Tax responsibility for collection of withholding income tax (“WIT”) by International Payment Facilitators (“IPF”)
International Business Articles
Barcellos Tucunduva Advogados
Sao Paulo, Brazil
The Central Bank of Brazil (“BACEN”), through Circular 3.691 of 2013 and its subsequent amendments (“Circular 3.691”), regulates, in its articles 132 and 132-A, the foreign exchange rules for the acquisition of goods and services abroad by Brazilian residents (the "International Purchases"), through companies named Facilitadoras de Pagamentos Internacionais or "International Payment Facilitators" or “IPFs”, free translation).
Pursuant to Circular 3.691, the acquisition of goods and services abroad by Brazilian residents (“Buyers”) using an IPF should be paid by using a card for domestic or international use or by means of a bank transfer from a deposit account.
IPFs act as intermediaries for the payment of International Purchases, closing foreign exchange transactions with financial institutions authorized by the Central Bank of Brazil (the “Brazilian F/X Entities”) whereby the payment of the International Purchases is remitted to the foreign sellers ("Sellers").
The Brazilian F/X Entities which close foreign exchange transactions with IPFs are required to maintain in their files the documentation related to the International Purchases, which include the date, amount and currency of each International Purchase, the name and Taxpayer Identification Number of the Buyers and the name and country of the Seller.
Roughly speaking, IPFs business model consists in attracting financial resources from the Buyers which are residents in Brazil and wish to acquire goods and services abroad from the Sellers. The IPFs receive the amounts from the Buyers and, through Brazilian F/X Entities, remit them to the Sellers abroad or any representative thereof duly appointed.
The imports of goods by Brazilian residents that do not exceed the amount of U$3,000.00 (Three thousand dollars) are tax exempt. On the other hand, remittances for the payment of imports of services have a nominal tax burden higher than 40%.
In view of the current legislation with respect the role of the Paying Source on remittances abroad, the purpose of this paper is to discuss the responsibility of the withholding income tax (“WIT”) collection on the remittances for payment of services acquired abroad, as well as to discuss the limits of the IPFs’ tax collection responsibility on such remittances.
Taxation on imports of services by Brazilian individuals
The law that introduced the liability of the Payment Source of withholding the WIT due by the non-Brazilian residents is dated 1943. Since then, Brazilian tax legislation on this matter has suffered several changes but the tax collection liability of the Paying Source remains the same.
The current tax burden on the imports of services is very expressive. In addition to the WIT, imports of services should also be subject to the social contributions - a different type of tax with specific, legal and public budget allocations - named PIS and COFINS (“PIS” and “COFINS”), service tax (“ISS”) and tax on foreign exchange transactions (“IOF”). Unlike WIT levy on the income earned in Brazil by non-Brazilian residents and IOF on exchange transactions, PIS, COFINS and ISS are taxes directly connected with the imports of services, in the sense that they only levy when an import of services really occurs.
The rationale for such enormous tax burden is clearly to stimulate the hiring of Brazilian service providers by Brazilian acquirers.
When the regulations were issued, it was impossible to predict the future existence of electronic commerce sector and the complexity and specifications of the new forms of commercial relationships and arrangements typical of the electronic commerce sector. For this reason, the current rules in force do not give the proper legal support or the right tax treatment for the new transactions that are taking place under the electronic commerce environment.
IPFs role is one of the consequences originated from the new ways of acquiring services that not only are no longer limited to the country or Municipality of the Buyer, but also require speed and security for all the parties involved in this commercial relationship.
The tax burden on the service payment remittances imposed to non-Brazilian residents is a typical example of the mismatch between the current legislation and the reality of the electronic commercial transactions. As mentioned, PIS, COFINS and ISS levy are directly linked to the imports of services that it turns, it is related to the place (country) where the “result of services” did take place. Thus, if the result of the imports services imported is verified in Brazil, then an import of services indeed occurred and PIS, COFINS, ISS are due.
The legislation does not have a clear definition of what should be understand as a result from services imported. However, there are decisions where “result of service” is define as being the use or enjoyment of a certain service and when the service taker is a Brazilian resident and is domiciled in Brazil, the triggering event of PIS, COFINS and ISS occurred.
Additionally, there are no decisions that deeply explore the variety of tax controversies relating to the electronic commerce sector nowadays, such as a possibility of a Brazilian resident who is in German and acquires a service in US. This example is the current reality and it does not have yet its own and proper tax regulations in Brazil.
Therefore, considering the current economic and functional reality of the electronic commerce sector and the fact that the Buyer can be anywhere and not necessarily in the place where he/she lives, such distinction could not be more inappropriate.
Liability for collection of the WIT on the remittances for importation of services payments
The Brazilian income tax legislation establishes that all income earned by non-Brazilian residents in the Brazilian territory is subject to the WIT when remitted or when becomes available for the foreign beneficiaries. This is because Brazil not only adopt the Paying Source Principle, but also subject the non-Brazilian residents to the same tax rules applicable to the Brazilian residents.
The WIT rate applicable varies according to the nature of the income and the Payment Source is liable for the collection of the WIT basically, with some exceptions, in all situations.
Brazilian Tax Revenue Service1, defines “Payment Source” as an individual or a legal entity that credits or pays the amounts to a beneficiary, thereby withholding and collecting the WIT, filing the WIT Return (“Declaração do Imposto de Renda Retido na Fonte” or “DIRRF”) and providing the WIT receipt to the beneficiary.
Paying Source has the obligation of withholding the WIT, on behalf the Sellers and paying the WIT to the Brazilian Federal Tax Revenue (“Brazilian IRS”). The role of support to the Brazilian Tax Authorities is also evidenced in the obligation of providing information to the Brazilian Revenue Service with respect the nature of the amounts remitted abroad, the country and the identification of the beneficiaries.
From the IPFs perspective, considering they are not Buyers or Sellers but intermediaries, they should not be considered the legal taxpayers of the WIT simply because the Sellers are the effective beneficiaries of the payments remitted abroad and once they are submitted to the same rules of the Brazilian residents, any income earned (such as the price of the services), in the Brazilian territory, has to be taxed or, in the case, withheld by the Paying Source when remitted.
IPFs should not also assume the role of Paying Source either by acting as auxiliary agents in the tax collection simply because they are not allowed by BACEN to carry out foreign exchange transaction for the payment of services on behalf the effective acquirers which are its clients (Buyers). In the event of the Paying Source did not withhold the WIT on remittances for the payment of services acquired by IPFs clients (Buyers) abroad, Brazilian tax legislation requires that Paying Source (and only the Paying Source) pays the income tax due by the Sellers.
Nowadays, IPFs is developing a role of auxiliary agent of the Paying Source by contributing to the identification of the Buyers and providing information and documentation required by BACEN. This does not mean that IPFs are sharing the tax liability of the WIT collection whatsoever. Unless the current tax legislation on this matter is updated in order to determine and amplify the limits and the liabilities of the IPFs in transactions under the electronic commerce environment, from the legislative perspective, IPFs may continue to act as intermediaries in such transactions.
Aline Bauermeister Marcia Takano
1 Decision 271 dated as of September 26 of 2014.