International treaties to avoid double taxation are being redesigned. The most recent agreements signed by Brazil with Singapore, Switzerland and the United Arab Emirates bring changes that, according to experts, align the country with BEPS (Base Erosion and Profit Shifting), a plan by the Organization for Economic Cooperation and Development (OECD) with the support of the G20 to avoid the transfer of profits to low-tax countries. Tax experts told JOTA that the changes bring Brazil into line with international tax cooperation and increase predictability and legal certainty for investors.
The changes include the classification of Interest on Equity (JCP), defined as interest and not dividends, in addition to who is entitled to the benefits provided for in the treaty, providing for the exclusion of companies if it is concluded that the main objective of a business arrangement or transaction was to obtain a tax benefit.
On the other hand, another change, which is the definition of what can be classified as a technical service, does not follow the OECD Model Convention, but the UN Model Convention for international treaties to avoid double taxation. According to experts, the change tends to reduce tax disputes in Brazil, but does not bring the country closer to the rules adopted by the OECD, since the member countries of the group do not tax technical services.
The three agreements were signed in 2018. The treaties with the United Arab Emirates and Switzerland were internalized (incorporated into Brazilian legislation) in 2021, and with Singapore, in 2022, after approval by the Senate and sanction by the President of the Republic, Jair Bolsonaro.
According to Daniel Franco Clarke, from the tax department at Mannrich e Vasconcelos, there is a trend towards Brazil reviewing treaties to adapt to BEPS. “[Brazil] is effectively renegotiating [treaties] to review points within the BEPS context,” he says. In addition to the agreements with the United Arab Emirates, Switzerland and Singapore, he says that the treaty with Uruguay, signed in 2019 but not yet internalized, followed the same guideline.
For Marcos Matsunaga, partner at Ferraz de Camargo e Matsunaga, the updates are related to Brazil’s adaptation to international tax cooperation measures. “Brazil has a relatively small and old network of treaties. We can include these last three within a change in the last 10, 15 years, in which the country is trying to increasingly insert itself in this movement of cooperation between global tax authorities.”
The lawyer notes that Brazil must promote further changes to the network of treaties, due to its intention to become a member of the OECD, and also to BEPS 2.0, a new phase of discussions of the BEPS project. “BEPS 2.0 has two pillars. The first is about how to tax the digital economy, especially big techs, and the second, about the issue of the minimum of 15%, that is, no company will have a tax burden on income higher than 15%”, he comments.
JCP and right to benefits
According to Georgios Theodoros Anastassiadis, a partner in the tax department at Gaia Silva Gaede, the changes related to JCP and who can benefit from the treaty's benefits aim to curb tax evasion through aggressive tax planning. In the case of JCP, according to him, by making it clear that it is interest, the treaties seek to avoid a situation of double non-taxation, that is, that the amounts escape taxation in Brazil and abroad.
“Brazil considers interest and deducts it [from the IRPJ calculation base], but abroad, it was considered a dividend and did not pay [tax] either. The controlling company that invests in the Brazilian subsidiary and receives JCP could treat it as a dividend, but, with the treaty, it must also treat it as interest. [The other country] is bound, the treaty is law for both countries,” he notes.
Marcos Matsunaga makes a similar assessment. “The JCP deals with what people call hybrid instruments. It would be a figure in which one country treats it one way and another another way. Brazil treats it as interest and many countries treat it as dividends. It could lead to situations of both double non-taxation, in most cases, and eventually double taxation,” he says.
In the case of defining who is entitled to the benefits provided for in the treaty, with the possibility of excluding companies if it is concluded that a certain arrangement or transaction is intended to benefit from the tax benefit, Georgios Anastassiadis says that this is a compliance instrument. “It is defining who is entitled to the benefit so that no one uses the treaty irregularly,” he comments.
Daniel Clarke says that the amendment brings Brazil closer to the BEPS requirements. “It is a benefit limitation clause. Basically, it gives the tax authority a margin of discretion to analyze and conclude whether the transaction was only made to benefit from a certain article of the treaty. It is in compliance with the minimum BEPS rules. Brazil is adapting to a less distorted international investment environment.”
Technical services
Experts also point out that the definition of what would fall under the category of technical services, as set out in the new treaties, seeks to put an end to the dispute between tax authorities and taxpayers over which expenses would be deductible from corporate profits, the taxation of which is regulated in Article 7 of the international treaties. Thus, in practice, the definition is unfavorable to taxpayers, who are discussing the taxation of technical services in court and at the Administrative Council for Tax Appeals (Carf).
Daniel Clarke notes that the inclusion of a specific provision on the taxation of technical services is in line with Article 12-A of the UN Model Convention on international treaties for the avoidance of double taxation.
According to the lawyer, the definition incorporated into the treaties is in line with the Federal Revenue Service's understanding of the subject. “It is a very broad definition, which encompasses any payment for services of a managerial, technical or consulting nature. We do not have a definition of what technical services are in law. Taxpayers argue that, if the treaty does not state what a technical service is, even if there is an equivalence [of services] to royalties, there should only be taxation if there is a transfer of technology”, he says.
Georgios Anastassiadis, from Gaia Silva Gaede, also considers the definition broad. “In the old [treaties], there was a protocol equating technical services to royalties. The newer ones are introducing this article 13, stating that, when a country pays for a technical service, it can be withheld in Brazil up to the limit of 10% [referring to Income Tax]. The Brazilian tax rate is 15%. Practically every service you pay for will fall under this article 13”, he says.