Brazil is actively participating in the worldwide effort to tackle aggressive tax avoidance and tax planning by multinationals as set out in OECD/G20 base erosion profit shifting (BEPS) plan agreements.
In this context, the Brazilian Federal Revenue Agency published country-by-country reporting requirements (Declaração País a País) to increase the transparency of international transactions within business groups and to fight abusive practices that erode the tax base.
While these rules, outlined in RFB Normative Instruction 1,681/2016, were published in December 2016, they continue to generate a lot of discussion in Brazil because many questions associated with the new rules remain unresolved.
Brazil’s country-by-country reporting rules
Under Brazil’s country-by-country reporting rules, any entity resident or domiciled in Brazil that is the ultimate or controlling entity of a multinational group with annual turnover equal to or exceeding € 750 million or R$ 2.260 million in the preceding year will be required to issue a country-by-country report.
The country-by-country report must be submitted by July 31 of the following year, commencing with calendar year 2016, and will be part of the Escrituração Contábil-Fiscal (ECF), which is the electronic set of files that replaced the annual corporate income tax return in Brazil that must be sent to the Federal Revenue Service (Secretaria da Receita Federal do Brasil (RFB)).
The form “W” of the ECF must be properly filled.
One should be aware that a Brazilian entity must prepare a country-by-country report even if not the ultimate controlling entity of the group if any of the following criteria are met:
- The ultimate or controlling entity of the Brazilian company is not obliged to file a country-by-country report in the country of residence.
- The country of residence has an exchange of information agreement but not a competent authority agreement in force with Brazil.
- The country-by-country report was not submitted because of a systemic failure, namely, the jurisdiction suspended automatic exchange of information with Brazil, or failed several times to share country-by-country reports with Brazil.
It is extremely important for Brazilian entities to follow-up with their company headquarters to understand how and when the country-by-country report will be filed to avoid problems in Brazil.
If the ultimate or final controlling entity is not required or fails to present the country-by-country report, the Brazilian entity must either appoint another group entity that has filed, or submit the country-by-country report itself. The same conditions apply if there is a systemic failure.
In such cases, filing deadlines will apply and participation in a bilateral agreement or in the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CBC MCAA) will be required.
As to the exchange of country-by-country reports, Brazil has been a participant in the CBC MCAA since October 21, 2016.
The majority of countries that have signed the CbC MCAA will exchange reports for taxable periods beginning January 1, 2017; however, Brazil is requiring reports covering the calendar-year ended in December 31, 2016.
There remain several unanswered questions regarding to how to present the required information in Brazil’s country-by-country report.
Major issues relate to GAAP differences and how to treat the equity pick-up revenue registered in the books of Brazilian companies for compliance with Brazil’s worldwide taxation regime, as other countries do not require such information and it may create a misleading report.
Also, how to report different forms of settling tax debts, such as the common “offset” procedure – the PER/DCOMP, are still missing.
Further, the criteria for determining a “constituent entity” remains a question mark because it is unclear how the Brazilian tax authorities will view entities such as hybrids and transparent entities.
More generally, the final BEPS report in Action Plan 13 indicates that jurisdictions signing on to the country-by-country reporting scheme must commit to a maximum level of confidentiality. BEPS Action Plan 13 also states that the country-by-country reports should be used for assessment of high level BEPS risks and as a tool to substantiate further inquiries and investigations rather than to propose adjustments to the tax base based on the country-by-country reports alone.
It is unclear how and if the Brazilian tax authorities will meet such requirements, so a very careful evaluation of the country-by-country reporting information submitted at the ultimate entity level is recommended.