Contribution to SENAR Gross Revenue from farming sales. Binding Precedent Proposal (PSV) No. 98 Street lighting service

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1 Tax report n Year VI March 2015 Dear Readers: The purpose of this Tax Bulletin has as its objective to keep our clients and other interested parties duly up-to-date on the main subjects being discussed and decided by the Judiciary, Legislative, and Executive. In this st issue, we address fifteen different issues related to Jurisprudence, Regulations and Inquiry Solutions. To access each of the texts individually, click: Jurisprudence STF General implications recognized Contribution to SENAR Gross Revenue from farming sales Tax immunity ITBI (Property Conveyance Tax) Real Estate included in a corporation s assets STF Binding Precedent (SV) No. 41 Binding Precedent Proposal (PSV) No. 98 Street lighting service STJ COFINS (Social Security Funding Contribution) Rental of shopping mall parking boxes TRF1 CSLL (Social Contribution on Net Earnings) Non-applicability Cooperative actions by a farming loan cooperative TRF1 Social Security Contribution payment by healthcare insurance operators TRF1 Special Internal Drawback Customs System Possibility of granting tax benefits when the import amount is less than the international financing amount TRF4 REFIS (Tax Compliance Recovery Program) Calculation error in the calculation of installments Negligible amount Later settlement of the outstanding amount Impossibility of exclusion Regulations and Inquiry Solutions Interpretative Declaratory Act No. 1/2015 IRPJ/CSLL (Corporate Income Tax/Social Contribution on Net Earnings) Notional Income Manufacturing Query Solution COSIT No. 15/2015 EIRELI (Limited Liability Sole Proprietorship Company) Taxation as a Corporation Query Solution COSIT No. 17/2015 Foreign Company Subsidiary - Certificate of Tax Residence in Brazil and Taxation Based on the Worldwide Income

2 Tax report n Year VI March 2015 Query Solution COSIT No. 21/2015 Costs and Expenses Allocation Agreement Registration with SISCOSERV Query Solution COSIT No. 50/2015 IOF (Financial Operations Tax) Credit Effect on Financial Resource Loan Operations by means of Current Accounts Query Solution COSIT No. 68/2015 ZFM (Manaus Free Trade Zone) Sales Revenue Inclusion in the CPRB (Social Security Contribution on Gross Revenue) Calculation Basis Query Solution DISIT 3rd RF Offsetting Tax Paid Abroad for Direct Services Provision Corporations that Opted for the Notional Income

3 Tax report n Year VI March 2015 Souza, Schneider, Pugliese e Sztokfisz Advogados law firm is available to its clients should they have any questions on the decisions commented on in this newsletter. Enjoy your reading.

4 Tax report n Year VI March 2015 Jurisprudence STF General implications recognized Contribution to SENAR Gross Revenue from farming sales On 03/27/2015, the Virtual Plenum of the Supreme Federal Court (STF) acknowledged the existence of a General Implications during a discussion related to the constitutionality of the applicability of the SENAR Contribution to gross revenue from farming sales, under Article 62 of the Transitional Constitutional Provisions Act (ADCT) and Articles 150 (subparagraph II) and 240 of the 1988 Federal Constitution. Said constitutional matter shall be discussed under the Extraordinary Resort (RE) No /SC, reported by Justice Dias Toffoli. Tax immunity ITBI (Property Conveyance Tax) Real Estate included in a corporation s assets On 03/20/2015, the Supreme Federal Court (STF) acknowledged the existence of General Implications during a discussion related to the scope of the tax exemption for Property Conveyance Tax (ITBI), provided for in Article 156, 2, subparagraph I, of the 1988 Federal Constitution, applied to buildings included in a corporation s assets, when the total amount for such property exceeds the limit of the share capital to be paid. This constitutional matter will be reviewed under RE (Special Appeal) No /SC, reported by Justice Marco Aurélio. STF Binding Precedent (SV) No. 41 Binding Precedent Proposal (PSV) No. 98 Street lighting service The Plenum of the Supreme Federal Court (STF), by majority vote - Justice Dias Toffoli was outvoted - approved Binding Precedent Proposal (PSV) No. 98 on 11/04/2015, so as to order the conversion of the Ordinary Precedent No. 670/STF ( The public lighting service can not be compensated by means of fees ) in the Binding Precedent No. 41, according to the terms originally proposed. Thus, on account of the aforementioned conversion, the text of the precedent shall gain normative force and shall be adhered to/applied by all entities of the Judiciary Branch and the direct and indirect government agencies at the federal, state and municipal levels. STJ COFINS (Social Security Funding Contribution Rental of shopping mall parking boxes On 02/10/2015, the First Panel of the Superior Court of Justice (STJ), when judging the REsp (Special Appeal) No /RJ, decided, by unanimous vote, that the income from the rental of parking boxes at shopping malls although structured as a condominium should be included in the calculation basis of the Social Security Financing Contribution (COFINS), pursuant to Article 2 of Complementary Act No. 70/1991. According to the rapporteur of the case, Justice Benedito Gonçalves, (i) shopping malls are companies, even incorporated as a condominium; therefore, these constitute a financial and autonomous unit, under Article 126, III, of the CTN (Brazilian Tax Code), with their own purpose and revenues, including registration with the CNPJ (National Corporate Taxpayers Registry) (ii) if the business generates income/revenue through the rental of goods and/or provision of services 1, then the amounts received are part of the revenue, 03

5 Tax report n Year VI March 2015 thus included in the calculation basis of any social contributions. Following this line of reasoning, the STJ has decided, in several cases, that applying the COFINS on revenue from administration and rental, by shopping malls, of either the commercial areas or parking boxes is legal. TRF1 CSLL (Social Contribution on Net Earnings) Non-applicability Cooperative actions by a farming loan cooperative On 10/03/2015, the Seventh Panel of the Federal Regional Court of the 1st Region (TRF1) decided, by unanimous vote, for the non-applicability of the Social Contribution on Net Earnings (CSLL) to the actions of farming loan cooperatives, pursuant to Article 79 of Act No. 5,4/1971 and Article 39 of Act No. 10,865/2004, except in the cases provided for in Articles 86 and 87 of Act No. 5,4/ The Reporting Judge Reynaldo da Fonseca considered the arguments of the decision so that the cooperative actions constitute results for the cooperative member (surplus), not profit for the cooperative; thus, the CSLL cannot apply. Therefore, the Justice has also followed the understanding already consolidated by the Superior Court of Justice (STJ) 3, i.e., actions typically cooperative actions 4 do not entail a market transaction or an agreement for purchase and sale of products or goods, thus not generating revenue for the cooperatives. Thus, any positive outcome from the aforementioned actions belongs solely to each of the members, not generating income for the cooperative association. TRF1 Social Security Contribution payment by healthcare insurance providers On 02/24/2015, the Seventh Panel of the Federal Regional Court of the 1st Region (TRF1) dismissed an Appeal filed by the National Treasury, understand that health insurance providers are not required to pay the Social Security Contribution on the amounts paid to the workers who provide services to the plan beneficiaries. The Rapporteur Judge Reynaldo Fonseca voted followed by all other members of the panel rejecting the applicability of the contribution, since the amounts are paid to the service providers, which are responsible for paying the Contribution. Such opinion of the 7th Panel is extremely relevant to all healthcare insurance providers, which can now find favorable jurisprudence acknowledging their right not to pay the social security contribution (INSS) on amounts that, in fact, are intended only for service providers. 1 Even for the benefit of its infrastructure or the condominium members. 2 I.e., when the cooperatives provide goods and services to nonmembers, since such cooperatives are required to separately account for the results, allowing the application of taxes. 3 REsp (Special Appeal) No /CE. 4 Cooperative actions are those conducted between the cooperatives themselves and between these and their members, in order to achieve the association objectives, including attracting members, loans to members and investment of the members resources. However, these do not include market operations or agreements for the purchase and sale of products or goods, under Article 79 of Act No. 5,4/71. 04

6 Tax report n Year VI March 2015 TRF1 Special Internal Drawback Customs System Possibility of granting tax benefits when the import amount is less than the international financing amount On 03/06/2015, the Eighth Chamber of the Federal Regional Court of the 1st Region (TRF1) decided, by unanimous vote, for the possibility of granting the benefit of the Special Internal Drawback Customs System even when the amount for the imported raw material is less than the price of the international financing agreement entered into by the taxpaying importer. In the case at hand, the taxpayer had won an international development tender for modernization of São Paulo subway, and its application for an internal drawback granting act has been turned down by the tax authority on the grounds that the international funding taken by the State of São Paulo for the aforementioned tender procedure was allegedly less than the price of the agreement entered into with the taxpayer, which is not allowed under Article 5 of Act No. 8,032/1990. After the trial court rejected the injunction, the Eighth Chamber of TRF1, following the vote of the assigned Rapporteur Federal Justice, Lana Ligia Galati, affirmed that the law does not explicitly require that the international funding matches the agreement entered into with the petitioner/winner of the international bidding. Please note, also, the opinion of the Federal Justice Maria do Carmo that, for an Internal Drawback, the relevant aspect is that the financed values are sufficient to pay for the products actually intended to build the property in Brazil. TRF4 REFIS (Tax Compliance Recovery Program) Calculation error in the calculation of installments Negligible amount Later settlement of the outstanding amount Impossibility of exclusion On 03/18/2015, the First Panel of the Federal Regional Court of the 4th Region upheld, by unanimous vote, the decision of the trial court, declaring the taxpayer s right to be reinstated in the Tax Compliance Recovery Program (REFIS), established by Act No. 9,964/2000. Due to a mistake when calculating the monthly gross revenue, the taxpayer failed to pay minor differences totaling R$ in more than 110 installments paid since joining the installment program, a scenario that led to its exclusion from REFIS. The Rapporteur Justice for the case, Joel Ilan Pacionik, understood that the taxpayer s bad faith was not observed, only a mere miscalculation when quantifying the monthly installment, stressing that, in the end, the outstanding amount was settled, confirming the taxpayer s good purpose of keeping the timely payment of the installments, even after being excluded from REFIS. Under such circumstances, the Justice underscored that a taxpayer that has the intention to redeem its tax credibility by paying its debts despite the harsh conditions to stay in the program should be privileged, since the law should not be enforced without restriction at the expense of other values protected by the legal system. 05

7 Tax report n Year VI March 2015 Regulations and Inquiry Solutions Interpretative Declaratory Act No. 1/2015 IRPJ/CSLL (Corporate Income Tax/Social Contribution on Net Earnings) Notional Income Manufacturing The Interpretative Declaratory Act No. 1 ( ADI No. 1/2015 ) from the Brazilian Federal Revenue Service was published on 03/06/2015, clarifying that, for purposes of determining the percentage on gross revenue to calculate the Corporate Income Tax ( IRPJ ) and Social Contribution on Net Earnings ( CSLL ) applied to the notional earnings, adopts the concept of manufacturing under Article 4 of Decree No. 7,212, dated June 15, Thus, for purposes of determining the IRPJ and CSLL calculation basis on notional earnings, manufacturing is considered any operation that modifies the nature, operation, finish, presentation or purpose of a product, or that enhances it for consumption; such concept includes the operations of transformation, processing, assembly, packaging or repackaging, renovation or refurbishment. We should stress that, under ADI No. 1/2015, the Federal Revenue Service settled the opinion that the product processing operation constitutes manufacturing, thereby superseding previous opinions that such operation would constitute a service, impacting the application of the notional earnings calculation percentage and, consequently, the IRPJ and CSLL due payable on operations of such nature. Query Solution COSIT No. 15/2015 EIRELI (Limited Liability Sole Proprietorship Company) Taxation as a Corporation The Query Solution No. 368 from the General Taxation Coordination Office ( COSIT ), published on 03/06/2015, addresses taxation via Corporate Income Tax ( IRPJ ) of professional services provided by an individual entrepreneur or by a limited liability sole proprietorship company ( EIRELI ). According to COSIT, revenues earned by an EIRELI are subject to the same taxation rules for as other corporations, not to the rules applicable to individuals. This is because Article 980-A, 5 of the Brazilian Civil Code, by providing that compensation from the assignment of tangible property rights linked to the business held by the owner of a corporation can be assigned to an EIRELI incorporated for the provision of services, enables taxing the revenue of such companies as corporations. Query Solution COSIT No. 17/2015 Foreign Company Subsidiary - Certificate of Tax Residence in Brazil and Taxation Based on the Worldwide Income On 03/04/2015, Query Solution No. 17 was published by the General Taxation Coordination Office ( COSIT ) of the Brazilian Federal Revenue Service, addressing the effects of the application for a Tax Residence Certificate issued by the Brazilian Federal Revenue Service regarding the income taxation of foreign-company subsidiaries in Brazil. More specifically, the question set out in the Query Solution relates to the construal of Article 2, 2 of the Normative Instruction No. 1,226, dated December 23, 2011, which provides that the application for a 06

8 Tax report n Year VI March 2015 Brazilian Tax Residence Certificate entails the consent of the concerned person to submit to taxation in the country, based on the worldwide income. Based on this prediction, the consulting company asked whether the Brazilian taxation system would affect not only the worldwide income earned by the subsidiary established in the country, but also the worldwide income earned by the parent company and other companies of the group based abroad. The view expressed in the Query Solution was that the Brazilian tax system affects only the worldwide income earned by the subsidiary of the foreign company in Brazil. In this regard, the Query Solution makes clear that the Brazilian laws treats the foreign company subsidiary like Brazilian corporations, so that the company is considered resident in our country for tax purposes, being subject to taxation based on its worldwide income, and is entitled to a Brazilian Tax Residence Certificate. Query Solution COSIT No. 21/2015 Costs and Expenses Allocation Agreement Registration with SISCOSERV On 03/04/2015, the Query Solution No. 21 was published by the General Taxation Coordination Office ( COSIT ) of the Brazilian Federal Revenue Service, addressing the requirement to register with the Integrated System for Foreign Trade of Services, Intangibles and Miscellaneous Transactions that Lead to Asset Variations ( SISCOSERV ), for international transactions related to the cost and expense apportionment agreements. According to the Query Solution, for cost and expense apportionment agreements entered into between companies of to the same conglomerate, the corporation residing in Brazil that benefits from the service, intangible or a transaction that leads to asset variations is required to record such transactions in SISCOSERV, provided these are listed in the Brazilian Service Nomenclature ( NBS ), established by Decree No. 7,708 dated April 2, Such requirement applies both to the outsourcing of services by the parent corporation abroad in favor of other members of the apportionment agreement and to expense apportionment agreements where the service is provided by the parent company itself. Regarding the first case, the requirement to register with SISCOSERV stems from the existence of an obligation-related relationship whose nature is the true provision of a service, whereas in the latter case, such an obligation stems from the existence of a transaction that generates assets for the corporation, to the extent that the compensation offered in consideration for the activity made available represents an expense that entails variation of the Brazilian entity s assets. Under Article 9 of the Normative Instruction No. 1,396 dated September 16, 2013, the Query Solutions delivered by COSIT have a binding effect within the scope of the Brazilian Federal Revenue and support the applicability of the view expressed therein by a taxpayer found in the same scenario. Query Solution COSIT No. 50/2015 IOF (Financial Operations Tax) Credit Effect on Financial Resource Loan Operations by means of Current Accounts On 02/26/2015, Query Solution No. 50 was published by the General Taxation Coordination Office ( COSIT ), which expressed the view that the Tax on Credit Transactions ( IOF-Crédito ) applies to the so-called intercompany current account transactions. 07

9 Tax report n Year VI March 2015 In short, such transactions are intended to facilitate the creation of a mutual flow of funds between companies in order to meet momentary cash requirements of the parties involved. According to the understanding of COSIT, such operations would be subject to the IOF-Credit tax, since these bear the essential characteristics of financial loans between companies. Therefore, the Query Solution provides that the way in which the operations are carried out and the link between the entities involved are irrelevant. Query Solution COSIT No. 68/2015 ZFM (Manaus Free Trade Zone) Sales Revenue Inclusion in the CPRB (Social Security Contribution on Gross Revenue) Calculation Basis On 3/13/2015, the Query Solution No. 68 was published by the General Taxation Coordination Office ( COSIT ) of the Brazilian Federal Revenue Service, which addresses the inclusion of revenues from the sale of domestic goods for consumption or manufacturing at Manaus Free Trade Zone ( ZFM ) in the calculation basis of the Social Security Contribution on the Gross Revenue ( CPRB ). The taxpayer requested clarification on the applicability of Article 9 of Act No. 12,546, dated December 14, 2011 ( Act No. 12,546/2011 ), which orders that export revenues are excluded from the CPRB calculation basis. Since, pursuant to Article 4 of Decree-Law No. 288 dated February 28, 1967 ( Decree-Law No. 288/1967 ), the sales of Brazilian products to the ZFM have export characteristics for all relevant tax purposes, the inquirer asked whether the exclusion scenario provided for in Act No. 12,546/2011 covers the revenue from transactions involving the ZFM. COSIT stressed, however, that the text of Decree-Law No. 288/1967 only provides for the matching of tax effects related to the law in force at the time of enactment, which would not apply to CPRB, which was instituted only upon the enactment of Act No. 12,546/2011 which resulted from the conversion of the Provisional Measure No. 540, dated August 2, Thus, according to the view of COSIT, the revenue from sales of products for consumption or manufacturing at the ZFM should be included in the CPRB calculation basis. Query Solution DISIT 3rd RF Offsetting Tax Paid Abroad for Direct Services Provision Corporations that Opted for the Notional Income The Query Solution No. 3005, issued by the Taxation Division of the Brazilian Federal Revenue Office of the 3rd Tax Region ( DISIT 3ª RF ), was published on 03/19/2015, addressing the offsetting of tax paid abroad by virtue of services rendered outside Brazil by a Brazilian company that opted for the notional earnings method. The Query Solution was declared linked to the Dispute Resolution COSIT No. 8, dated July 16, 2014, which sets out the arguments supporting the views of the Brazilian Revenue Service (RFB) on the matter. According to the Query Solution, the Brazilian laws do not allow corporations opting for the notional earnings method to offset taxes paid abroad by providing services directly outside Brazil. The offsetting possibility would be restricted to corporations opting for the taxable income method, since Article 15 of Act No. 9,430, dated December 27, 1996, refers to the requirement that the income earned abroad is computed as taxable income, pursuant to Article 26 of Act No. 9,249, dated December 26,

10 Tax report n Year VI March 2015 However, the Query Solving acknowledges that, in the event of an agreement to avoid taxation between Brazil and the foreign country, which provides for offsetting as a method to avoid double taxation of income, the possibility of offsetting under the treaty would be ensured, including for corporations opting for the notional income method. Thus, although the view expressed in the Query solution is restrictive regarding the possibility of offsetting pursuant to the domestic laws, it is explicit when acknowledging that the provisions of the treaty prevail over the domestic regulations, based on Article 98 of the Brazilian Tax Code and the principle of specialty. 09

11 Tax report n Year VI March 2015 Team responsible for preparing the Tax Bulletin: Igor Nascimento de Souza (igor.souza@souzaschneider.com.br) Henrique Philip Schneider (philip.schneider@souzaschneider.com.br) Eduardo Pugliese Pincelli (eduardo.pugliese@souzaschneider.com.br) Cassio Sztokfisz (cassio.sztokfisz@souzaschneider.com.br) Fernanda Donnabella Camano de Souza (fernanda.camano@souzaschneider.com.br) Diogo de Andrade Figueiredo (diogo.figueiredo@souzaschneider.com.br) Flávio Eduardo Carvalho (flavio.carvalho@souzaschneider.com.br) Vitor Martins Flores (vitor.flores@souzaschneider.com.br) Rafael Fukuji Watanabe (rafael.watanabe@souzaschneider.com.br) Laura Benini Candido (laura.candido@souzaschneider.com.br) Rodrigo Tosto Lascala (rodrigo.tosto@souzaschneider.com.br) Pedro Lucas Alves Brito (pedro.brito@souzaschneider.com.br) Maria Carolina Maldonado Mendonça Kraljevic (mariacarolina.maldonado@souzaschneider.com.br) Viviane Faulhaber Dutra (viviane.dutra@souzaschneider.com.br) Flavia Gehlen Frosi (flavia.frosi@souzaschneider.com.br) Marina Lee (marina.lee@souzaschneider.com.br) Thomas Ampessan Lemos da Silva (thomas.ampessan@souzaschneider.com.br) Gabriela Barroso Gonzaga Ferreira Porto (gabriela.porto@souzaschneider.com.br) Ana Cristina de Paulo Assunção (anacristina.assuncao@souzaschneider.com.br) Sérgio Grama Lima (sergio.lima@souzaschneider.com.br) Pedro Paulo Bresciani (pedro.bresciani@souzaschneider.com.br) Gabriela Xavier Urbani (gabriela.urbani@souzaschneider.com.br) Pedro Guilherme Ferreira Bini (pedro.bini@souzaschneider.com.br) Roberta Marques de Moraes (roberta.moraes@souzaschneider.com.br) Tatiana Ergang Barros (tatiana.barros@souzaschneider.com.br) 10