Problems relating to Trade and Investment on Brazil
11. Restriction on profits remittance abroad |
|||
Issue |
Issue details |
Requests |
Reference |
| (1) Restricted External Remittance for Provision of Services | - Instituto Nacional da Propriedade Industrial (INPI=National Institution of Industrial Property) allows annual external remittance of royalty under restrictions of up to 5-years (extendable once only for 5-more years), within 5% of sales, etc. The external remittance requires filing of application to INPI, registration of contract, and registration at Banco Central do Brasil (BCB). It seems upon INPI registration it takes much time for examination in detail and confirmation of contract. - Tax on Royalty is extremely high. (1)As regards Remittance of Royalty, Withholding Tax of 12.5%, Tax on Financial Transactions of 0.38% and Contribution for Intervention on the Economic Domain of 10% are imposed. (2)As regards of remittance of service withholding tax of 15%, tax on financial transactions of 0.38%, contribution for intervention on the economic domain of 100%. Social Integration Programme of 1.65%, Social Integration Fund of 7.6%, in total of 5-kinds of taxes is imposed. (3)As regards Remittance corresponding to Actual Settlement of Expense Account, Withholding Tax of 15% plus Tax on Financial Transactions of 0.38%. - GOB levies 40% Tax upon External Remittance of Service Fees. A Member Firm Subsidiary (MFS) engaged in Agricultural Chemicals Business, acting as Regional Headquarters in Central-South America / Caribbean Region has lost its flexibility in business outside Brazil. |
- It is requested that INPI streamlines and simplifies the system for examination procedures of contract and for contract registration. - Restrictions as described in the left column have already been repealed in many countries and Brazil departs from the international trend. It is requested that GOB causes the law to be amended and improves its implementation by the authority. - Conversely, it is requested that GOB reviews the possibility for attracting service industries into the high cost Brazil, i.e., by reduction in ISS (Imposto sobre Servicos=Municipal Tax on Services) (5%) levied on Services rendered in Brazil. |
- BCB Regulation (CIRC1,533 CIRC2,685) - "Law on Foreign Capital and Remittance Abroad", etc. - Supplemental Act No.70 - Law Nos.10637, 10168, 10833 and 10865 - Supplemental Act No.116 - Administrative Decree No.7412 |
| (Action) - Remittance of royalty incurs various kinds of taxes, such as PIS/Coffins, ISS, etc. on Service Contract. Moreover, interpretation varies among lawyers and accountants on tax levy such as PIS/Coffins, ISS, etc. As a result, actual tax levy on remittance abroad is determined on a case by case basis. - The following kinds of taxes are levied on remittance abroad: (1) IRRJ (Federal Withholding Tax): 12.5% (Note: Under Brazil-Japan Tax Treaty reduced from 15% to 12.5%). (2) CIDE (Contribution for Intervention on the Economic Domain) 10%: (Although this is a Federal Tax, a certain portion of this tax serves as Municipal Tax Revenue.) (3) Social Contributions (PIS/COFINS Import): 9.25% PIS (Social Integration Program) (Federal Tax): 1.65% COFINS (Contribution for the Financing of Social Security) (Federal Tax): 7.6% (4) ISS (Tax on Services): 2% to 5%: (Municipal Tax) (Service Tax) (5) IOF (Tax on Financial Transactions): 0.38%: Remittance Tax - In principle, GOB restricts to 5% on the sales price the amounts of royalty and licensing fees payable to the licensor and deductible for the use of patents and trademarks. - Brazilian enterprises are required to pay to foreign enterprises royalty through the Central Bank of Brazil ("CBB"). In this context, a Brazilian enterprise pays to CBB the fund in the Brazilian currency. CBB converts the fund into the U.S. dollars to enable the governmental control of international trade balance, and remit the sum to foreign payees. - BCB requires applicants to file declaration electronically for all external payments made to the headquarters of the enterprise making direct foreign investment via the BCB's electronic system ("SISBACEN"), the declaration system (RDE-IED: foreign direct investment; and RDE-RDF registration of financial transaction). The receipt of the invested fund and remittance to overseas' payees are thus made electronically, using the BCB's electronic system. (Law No.4131/62, Government Decree 55.762/65 BCB). - Where the corresponding amount is not registered at CBB such as remittance of profits, capital, or reinvestment, remittance abroad is restricted. Furthermore, remittance in the foreign currency in excess of the original amount registered becomes subject to withholding tax levy. - In Brazil, by amendment in 1991 of income tax law (Law No.8383/91), inclusion in expenses of external remittance between related companies has been made possible. (Up to that time, Brazilian subsidiaries remittance for licencing fees, etc. to their parents in home countries was disallowed as expenses.) To begin with, Foreign Direct Investment Law (Law No.4131/62) allows only up to 5% inclusion into expenses of external remittance of royalties, etc. Ministry of Finance Order (Ordinance 436/58), promulgated under the 1991 amendment of income tax law, made it possible to include in expenses royalties remitted abroad under the contract signed and recorded by INPI and registered at the Central Bank. No royalty remitted in excess of the limit under Ordinance 436/58 may be included in expenses. Thus, inclusion into expenses of royalty payment requires registration at INPI and acceptance of INPI's terms that include the cap of 5% on the royalty rate. In effect, 5% against the net sales amount attributable to the technology in concern is the maximum deductible rate as expenses on account of the royalty payment. - Regulation Decision No.55 of August 27, 2003 requires completing the details for the technology transfer program or the workforce training program upon filing application for the technical after-service certification on technology transfer registered with INPI, sales and purchase of equipment with technical service based on the documents issued by Federal Revenue Bureau, technological collaboration within the enterprises of the same group, deed in foreign currency exchanged between the public corporation and foreign corporations and agreements and contracts. - Since July 2006, INPI has introduced the electronic filing system for processing the trademark applications, while reinforcing INPI with additional 130 examiners to alleviate the backlog of the pending patent applications. As a result in the first two-months of 2008, the patent service cases that INPI processed have increased by 20.88%. In September 2008, The World Intellectual Property Organization (WIPO) acknowledged INPI as International Searching Authority (ISA) and International Preliminary Examining Authority (IPEA). This acknowledgement, it is hoped, will reduce the cost of filing overseas' applications of Brazilian patents and increase the number of patents issued under the Patent Cooperation Treaty (PCT). - GOB gets involved in payment of royalty abroad as a part of its control on international trade balance. (In principle, 5% on the sale amount is the maximum for royalty.) - Beneficiary with contract for more than 5 years is not authorized to deduct technical transfer fees from taxable income payment. - Japanese enterprises since February 2009 brought up the issue before GOB, urging improvement over the issues concerning the duration of the period for the Technical Transfer Agreement, and for the Confidentiality Obligations, and the cap on the royalty at the Japan-Brazil Joint Committee on Promotion of Trade and Investment. - At the Japan-Brazil Joint Committee on Promotion of Trade and Investment held in February and September 2009, Japan side brought up the issue on royalty payment. Brazilian side expressed its appreciation of the problems. - For remittance of royalty, the applicants must first complete registration at INPI and then do the same also at BCB. - Normally, registration at INPI is not required for remittance abroad under a Service Contract that does not accompany provision of Transfer of Technology. However, Commercial Bank at times refuses such registration at BCB and requires, at its own discretion, registration at INPI, or else directs applicant to consult with a legal counsel. - Decision of Yes or No varies by Commercial Bank on remittance abroad under a Service Contract. It is the same if registration is required at INPI, depending upon lawyers and accountants consulted. These puzzling questions are troublesome to not a few enterprises. - If the amount of royalty exceeds the cap of 5% on the annual sales amount, remittance of the initial cost incurred for provision of technical assistance is denied, even if it is registered as royalty at INPI. - At the Japan-Brazil Joint Committee for Promoting Trade and Investment during 2009 through 2011, GOJ have urged GOB for improvement such as INPI cap on the royalty rate and issues concerning reduction in confidentiality and secrecy maintenance period. |
|||
| (2) Cap on Royalty Rate between Related Enterprises | - BCB restricts the royalty rate among related parties. Moreover, materials and component parts procured from the related enterprises must be excluded from the royalty calculation basis. - INPI's approval is necessary for External Remittance of Royalty for use of Patent, Industrial/Commercial Trademark, Scientific / Technical Cooperation, etc., provided, however, that the Cap on the amount of remittance is low, only 5% minimum against Net Sales (the excess of which is deemed as distribution of profit). It blocks investment from foreign countries that accompanies high-end technical transfers. Moreover, royalty remittance on trademarks is only1% maximum, which is extremely low compared to other countries. |
- Restrictions as described in the left column have already been repealed in many countries, and Brazil departs from the international trend. It is requested that GOB causes the law to be amended and improves its implementation by the authority. - It is requested that INPI raises the cap on royalty remittance. |
- "Law on Foreign Capital and Remittance Abroad", etc. - Act 4131 (1962) - Ministry of Finance Decree 436 (1958) |
| (Action) - By amendment of Corporate Income Tax Law of 1991 (Law No. 8383/91), deduction is made possible of remittance abroad between the related parties, provided, however, that under Foreign Fund Law (Law No. 4131/62), 5% cap was provided to begin with as the amount of deductible royalty remitted abroad. At the 1991 amendment of Corporate Income Tax Law, by reference to MOF Ordinance (Ordinance 436/58), it was decided to approve deduction from the taxable income the remittance abroad of royalty based on the Agreement signed and recorded by INPI and registered at BCB within the limit so prescribed in the regulations. INPI therefore does not approve royalty rate that exceeds this cap on the royalty as deduction from the taxable income. Thus, registration at INPI is a precondition for inclusion into deductible fund of royalty remitted abroad. For the purpose of this registration the applicant has no alternative but to accept INPI's conditions, (namely, the cap on inclusion into deductible expenses equals the cap on royalty rate). Consequently, in the Agreement between the related parties, the royalty rate is maximum 5% on the net sales amount emanating from the technology so transferred. - Since the 1st Japan-Brazil Joint Commission Meeting for Trade and Investment of February 2009 to the 6th Meeting of November 2012, Japan side has successively requested improvement on the rate of royalty. (2013 Report on Compliance by Major Trading Partners with Trade Agreements) |
|||
| (3) Difficult Profit Collection due to Complex Taxation System | - Tax levy scheme on profit collection and complexity of tax scheme in Brazil serve as conundrum in appreciating the business risk and opportunities in Brazil. - GOB has never authorised external remittance on account of debt (such as payment of traveling expenses on business trip) other than import that does not accompany movement of goods. Due to the following issues, member firm is at a loss on the respective accounting treatment, lest substantial uncollected accounts receivables may result. Restrictions on remittance have been on the way to deregulation (personal remittance procedure of up to R$20,000 has been streamlined, etc.): -- Taxation scheme over financial transactions is complex/ambiguous, -- Abuse of ambiguity in transfer price taxation system, -- Heavy tax burdens, -- Nebulous netting policy, -- Absence of refunding scheme on the VAT levied bad debt on accounts receivables, -- Absence of consolidated tax payment scheme. |
- It is requested that GOB advances legislative overhaul and consultation to arouse foreign investment into Brazil. - It is requested that GOB fundamentally removes the Brazilian financial restrictions. |
|
<<BACK |