By Francisco Lisboa Moreira, Bichara Advogados, São Paulo & Matheus de Moura Sena, KPMG, Singapore
May has been quite a busy month for international tax matters in Brazil as the country signed double tax treaties with both Singapore and Switzerland.
These two treaties, although signed the same month, share relatively different contexts.
We should recap, first, the Brazilian request to join the OECD. The Swiss treaty incorporates some provisions from the OECD/G20 base erosion profit shifting project, which are a direct result of that effort.
However, negotiations for the Swiss treaty date back to 2015, when the Swiss foreign affairs minister visited to express the considerable concern of Swiss multinationals investing in Brazil on account of Brazil listing certain Swiss structures as Privileged Tax Regimes, informally known as the grey list. The Brazil-Switzerland tax treaty reflects that history, as well.
In relation to Singapore, in December 2017 Brazil removed Singapore from its Low Tax Jurisdiction List, informally known as black list, and included Singapore’s concessionary tax regimes at its Privileged Tax Regime list, the so-called grey-list, for regimes that bear an effective tax rate below Brazil’s 20 percent threshold (even though the “Portaria” – a Normative Act – from the Ministry of Finance placed the threshold tax rate for a regime or dependency to be considered as a privileged at 17%).
These actions improved the conditions for bilateral investment into Brazil while the grey-listing counter-measure aimed to create an equilibrium between the countries’ tax regimes.
Brazilian businesses that seek to benefit from Singapore concessionary tax rates should evaluate properly their tax exposure because popular Singapore tax incentives related to shipping, trading, and aviation remain listed as privileged tax regimes.
Technical services
Both treaties introduce new Article 13 on fees for technical services and the content is exactly the same. The treaty articles are inspired by Article 12-A of the United Nations model treaty, granting taxing rights on technical services to source countries.
This is an old demand of Brazil; most of Brazil’s existing tax arrangements (except for Austria, Finland, France, Japan, and Sweden) include a treaty protocol article that moves taxation of technical services, administrative services, and administrative assistance from Article 7 (business profits) to Article 12 (royalties). These amendments benefit Brazil, as the royalty provisions in Brazilian tax treaties are always source-oriented (normally at a 10% or 15% withholding tax rate).
Exchange of information
Article 27 of the Brazil-Singapore tax treaty, concerning exchange of information (EOI), follows Article 26 of OECD treaty model.
In addition, Inland Revenue of Singapore (IRAS) states that: “[i]n assessing whether an EOI request is valid and meets the EOI standard, IRAS will rely on the Commentary on Article 26 (Exchange of Information) of the OECD Model Tax Convention and the Commentary to the Convention on Mutual Administrative Assistance in Tax Matters on the interpretation and application of the EOI provisions.”
Furthermore, both Brazil and Singapore have adopted Common Reporting Standard (CRS) Regulations 2016. Singapore financial institutions (SGFIs) already must provide IRAS with a return setting out the CRS information of reportable accounts that they maintained during the calendar year in several jurisdictions, including Brazil. Therefore, the new treaty is another step in strengthening EOI between Brazil and Singapore tax authorities.
The corresponding exchange of information article of the Swiss tax treaty also follows the OECD tax treaty model.
Brazil and Switzerland previously signed a treaty providing for exchange of information which was approved by the Brazilian House of Representatives on September 21, 2017. The treaty has been sent to the Senate for the final approval.
Under this treaty, both countries will provide mutual aid for collection and execution of tax credits. Also, the agreement states that tax authorities may use, under request, information provided by banks, financial institutions, and any person acting as representative, including nominees and trustees.
The two countries also signed an agreement in 2016 providing for automatic exchange of information from 2019 using data available in 2018; however, final approval of this agreement is still needed by both countries’ legislatures.
Treaty abuse
Both treaties contain an “Entitlement to Benefits Clause.” In general terms, the clause can be seen as an effort by the Brazilian tax authorities to deny tax treaty benefits in situations seen as abusive or exceeding the intent of the treaty. The provision could give rise to court disputes in the future.
In the authors’ opinion, both Switzerland and Singapore agreed to include this provision to counter tax evasion.
Privileged tax regimes
Brazil has created, since 2010, the concept of Privileged Tax Regimes with milder effects than the regular tax haven/black-list (Favorable Tax Regimes) treatment.
Nevertheless, under the Privileged Tax Regime, an entity would be subject to stricter thin capitalization rules (a 0.3:1 debt-to-equity ratio as opposed to the standard 2:1 ratio); mandatory transfer pricing rules application (even to non-related parties); and mandatory disclosure of expense deductions.
In December 2013, a limited treaty signed by Brazil and Singapore covering profits derived from international air and shipping transport entered into force.
This treaty exempted profits from derived the mentioned areas. However, in December of 2017, as mentioned above, Brazil removed Singapore from its list of Low Tax Jurisdictions, and among others, including the following concessionary tax regimes as Privileged Tax Regimes:
- Special rate of tax for non-resident ship-owner or charterer or air transport undertaking;
- Concessionary rate of tax for shipping investment manager;
- Concessionary rate of tax for leasing of aircraft and aircraft engines;
- Concessionary rate of tax for aircraft investment manager;
- Concessionary rate of tax for container investment enterprise;
- Concessionary rate of tax for ship broking and forward freight agreement trading;
- Concessionary rate of tax for shipping-related support services;
That created a problem because the limited treaty provides a tax exemption yet the grey list, provides that income under these concessionary regimes should be taxed under Article 2, § 5º-A of Normative Instruction (IN RFB) 1,455/2014.
New Article 8 of the Singapore-Brazil tax treaty calls for profits of an enterprise of a contracting state from the operation of ships or aircraft in international traffic to be taxable only in that State.
In addition, paragraph 3 is consistent with most recent Singapore treaties (e.g., the treaties with the United Kingdom and Switzerland), covering related profits from the rental on a bareboat basis of ships or aircraft; profits from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise; and interest on funds connected with the operations of ships or aircraft.
That adds another ingredient to the lack of clarity for international transport.
For example, when then new Brazil-Singapore tax treaty is in-force, would the profits related to a rental of a floating production storage and offloading (FPSO) from a Singaporean (enjoying concessionary rate) entity to a Brazilian entity, operating in the Brazilian Exclusive Economic Zone be:
- exempt under the limited treaty;
- subject to 25% withholding tax (under article 2 § 5º-A of IRB 1,455/2014); or,
- subject to Singapore tax regime (which exempts the mentioned profits) when the tax treaty is in-force?
It is not clear at this point and it may take substantial litigation in Brazil for this to be resolved.
Considering that Singapore and Brazil’s economic relations in shipping, offshore oil & gas, and aircraft are quite relevant, it is crucial that Brazil harmonize its internal legislation to its treaties before the treaty with Singapore enters into force.
Brazil’s position on Article 7
It will be interesting to observe Brazil’s position on its worldwide taxation regime for corporations, as the mentioned two treaties have been signed after the enactment of Law 12,973/14 which “updated” Brazil´s universal taxation regime.
Brazil applies a unique international tax approach, providing that the mere booking of a positive result of an investment in a country, even if not distributed, should be included in the corporate income tax base.
Logically, Article 7 of the OECD Model Treaty, which is included in all Brazilian treaties, maintains taxing powers to the residence country for business profits, but Brazil has a unique, yet creative, approach, considering the accounting entry of the positive equity pick-up method as income to the Brazilian entity specifically for controlled subsidiaries.
Also, issues may occur for Brazilian trading company subsidiaries, especially Singapore subsidiaries, because they bear an effective tax rate below 17% under Portaria MF 488/2014 (IN RFB 1,037/2010 rate is still 20%) and thus are categorized as Privileged Tax regimes, preventing tax consolidation under article 78 of Law 12,973/14.
Entry into force
Considering the backlog of pending tax treaties signed by Brazil, such as the Russian and Paraguayan treaties, signed in 2004 and 2000, respectively, and that Brazil will have general elections in 2018, it could take three years for Brazilian Congress to ratify the Singapore and Swiss treaties.
However, as the speedy signature was a surprise, it may be that ratification will be speedy as well.
The views expressed by the authors are personal and do not represent the views of any affiliated institutions.
Francisco Lisboa Moreira
Francisco Lisboa Moreira is a tax lawyer with 17 years of experience with Brazilian taxation, having participated in various projects involving a broad range of tax questions, including international tax planning, transfer pricing, general tax consulting, due diligence projects and cross-border transactions.
His credentials include an LLM International Taxation at NYU and a Master´s Degree (ongoing) at the University of São Paulo.
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Avenida Presidente Juscelino Kubitschek, 1909 - Torre Norte, 23° andar, Vila Nova Conceição
São Paulo - SP
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Avenida Presidente Juscelino Kubitschek, 1909 - Torre Norte, 23° andar, Vila Nova Conceição
São Paulo - SP
CEP: 04.543-907
Tel.: (55-11) 3237-4588
Fax.: (55-21) 2224-5295
e-mail: [email protected]
Matheus de Moura Sena
Matheus holds a law degree from the Rio de Janeiro State University Law School (Brazil), and a post-graduate degree in Brazilian Tax Law from Fundação Getúlio Vargas (Brazil). Additionally, Matheus holds an LLM degree in International Taxation at New York University.
Since 2010, Matheus has been a member of the Brazilian Bar Association (OAB), and since 2017 a member of the Portuguese Bar Association (OAP), accumulating sound experience as Tax Attorney.
Currently, he is a tax senior Associate at KPMG in Singapore. His research projects, “Specialized Conflict of Laws” (2008), and “Regulatory Environmental Taxation” (2010) were sponsored by Brazilian Government Agencies.
Matheus has publications on Tax and International Law (especially in the right of secession, treaties law, right to self-determination and humanitarian law).
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KPMG Services Pte. Ltd. (Registration no: 200003956G)16 Raffles Quay #22-00
Hong Leong Building Singapore 048581
Email: [email protected]
Latest posts by Matheus de Moura Sena (see all)
KPMG Services Pte. Ltd. (Registration no: 200003956G)
16 Raffles Quay #22-00
Hong Leong Building Singapore 048581
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