0% withholding tax on services - if you are from the right country

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Selling Engineering services in Brazil

Taxation of software importation by end users in Brazil

The IRS has recently changed its understanding on the income tax levied on the payments of services imported into Brazil from companies abroad.

The previous rule required the payment of withholding income tax over payments for technical services provided by foreigners, even if the provider were located in countries that had signed Non-Double Taxation Agreements with Brazil.

Instead of that, the IRS determined a new set rules. 

From now on, the technical services paid to countries with which Brazil has Non-double taxation agreements will receive the same tax treatment the NDTA provides for:

a) Royalties: whenever the Agreement expressly provides that technical services shall receive such treatment, in the event the Agreement authorizes the taxation in Brazil;

b) Independent jobs and services: whenever the technical service consists in a technical training or similar; in the event the Agreement authorizes the taxation in Brazil and except the above condition;

c) Profits: when none of the above conditions apply.

In other terms: you may collect less income tax when selling services to Brasil, since income originating from services might be treated as profits and thus become exempt form taxation. 

In most cases, however, services continue to be taxed as Royalties or independent professional services at rates ranging between 10% and 25%.

Remember that this taxation refers only to income tax. Other taxes on services import remain applicable.

In order to facilitate your comprehension of this change, our team conducted a thorough study of all Non-double taxation agreements and conventions in force in Brazil today. The result follows:

Payments to Austria, Finland, France Japan and Sweden

- Technical training services (and only training), will be taxed at the rate of 15%.

- Other technical services (including consulting, engineering services, etc.) will be treated as profits, therefore no withholding tax will be charged.

The change in relation to these four countries is the real innovation brought by the new understanding of the IRS.

It is no coincidence that many providers of services to Petrobras come from France, and that several big Brazilian companies have financial centers in Austria.

There is no specific position on the taxation of payments for software licensing. It is not known whether they will continue to be taxed at 15%, as predicted by specific legislation, or if the license can be purchased from the four countries listed here without the imposition of income tax.

Payments to Israel, Mexico 

The interpretation regarding the taxation of payments remitted to these countries is controversial. 

Despite these NDA prescribe an equivalence between royalties and technical services, these agreements have a clause of "most favored nation" that demands the isonomic treatment of such countries to other countries with Non-double taxation agreements.

Thus, our interpretation is that:

- Technical training services (and only training), will be taxed at the rate of 15%.

- Other technical services (including consulting, engineering services, etc.) will be treated as profits, therefore no withholding tax will be charged.

However, it is necessary to emphasize that this is merely an interpretation and one should wait for futher IRS comments.

Payments to other countries 

(South Africa, Belgium, Canada, Chile, China, Korea, Denmark, Ecuador,

Spain, Philippines, Hungary, India, Italy, Luxembourg, Norway, Netherlands, Peru,

Portugal, Slovak Republic, Czech Republic , Turkey, Ukraine)

Those agreements expressly state the equivalence of technical services and royalties and do not include a clause of "most favored nation". 

the taxation of payments remitted to them is unchanged.

Furthermore, we emphasize that this decision is very recent and the Brazilian Federal Revenue may amend or may change its interpretation.

Once again, we highlight the changes presented regard solely to income tax and do not affect other taxes on services import.

Eike Batista's OGX Austria and OGX Netherlands: left out of bankruptcy, but why do they exist? Also: Brazilian timid take on transnational jurisdiction

READ ALSO:  Has Eike and the "X" group mislead investors? My analysis

Brazilian (not so) timid take on transnational jurisdiction: OGX Austria included in the Brazilian bankruptcy

As you might have seen, OGX Offshore Units have been Left Out of Bankruptcy Case by Brazil Judge. 

The news is very interesting, specially for those who might have obtained collateral from any of the offshore units. 

But I'd like to start from another angle: Why does OGX has subsidiaries in non-oil-producer  European countries? And why the Netherlands and Austria?  (I'm not sure if OGX's subsidiary in the Netherlands is really excluded from Bankruptcy. The reports vary. I will assume it is excluded).

The answer: Non-double taxation agreements (NDTA). Plus, of course, Dutch benevolent corporate tax laws.

Brazil has precious too few NDTA. Over time, the use of Austria and Netherlands turned into the industry's standard. This is because Austria has a good standing in the European financial market. And because the NDTA with Netherlands allows for a tax planning resembling a "Dutch Sandwich". 

Most companies will direct profits to the Netherlands, use them to increase the capital of the Dutch company, then reduce that capital and repatriate the surplus.

Also, Austria is a beautiful place and I think the lawyers that first advised this kind of structured (back in 1975) enjoyed traveling there. 

Back to the bankruptcy procedure: 

Quick tip: The media has been referring to it as a bankruptcy, but it is actually a judicial recovery, similar to a judicial reorganization or to an arrangement with creditors. 

I only had access to an abridged version of the decision, so I can't lay out all the legal basis the judge has adopted. But I can make an educated guest. 

First, the Brazilian law on bankruptcy does not cover foreign subsidiaries specifically. It has some provisions about debts and credits in foreign currency, and about consolidated debts of the group, but does not go so far as including foreign related companies to the procedures. 

Second, Brazilian general procedural rules are very cautious when dealing with extraterritorial competence. In general terms, only companies with a permanent place of business in Brazil (or, at leas, a fixed representative here) can be included in litigation procedures as if they were nationals.
Third, the judge has claimed that including foreign subsidiaries in the Brazilian bankruptcy would amount to piercing the corporate veil.  He didn't elaborate much, but I think his reasoning was that doing so would be unfair to other foreign partners who might participate in the OGX Austria, for example. Also, the arbitrary inclusion of foreign controlled companies could pave the way for the inclusion of foreign investors in the bankruptcy. This would generate and absurd jurisprudence, that could upset markets and make Brazil an undesired place for the world's money. 

I think the Judge was right. Let's see what the court of appeal will say about it. 

Proud about tax planning: Google and me

Google's boss has just said that he is proud of Google's tax avoidance strategy (see below)

I'm also proud of Google's strategy to dodge taxes. That is what I do for a living and I must say that Google's lawyers have created a beautiful work of art when doing the company's tax planning. It is all there: offshore companies, subsidiaries, Dutch sandwich, money centers, tax havens. Bravo!

But Google must take UK and America's threats of taxing them seriously. They may look at Brazil and find out that the Brazilian government has seriously limited the use of offshore companies and tax havens by automatically taxing any gains from foreign subsidiaries the moment they are put on the books, and not when they are transferred to the controlling company (this last option would be the most usual in the civilized world).

Vale, the mining company, is waiting for a judgment on the legality of the Brazilian awkward (by awkward I mean unjust and crazy) tax regime. Some 15 billion US dollars are being claimed by the government. (By the way, check the development of a similar case here)

In order to avoid this kind of taxation, Brazilian companies are now making heavy use of the few Non double taxation agreements that Brazil has signed. Austria is a personal favorite, but the Netherlands are very popular.

Google, don't let the government be evil! Dodge the dogs and lions.

By the way, if you are a Brazilian individual with more than 40k USD on a bank, I'd recommend you to move your money abroad. Brazilian government has too much control over it, and the online system for money seizure is a real letdown for any businessman.

NOTE: For the pro government intervention readers (which should be none), here is the opposite view: http://treasureislands.org/google-boss-eric-schmidt-takes-a-dim-view-of-capitalism/.

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Google boss: I'm very proud of our tax avoidance scheme

Google's Chairman Eric Schmidt said £2.5 billion tax avoidance 'is called capitalism'

From:http://www.independent.co.uk/news/uk/home-news/google-boss-im-very-proud-of-our-tax-avoidance-scheme-8411974.html

The head of the internet giant Google has defiantly defended his company’s tax avoidance strategy claiming he was “proud” of the steps it had taken to cut its tax bill which were just “capitalism”.

In an interview in New York Eric Schmidt, Google’s Chairman, confirmed the company had no intention of paying more to the UK exchequer. Documents filed last month show that Google generated around £2.5 billion in UK sales last year but paid just £6m in corporation tax.

The Californian based search giant has also been revealed to have sheltered nearly $10bn of its revenues in Bermuda allowing it to avoid some $2bn in worldwide income taxes in 2011.

But Mr Schmidt said such schemes were legitimate and the company paid taxes “in the legally prescribed ways”.

“I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate,” he said.

The Silicon Valley boss went on to suggest that Google would not turn down the opportunity to draw on the big savings allowed under the law in the countries it operates in: “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”

He also ruled out following Starbucks in voluntarily handing more money over to the UK Government.

“There are lots of benefits to [being in Britain],” he said.

“It's very good for us, but to go back to shareholders and say, 'We looked at 200 countries but felt sorry for those British people so we want to [pay them more]', there is probably some law against doing that.”

Mr Schmidt’s defiant stance is unlikely to find favour on either side of the Atlantic with both the American and European Governments searching to find ways of forcing “stateless” internet companies such as Google to pay more tax.

The issue will be raised by George Osborne when Britain takes over the chairmanship of the G8 and will also be investigated by the Organisation for Economic Co-operation and Development (OECD).

Last week the Chancellor said he was committed to “leading the international effort” to prevent international companies transferring profits away from major economies, including Britain, to tax havens.

“We will put more resources into ensuring multi-national companies pay their proper share of taxes,” he said. “With Germany and now France, we have asked the OECD to take this work forward and we will make it an important priority of our G8 Presidency next year.”

Tonight Margaret Hodge, chairman of the powerful House of Commons Public Accounts Committee, which recently cross examined Google UK on its tax affairs said Mr Schmidt should be ashamed rather than proud of his company’s tax bill

“For Eric Schmidt to say that he is ‘proud’ of his company’s approach to paying tax is arrogant, out of touch and an insult to his customers here in the UK,” she said.

“Ordinary people who pay their taxes unquestioningly are sick and tired of seeing hugely profitable global companies like Google use every trick in the book to get out of contributing their fair share.

Google should recognise its obligations to countries like the UK from which it derives such huge benefits, and pay proper corporation tax on the profits it makes from economic activity here. It should be ashamed, not proud, to do anything less.
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