TaxNewsFlash-Americas

November 14, 2008
No. 2008-29

Brazil

Royalty Payments Are Exempt from PIS and COFINS

The Brazilian tax authorities (Receita Federal) recently issued guidance providing that cross-border payments of royalties for the use of trademarks and know-how are not subject to two federal taxes imposed on gross revenue and imported goods and services—PIS (Programa de Integração Social) and COFINS (Contribuição para o Financiamento da Seguridade Social).*

* The tax imposed under PIS concerns a levy under the employee’s profit participation program, and the tax imposed under COFINS relates to financing of the social security program.

For an electronic version of the guidance (in Portuguese): Contribuição para o PIS/Pasep e Cofins Coletânea da Legislação

Summary

Levies of PIS and COFINS with respect to imported goods and services have been asserted since May 2004 at a rate of 9.25%, and since then, the issuance of regulations raised certain questions concerning the imposition of these taxes on royalty payments.

Brazilian companies challenged the imposition of PIS and COFINS on royalties and specifically questioned whether royalty payments are to be considered or viewed as “services” and therefore subject to PIS and COFINS. The Brazilian tax authorities generally agreed that royalties would not be subject to PIS and COFINS, provided the underlying agreements clearly indicated the amount corresponding to services and those related to royalties. Otherwise, the entire contract amount would be subjected to PIS and COFINS.

KPMG Observation

With the recent guidance, companies that have remitted PIS and COFINS with respect to cross-border royalty payments may have refund opportunities, provided they comply with the refund procedures under Brazilian law.

While the guidance applies only with respect to PIS and COFINS, some observers note that similar logic could be applied in taxpayers’ discussions regarding application of the municipal services tax—Imposto Sobre Serviços (ISS)—on cross-border royalty payments. Currently, ISS is also imposed on cross-border payments of services, but the recent guidance raises a question as to whether royalties fall under the concept of services.

For additional information, contact a tax professional with KPMG in Brazil (São Paulo):

Roberto Cunha, + 55 11 2183-3119, rcunha@kpmg.com.br

Elson Bueno, + 55 11 2183-3281, ebueno@kpmg.com.br

Marienne Munhoz, + 55 11 2183-3182, mmunhoz@kpmg.com.br

Ericson Amaral, +55 11 2183-3375, eamaral@kpmg.com.br

Murilo Mello, + 55 11 2183-3261, murilomello@kpmg.com

Maira Rigoni,+ 55 11 2183-3218, mrigoni@kpmg.com.br

Marcos Novo, + 55 11 2183-3230, mnovo@kpmg.com.br

Maurcio Correa, + 55 11 2183-3219, mccorrea@kpmg.com.br

Rodrigo Otero, + 55 11 2183-1718, rrotero@kpmg.com.br

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