Can the matrix company pay for the goods purchased by the Brazilian subsidiary/affiliated company?

One more of my series of e-mail replies:

Hello,

I was doing a search on a type of tax in Brazil, and I came across your blog. It is very helpful-- thank you for sharing! I have a tax question that I can't seem to find the answer to, and I was hoping that maybe you knew the answer. I left this question as a comment to one of your blog entries, but I also thought I should email just in case.

I am trying to find out the tax consequences for the following scenario:

A U.S. company has a subsidiary located in Brazil. The subsidiary engages in some sort of sales transaction with a vendor (say, for office supplies), also located in Brazil. The goods purchased are to be used by the subsidiary located in Brazil, but the goods will be paid for by the U.S. parent company.

Do you have any idea what the tax consequences would be for the U.S. parent, Brazilian subsidiary, and vendor on this type of transaction? I am aware of taxes for a loan from a foreign company, but I need to know the tax consequences for a transaction like the one above that doesn’t involve a loan.

Thank you very much for your help!

Best Regards,

Isolde

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Dear Isolde,

Thank you for your comments.

I have replied your answer in the blog, but thought that a direct email would also be a good idea.

The right thing to do is to send the money directly to the Brazilian subsidiary. The money shall be declared before the Brazilian Central Bank either as capital or as a financial loan.

For a series of reasons, a local vendor in Brazil cannot receive foreign payment for goods sold inside Brazil. In this case, the vendor would be obliged to export the goods, which is not what you want.

I would be glad to help you with the capital registration.

By the way, what kind of subsidiary is that? A Brazilian company with foreign capital?

Warm regards,

Adler

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Adler,

The Brazilian company is a wholly owned subsidiary of a foreign parent. Does this answer your question? The foreign parent wishes to directly pay a vendor in Brazil who provides goods or services to the wholly owned Brazilian subsidiary. If this is not permitted, can you please explain why? 

Thanks again for your help!

Best,

Isolde

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Dear Isolde,

This is, how can I say, legally awkward due to tax declaration procedures.

In your example, the supplier in Brazil would be donating goods to a local company and receiving a payment from abroad.

Or, in other terms, the local supplier would receive payment from abroad with orders to deliver the goods to a local company.

The local supplier would have to issue an invoice. The invoice cannot be issued against the local company, because it is not the real buyer. It would have to be issued against the foreign company.

If the foreign company orders the delivery to be made in Brazil, then OK, this might work.  But it would indicate that the foreign company has an office in Brazil, which is not the case.

Also, how would the local subsidiary declare this in its books? As donation? It cannot be declared as foreign capital, because it has not come though the Central Bank.

On the other hand, declaring it as a donation is incorrect (not true), because I'm sure the matrix company will declare that this expense is an investment.

So, to sum it up: this might work to purchase 2 thousand dollars in office supplies once, but it is a completely irregular arrangement that cannot be used for regular operations, or at all.

Regards,

Adler

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Adler,

I am just getting your emails. Thank you very much for your help.

I greatly appreciate it! I have forwarded this information to my boss, along with your contact information. Because there are many complications, I am not sure if he will decide to pursue the situation further, but if he does, he may be emailing you. 

Thank you again!

Take Care,