By Ed Taylor (Bloomberg BNA – International Tax Monitor)
A ruling by a Brazilian revenue service appeals court has set an important precedent for companies seeking tax credits for their royalty payments.
On April 11, the superior court of the service’s Administrative Appeals Court System (Carf) ruled in favor of Brazilian firm Sonopress-Rimo Industria e Comercio Fonografico SA, authorizing it to use its royalty payments to claim credits for the PIS and Cofins social contribution taxes.
The ruling (No. 19515.722673/2013-75) has yet to be published on the court’s website, but was reported by Brazil’s online judicial service Jota, which monitors the appeals courts.
The Brazilian firm is the sole distributor in Brazil for Walt Disney Co. and was appealing a 2008 revenue service decision rejecting the use of royalty payments for tax credits. That decision was based on the revenue service’s position that royalties don’t constitute an input used in the production process and therefore don’t qualify for credits.
In 2002 and 2003, Brazil’s congress passed laws that eliminated the cumulative impact of the PIS and Cofins taxes. Prior to these laws, the taxes were charged at every stop along a company’s production line. The congress altered this to make sure that the taxes were only paid at the final stop.
The laws also raised the taxes and, to compensate, permitted companies to receive credits on a list of inputs. Since then, companies have been fighting with the government over this list.
Last Stop
The superior court, the last stop in the Carf appeals system, accepted the company’s position that its royalty payments should be treated as inputs since they account for 88 percent of its costs.
The court in its decision cited a Feb. 22 ruling by Brazil’s second highest appeals court, the Superior Court of Justice, which expanded the list of inputs that qualify for credits to include any item or service deemed essential or relevant for a company’s product.
This was the superior court’s first ruling on this question, meaning it sets a significant precedent, attorneys told Bloomberg Tax.
“The decision by the superior court is an important precedent not only because it is the court’s first on this question but because it demonstrates that non-material items can be recognized as inputs for PIS and Cofins credits as long as they are relevant for the taxpayer’s activity,” said attorney Fabio Pallaretti Calcini of the law firm Brasil Salomao and Matthes in an April 19 email. “This decision will certainly open a relevant precedent for other incorporeal items to be recognized as inputs.”
In recent years, lower Carf appeals courts have also dealt with the question of royalties generating tax credits, but with conflicting decisions.
In January 2017, a Carf court ruled in favor of Volkswagen AG, but this February, another court ruled against the Brazil unit of German multinational Rheinmetall Automotive AG, according to attorney Daniela Cristina Ismael Floriano of the law firm Rayes & Fagundes.
“The previous position of Carf was to link the right to PIS and Cofins credits to the rules for excise tax credits which are more restrictive. There are many diverse decisions but with the ruling by the Superior Court of Justice expanding the definition, Carf is now following this line. This ruling by the superior Carf court confirms this change of position to the benefit of taxpayers,” she in an email.
