Texto para “Tax Notes International”, Volume 79, Number 3 – July 20, 2015.
Autor: Bruno Fajersztajn
Ramon Tomazela Santos
CONTRADICTORY BRAZILIAN DECISIONS ON THE TAXATION OF COST- SHARING AGREEMENTS
Cost-sharing agreements are commonly used by companies from the same corporate group to promote the apportionment and reimbursement of costs and expenses incurred for their common benefit. They optimize resources and reduce overall costs and expenses, thereby increasing the efficiency of the corporate group.
After a period of contradictory positions, the General Coordination Office for the Federal Revenue Taxation System (COSIT) issued Dispute Resolution Ruling No. 23/2013, which consolidated tax authorities’ official opinion on the tax aspects of cost-sharing agreements. However, recent COSIT decisions (Tax Rulings n° 21/2015 and No. 43/2015) in response to taxpayer inquiries contradict Dispute Resolution Ruling No. 23/2013, thus raising doubts regarding the tax treatment of cost-sharing agreements.
Taxation of Cost-Sharing Agreements
Initially, in the Answer to Advance Tax Ruling Request n°. 8/2012, COSIT held that the administrative expenses allocated to companies under a cost-sharing agreement can be deducted from the tax bases of the corporate income tax (CIT) and the social contribution on net profits (SSC) if:
• the expenses demonstrably correspond to goods and services effectively paid and received;
• the expenses are necessary, usual, and normal in the companies’ activities;
• the apportionment occurs through reasonable and objective criteria previously adjusted and properly formalized by a contractual instrument signed by the parties;
• the apportionment criterion is consistent with the effective expense of each company and with the global price paid for goods and services, in compliance with the general accounting principles; and
• the company responsible for centralizing the acquisitions of goods and services appropriates as expense only the portion that it is entitled to under the apportionment criterion.
In the same decision, COSIT said that amounts remitted to the nonresident company as reimbursement of shared expenses are not subject to transfer pricing rules, provided that the cost-sharing agreement fulfilled its usual characteristics. Thus, to avoid the application of transfer pricing rules, the cost-sharing agreement will basically have to allocate the costs and risks inherent to the development, production, or acquisition of goods, services, or rights, consistent with the individual benefits expected or effectively received by each company. Also, the amount of the reimbursement costs must correspond to the effort or sacrifice effectively incurred in conducting the activity without any additional profit margin.
COSIT decided that only internal cost-sharing agreements by the parent company are not subject to withholding tax. COSIT said that for external cost-sharing agreements, in which the services centralized at the level of the parent company are outsourced to third parties, the amounts remitted are subject to withholding tax levied on the services actually rendered by the third parties. In that situation, the tax authorities concluded
that the parent company acts as a passthrough entity that simply collects the financial resources of all companies of the corporate group without changing the legal nature of the service provided by the nonresident third party.
COSIT then issued Dispute Resolution Ruling n° 23/2013 addressing the tax aspects of cost-sharing agreements, in which it reiterated that the costs and expenses that are necessary, normal, and usual for the operation of each company of the corporate group can be deducted from the tax bases for CIT and SSC. It also said the parent company must control the common expenses on separate accounts and sign a contractual instrument establishing clear and objective rules on the criteria for the allocation of the expenses among the companies of the corporate group.
Dispute Resolution Ruling n°. 23/2013 also stated that in domestic transactions, the amounts received as reimbursement of expenses (recovered amounts) are not subject to the Contribution for the Financing of Social Security (COFINS) and the Contribution for Social Integration program (P.I.S.). Although the decision analyzed a cost-sharing agreement signed among companies located in Brazil, COSIT’s conclusion represented an important official pronouncement of the tax authorities on the matter because it recognized that the recovered amounts are not a revenue source for the parent company because of the lack of economic gain.
More recently, in Tax Ruling No. 21/2015, COSIT rendered an important decision on whether the taxpayer has the obligation to enter cost- sharing agreements in SISCOSERV, an electronic system developed by the Brazilian government to monitor cross-border transactions involving services and intangibles. In a well-grounded decision, COSIT pointed out that costsharing agreements are guided by a collaborative principle in which the purpose of obtaining profit is not present.
On the contrary, the provision of services occurs in a competitive, free-market economy based on external price pressure and the objective of generating profits. Pointing to that distinction, COSIT concluded that cost- sharing agreements should not be entered in SISCOSERV.
Until now, those COSIT decisions have been highly praised by tax practitioners because they are correct interpretations of Brazilian tax law.
The Tax Authority Changes Its Mind
However, the recent COSIT Tax Ruling n° 43/2015 surprised tax practitioners with an unexpected change in the tax treatment of cost-sharing agreements. COSIT decided that amounts remitted to nonresidents via internal cost-sharing agreements are subject to withholding tax levied on the provision of services and to the Contribution for Intervention in the Economic Domain (CIDE), a tax levied on technical services or administrative assistance.
Tax Ruling n°. 43/2015 contradicts COSIT’s previous decisions and should be criticized, given that internalcost-sharing agreements involve neither the provision of services nor a profit margin accrued at the parent company level. Moreover, COSIT also mistakenly equated internal and external cost- sharing agreements, stating that it is irrelevant whether the activities that generated the costs shared were performed directly by employees of the company (internal costs) or by third parties (external costs).
At first sight, it would appear that COSIT is correct, because Brazilian tax authorities do not have jurisdiction to analyze costs incurred abroad by the parent company to check whether it charges from other companies in the corporate group only the costs incurred or also an additional profit margin.
Withholding tax is assessed on gross amounts, without the ability to deduct any costs. However, that does not rule out that cost-sharing agreements do not constitute a provision of services, but rather a specific contractual instrument guided by a collaborative principle. Thus, in the absence of a service activity, the actual taxable events necessary to trigger withholding tax and CIDE do not occur, and as a result, the tax authorities cannot charge those taxes on cost-sharing amounts.
Even more surprisingly is that despite the contradictory positions, COSIT did not revoke its previous decisions on the matter, as usually occurs when the tax authorities modify their formal understanding on a tax topic.
Conclusion
Tax Ruling n°. 43/2015 contradicts COSIT’s longstanding view on the taxation of cost-sharing agreements, giving rise to doubts and uncertainties regarding the issue, at least from the perspective of the tax authorities.
That uncertainty stems from the fact that COSIT decisions in Answer to Advance Tax Ruling Requests or Dispute Resolution Rulings have binding effect on all tax officials of the Federal Revenue Office, regardless of which taxpayer initiated the administrative procedure, as set forth in article 9 of Normative Instruction n° 9/2013.
Another difficulty caused by the new decision arises from the application of contradictory legal reasoning on the same subject (cost-sharing agreements) depending on the kind of tax analyzed by the tax authorities (CIT, SSC, P.I.S., COFINS, withholding tax, and CIDE). That leads to a situation in which
— because of binding effect and lack of repeal of previous decisions — tax authorities will have to adopt contradictory positions:
• based on Dispute Resolution Ruling No. 23/2013, the tax authorities will have to accept that amounts received as reimbursement of expenses under a cost-sharing agreement are not subject to P.I.S. and COFINS because they do not represent taxable revenue; and
• at the same time, based on Tax Ruling n° 43/2015, the tax authorities will have to charge withholding tax and CIDE on amounts remitted to nonresidents as reimbursement of expenses, even though that value does not constitute revenue from the provision of services.
The adoption of those contradictory positions is not consistent with many excellent and technical COSIT decisions on several tax subjects that benefit taxpayers and tax practitioners in general, who have the opportunity to know in advance, and with reasonable certainty, the position followed by the tax authorities on a specific matter. For that reason, it is unclear whether the new
decision results from a misunderstanding of tax law or political pressure within the public body.
How administrative and judicial bodies will face that challenging question remains to be seen; perhaps litigation on the topic will yield some answers.
