By six votes to four, the 1st Panel of the Superior Chamber of Carf granted the appeal of ArcelorMittal Brasil S/A, removing the incidence of Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on profits earned by a controlled or affiliated company abroad.
The majority of the advisors understood that the taxation of the amounts, provided for in article 74 of Provisional Measure (MP) 2158-35/2001, is incompatible with article 7 of the model convention of international treaties to avoid double taxation, which provides for taxation only in the country where the subsidiary or affiliated company is headquartered.
With this decision, the Superior Court consolidates a position favorable to the taxpayer adopted for the first time in August, in the trial of cases 16643.720059/2013-15, involving Ambev, and 16643.720045/2013-00, involving Pallas Marsh Serviços Ltda. At the time, the decision was 5-3 to eliminate taxation on profits abroad. Since then, counselors Guilherme Mendes and Ana Cecília Lustosa have joined the group.
In this specific case, the companies linked to the taxpayer are located in Argentina and the Netherlands, countries that have signed treaties to avoid double taxation with Brazil. The taxpayer's lawyer, Daniel Monteiro Peixoto, from Machado Meyer, argued that international treaties to avoid double taxation contain a rule of exclusive jurisdiction for taxation. In the lawyer's understanding, Article 7 establishes that the jurisdiction to tax or not the company's results is the Argentine or Dutch jurisdiction.
CFC
The representative of the Office of the Attorney General of the National Treasury (PGFN), Moisés de Sousa Carvalho Pereira, argued that what is taxed in Brazil is not the profits of the subsidiary or affiliate, but rather their impact on the results of the Brazilian company. He also said that, in the view of the PGFN, article 74 of MP 2.158-35 is a CFC rule. The acronym CFC refers to controlled foreign company. The purpose of the CFC rules is to prevent the diversion of profits to companies created in tax havens or countries with more favorable taxation.
The rapporteur, former councilor André Mendes de Moura, had already voted to deny the taxpayer's appeal. Councilor Lívia de Carli Germano dissented. The judge understands that international treaties to avoid double taxation establish a rule of jurisdiction, that is, only the country where the subsidiary or affiliated company is headquartered has jurisdiction to apply taxation.
Counselor Guilherme Mendes, who had requested to review this and other proceedings on the subject in the previous session, stated that, after delving deeper into the matter, he maintained the understanding he had when he was a member of the ordinary panels, that article 7 of the treaties does not exclude the taxation provided for in article 74 of MP 2158-35. He agreed with the Treasury's interpretation that article 74 is a CFC rule in nature.
“At no point is [the CFC rule] expressly set aside by any of the rules set out in the model convention [of double taxation treaties]. There is a rationale for not blocking CFC rules in the treaties,” he argued. However, the majority of the advisors agreed with the divergence.
The process runs under number 10600.720035/2013-86.
Other processes
Also on Tuesday morning, the councilors decided in favor of the taxpayer in the trial of process 16561.720090/2014-47, on the same subject, of Mosaic Fertilizantes P&K Ltda. In this case, however, the decision was made by a tiebreaker in favor of the taxpayer.
The reason is that, in the specific case, it was proven in the records that the taxpayer was not taxed in the Netherlands, a country that signed a treaty to avoid double taxation with Brazil.
The rapporteur, counselor Lívia de Carli Germano, stated that the information does not affect her position on the matter. The judge emphasized that, in her view, the international treaty establishes a rule of jurisdiction, indicating that the jurisdiction for collecting the tax is the Netherlands. Therefore, in the rapporteur's view, it is up to that country to decide, and may even not tax the amounts.
However, the president of the panel, Carlos Henrique de Oliveira, changed his vote in light of the data, to deny the taxpayer's appeal. "In this specific case, I will deny the taxpayer's appeal due to the lack of taxation in the country with which Brazil signed the treaty," he stated.
Finally, in the trial of case 16539.720011/2014-85, involving Belgravia Serviços e Participações S/A, the panel ruled out, by six votes to four, the taxation in Brazil of profits from a subsidiary or affiliate located in Portugal. The taxpayer proved that the profit had already been taxed in that country. In the case of a company with a subsidiary in Ecuador, no taxes were collected in that country. The charge was also ruled out, but due to a tiebreaker in favor of the taxpayer.