Contradictory Brazilian decisions on the Taxation of Cost-Sharing Agreements

1. Contradictory Brazilian Decisions on
The Taxation of Cost-Sharing
Agreements
by Bruno Fajersztajn and Ramon Tomazela
Reprinted from Tax Notes Int’l, August 10, 2015, p. 535
Volume 79, Number 6 August 10, 2015
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2. Contradictory Brazilian Decisions on the Taxation of
Cost-Sharing Agreements
by Bruno Fajersztajn and Ramon Tomazela
Cost-sharing agreements are commonly used by
companies from the same corporate group to pro-
mote the apportionment and reimbursement of costs
and expenses incurred for their common benefit. They
optimize resources and reduce overall costs and ex-
penses, thereby increasing the efficiency of the corpo-
rate group.
After a period of contradictory positions, the Gen-
eral Coordination Office for the Federal Revenue Taxa-
tion System (COSIT) issued Dispute Resolution Ruling
No. 23/2013, which consolidated tax authorities’ offi-
cial opinion on the tax aspects of cost-sharing agree-
ments. However, recent COSIT decisions (Tax Rulings
No. 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 Re-
quest No. 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 com-
pliance with the general accounting principles;
and
• the company responsible for centralizing the ac-
quisitions of goods and services appropriates as
expense only the portion that it is entitled to un-
der the apportionment criterion.
In the same decision, COSIT said that amounts re-
mitted 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 inher-
ent to the development, production, or acquisition of
goods, services, or rights, consistent with the individual
benefits expected or effectively received by each com-
pany. Also, the amount of the reimbursement costs
must correspond to the effort or sacrifice effectively
incurred in conducting the activity without any addi-
tional profit margin.
Bruno Fajersztajn is a partner and Ramon
Tomazela is a senior tax associate with Mariz
de Oliveira e Siqueira Campos Advogados in
São Paulo.
In this article, the authors analyze recent deci-
sions by the General Coordination Office for
the Federal Revenue Taxation System, which
have reignited the debate on the taxation of
cost-sharing agreements in Brazil.
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3. COSIT decided that only internal cost-sharing agree-
ments by the parent company are not subject to with-
holding 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 withhold-
ing tax levied on the services actually rendered by the
third parties. In that situation, the tax authorities con-
cluded 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 nonresi-
dent third party.
COSIT then issued Dispute Resolution Ruling No.
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 com-
mon expenses on separate accounts and sign a contrac-
tual 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 No. 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 deci-
sion analyzed a cost-sharing agreement signed among
companies located in Brazil, COSIT’s conclusion repre-
sented 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 tax-
payer has the obligation to enter cost-sharing agree-
ments 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 cost-
sharing agreements are guided by a collaborative prin-
ciple 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 No. 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 No. 43/2015 contradicts COSIT’s previ-
ous decisions and should be criticized, given that inter-
nal cost-sharing agreements involve neither the provi-
sion of services nor a profit margin accrued at the
parent company level. Moreover, COSIT also mistak-
enly equated internal and external cost-sharing agree-
ments, 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 jurisdic-
tion to analyze costs incurred abroad by the parent
company to check whether it charges from other com-
panies in the corporate group only the costs incurred
or also an additional profit margin.
Withholding tax is assessed on gross amounts, with-
out the ability to deduct any costs. However, that does
not rule out that cost-sharing agreements do not consti-
tute a provision of services, but rather a specific con-
tractual 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 contradic-
tory positions, COSIT did not revoke its previous deci-
sions on the matter, as usually occurs when the tax
authorities modify their formal understanding on a tax
topic.
Conclusion
Tax Ruling No. 43/2015 contradicts COSIT’s long-
standing view on the taxation of cost-sharing agree-
ments, giving rise to doubts and uncertainties regarding
the issue, at least from the perspective of the tax au-
thorities.
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, regard-
less of which taxpayer initiated the administrative pro-
cedure, as set forth in article 9 of Normative Instruc-
tion No. 9/2013.
Another difficulty caused by the new decision arises
from the application of contradictory legal reasoning
on the same subject (cost-sharing agreements) depend-
ing 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
PRACTITIONERS’ CORNER
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4. of binding effect and lack of repeal of previous deci-
sions — tax authorities will have to adopt contradic-
tory 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 No. 43/
2015, the tax authorities will have to charge with-
holding 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 opportu-
nity to know in advance, and with reasonable certainty,
the position followed by the tax authorities on a spe-
cific 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 litiga-
tion on the topic will yield some answers. ◆
PRACTITIONERS’ CORNER
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