Brazil revises law on tax treatment of cross-border payments for data centers located abroad


From the Tax department of Campos Mello Advogados*

Newly published Brazilian Interpretative Act (Ato Declaratório Interpretativo) N. 7/2014 expresses the Brazilian IRS’s view regarding the tax treatment applicable to cross-border payments for the use of data centers located abroad.
According to the Act, when the Brazilian source of payment hires data centers abroad for the use of storage systems and remote data processing, the transactions may not be characterized as rental, but as typical provision of services, which triggers withholding income tax at 15 percent (25 percent if the recipient is located in a tax haven jurisdiction), Cide-royalties at 10 percent and PIS/COFINS-Importation at 9.25 percent (in addition to the 0.38 percent financial tax levied on the foreign exchange transaction).  The Act does not address Services Tax, since this is a municipal tax.
It is worth noting that, prior to this Act, the IRS issued Ruling (Solução de Divergência) N. 6/2014, published on July 23, in which tax authorities anticipated the understanding above, and also clarified that, in principle, the performance of support activities, security, Internet access, room temperature control and management services may not be segregated, for tax purposes, from equipment rental, since those services are embedded in data center activities.
Neither the Act or the Ruling have mentioned the new definition of “technical services” provided for in Normative Instruction IRS N. 1,455/2014, which now also comprises the performance of service derived from automated structures with clear technological content. Thus, it is not clear whether this definition was taken into account in the IRS´s understanding.
Despite the fact that the Act must be followed by federal tax authorities, in our view it may be possible to challenge tax assessments of Cide and/or PIS/COFINS-Importation taxes depending on the facts and circumstances of the specific case, subject to a careful evaluation of the contractual provisions.
Finally, the Act revoked all Rulings that reached a different conclusion. As an example, we may mention Private Ruling N. 86, of 2012, according to which these transactions were not subject to PIS/COFINS-Importation taxes.

 *This article was prepared by the Tax department of Campos Mello Advogados, an independent law firm, which has as tax partners Guido Vinci, Leonardo Homsy and Humberto Marini, based in Rio de Janeiro, and Ana Luiza Martins and Alex Jorge, based in São Paulo.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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