A common practice in the Oil & Gas industry by foreign investors is to advance payments of expenses incurred on behalf of the Brazilian subsidiary to later seek reimbursement. This fact pattern usually happens during the pre-operational phase of the Brazilian subsidiary, which can be quite long due to the significant investments required in the Oil & Gas business, and sometimes even after becoming operational due to several reasons (e.g., long “know your client” procedures by the Brazilian banks).
The tax treatment of cross-border reimbursement of expenses is a controversial subject in Brazil in view of the lack of clear provision in the tax regulations and the general application of the withholding income taxation based on the source of payment rule (disregarding international rules and principles of sourcing). In light of that, the Brazilian Federal Revenue Office (“RFB”) has usually treated international reimbursement of expenses as a payment for the importation of services, which is subject to several taxes that can add up to approximately a 50% effective tax rate.
However, under Private Letter Ruling (PLR) COSIT No. 378, issued on August 23, 2017, RFB ruled that cross-border payments made for the reimbursement of the advance made by the parent/related company abroad to expatriates residing as taxpayers in Brazil (employees or self-employed), are not subject to service import taxes.
RFB’s opinion is that the amounts reimbursed by the Brazilian company up to the limit of the remuneration received by the expatriate abroad, with no mark-up or margin added, do not constitute income of the foreign parent/related company. The repayment under consideration is a mere recovery of costs for the latter and, therefore, should not be treated as service import from a tax perspective.
In financial terms, such PLR represents significant tax savings in comparison to the default importation of services scenario (as high as 50% of tax costs). Such type of cross-border reimbursements should attract only 0.38% FX/IOF levied on the amount converted into foreign currency (if applicable).
Note that PLRs COSIT are binding rulings to tax agents when analyzing fact patterns substantially similar. Thus, Brazilian entities can rely on PLR COSIT No. 378/2017 with some comfort provided that the facts are in essence the same.
Nonetheless, in case of reimbursements of expenses of a different nature and/or paid under different circumstances (i.e., expenses related to office lease, legal and financial services, among others usually very common during pre-operational phase) a more careful analysis is advisable so as to confirm the applicable tax impacts.
Therefore, Brazilian companies should consider its own specific facts to determine whether this PLR would be applicable or seek advice from a tax professional or eventually seeking its own PLR.