe harbor of the minimum 5% net profit margin may not apply because the company will be receiving a commission on actual sales, which is different from providing market services to the parent and adding a 5% margin to its cost. In other words, the company may even have taxable losses. Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 8
2.2 Second Scenario - Software Distribution Agreement Under this scenario, the parent enters in a software distribution agreement with the local subsidiary to license the software to local customers. The local subsidiary pays the parent a fee equivalent to a percentage of the price of the sublicense agreements. As mentioned above, this is the most common model of business adopted by software companies in Brazil. 2.2.1 Effects for the Non-Resident Parent As mentioned above, the parent licensor is subject to withholding income taxes and municipal services tax. In fact the payments for both physically and electronically delivered software are subject to 15% income withholding tax if not lowered under an applicable tax treaty. The 2% to 5% ISS tax also applies to payments for software programs regardless of whether provided physically or electronically. 2.2.2 Effects for the Buyer/Importer Pursuant to the Ministry of Finance Ordinance No. 181/89, only the carrier media bearing software will be subject to import duties and other taxes levied upon importation, provided that the commercial invoice states the value of the carrier media separately from the value of the software. Therefore, under the regular import procedure, the Brazilian importer would be subject to the following taxes over the carrier media (diskettes, CD-ROMs, etc.): (i) import duty (“11”) at a 16 % rate over the CIF value; (ii) federal excise tax (“IPI”) at a 15% rate over the CIF plus II, and (iii) state value-added tax (“ICMS “) at a 18% rate over the CIF plus II plus IPI (ICMS rates vary from State to State; in the State of Sao Paulo the applicable rate is 18% over twice the value of the carrier media). Further to Ordinance No. 181/89, there is also Decree No. 2,498 of February 13, 1998, which regulates the application of the WTO Valuation Agreement. Article 20 of Decree No. 2,498/98 makes specific reference to Decision 4.1 of the GATT Valuation Committee and provides that the customs value of the carrier media containing data or instructions for data processing equipment shall be determined solely on the value of the carrier media, provided that the value of the data and instructions is separately stated in the acquisition document. On paying the license fees the Brazilian subsidiary in addition to withholding the 15% income tax, ISS varying from 2 to 5%, depending on where licensee is located, and to the 9,25% PIS and COFINS. Transfer pricing issues will also apply to the fee payment to the parent. 2.2.3 Just-in-Time Sales The U.S. seller may opt to export the products for deposit in a bonded warehouse in Brazil. The goods remain deposited in the bonded warehouse in the name of the U.S. seller and either a Brazilian subsidiary or directly the customer may act as the importer of the goods deposited. Under the bonded warehouse regime, imported products are stored in an authorized place and the payment of taxes is deferred (import duty, IPI, PIS, COFINS and ICMS). For tax purposes, the storing of products in the bonded warehouse does not correspond to an importation process fully carried out. This will occur only upon removal of the products from the bonded warehouse, Baker & McKenzie Cross-Border Buy-and-Sell Transactions - Brazil 9
on which occasion they will be considered nationalized products. Only then all taxes levied on the
importation will be due. With respect to products to be exported or re-exported directly from the bonded
warehouse, no import taxes and duties will apply.
The use of this system offers a number of advantages, such as:
(i) the duties and taxes will only be due upon removal of the products from the bonded warehouse
(nationalization), if any;
(ii) the products will be at the importer’s disposal, in the country, with the possibility of being
exported to other countries without being nationalized;
(iii) the goods may remain in the bonded warehouse for the period of one year, renewable for a
maximum term of three years.
The operations with bonded warehouses allow the exporter to mainta in legal title to the products
deposited until customs clearance. The parties involved in operations with bonded warehouses:
(i) consignor: the foreign exporter of the goods to be deposited in the bonded warehouse;
(ii) consignee: the importer;
(iii) depositary bailee: the company authorized to operate a bonded warehouse, responsible for the
safekeeping of the goods deposited, and
(iv) purchaser: the legal entity who purchases goods deposited in the bonded warehouse (the
purchaser and the consignee may be the same entity depending on the structure of the specific
operation).
Goods that are shipped to Brazil for deposit in a bonded warehouse must be accompanied by a pro-forma
invoice that expressly states (i) that the goods will be deposited in a bonded warehouse upon arrival in
Brazil; and (ii) that the goods do not have foreign exchange coverage .
For removal of the goods from the bonded warehouse, a definitive invoice will be issued with exchange
coverage . Payment for the goods will be remitted abroad based on the definitiv e invoice.
Although the foreign exporter will retain legal title to goods deposited in a bonded warehouse, the
Brazilian consignee will be responsible for those goods until they are nationalized; as a result, the
consignee will also be responsible for paying the applicable storage fees.
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