International Tax Newsletter - February 2025

New Tax Regulation Establishes Minimum Tax for Multinationals

As of January 1st, 2025, Brazil has implemented Law #15,079/2024, introducing a minimum tax rate of 15% on profits of multinational companies operating within the country. This legislation aligns with the Organization for Economic Co-operation and Development's (OECD) Pillar 2 guidelines, aiming to harmonize Brazil's tax system with global standards. The regulation applies to companies with annual revenues exceeding €750 million. Non-compliance may result in fines and sanctions.

The primary objective of this law is to combat tax base erosion and profit shifting by multinational enterprises, ensuring they contribute a fair share of taxes in Brazil. Tax experts advise affected companies to review their fiscal strategies and ensure compliance with the new requirements to avoid potential penalties.

This initiative reflects Brazil's commitment to international tax cooperation and the adoption of measures that promote a more equitable and transparent global tax environment

STF Reaffirms Decision on Non-Incidence of ICMS in Asset Transfers

The Supreme Federal Court (STF) has reaffirmed that the Tax on the Circulation of Goods and Services (ICMS) does not apply to the transfer of goods between establishments of the same taxpayer located in different states. However, this ruling is effective only from the fiscal year 2024 onwards. This unanimous decision was made during the judgment of Extraordinary Appeal (RE) #1490708, which holds general repercussion. 

Previously, the STF had established this understanding in Topic #1099, during the judgment of the Extraordinary Appeal with Agravo (ARE) 1255885. Subsequently, in Declaratory Action of Constitutionality (ADC) #49, the Court determined that this ruling would take effect only from 2024, except for cases already in progress before the decision. 

In the current case, the State of São Paulo challenged a local Court of Justice decision that applied the ICMS exemption before the stipulated timeframe. In his vote to reaffirm the Court's jurisprudence, Minister Luís Roberto Barroso emphasized that disregarding the modulation of effects decided in ADC #49 would violate the authority of STF decisions and compromise legal certainty and fiscal balance. 

The STF established the following binding thesis for similar cases:

"The non-incidence of ICMS on the transfer of goods from one establishment to another of the same taxpayer located in different states, as established in Topic #1.099/RG and ADC #49, takes effect from the fiscal year 2024, except for administrative and judicial processes pending conclusion until the date of publication of the judgment 

The Federal Regional Court of the 5th Region (TRF-5) has ruled to suspend the two-year "quarantine" period imposed by the National Treasury for taxpayers with canceled agreements due to non-compliance. This ruling allows a company to enter into a new tax settlement, a decision considered unprecedented by experts.

The court’s ruling benefits a company in João Pessoa that offers preparatory courses for exams like the Enem and public contests. The decision mandates that the National Treasury Attorney’s Office (PGFN) finalize a new tax settlement with the company and suspend the collection of its outstanding taxes. Additionally, the PGFN must issue a positive certificate with a negative effect, unless there is a legal barrier preventing it.

This precedent is significant in the context of the federal government's efforts to increase revenue collection. According to PGFN, by October 2024, R$ 27.8 billion had been collected through tax settlement agreements, accounting for over half of the total R$ 49.2 billion in recovered tax debts during the same period.

STJ to Decide on Taxation Timing of IRPJ and CSLL in Tax Compensation

The Superior Court of Justice (STJ) is set to rule on the appropriate timing for the collection of Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) on recovered tax credits—a significant point of contention between the Federal Revenue Service and companies. The central issue is whether taxation should occur upon the authorization of the credit or upon the approval of its compensation, directly affecting companies under the Real Profit taxation regime.

Currently, the Federal Revenue Service asserts that IRPJ and CSLL should be levied at the time the credit is authorized, even if the company has not yet utilized the entire credit for tax offsets. Conversely, taxpayers argue that taxation should only occur as the credits are effectively used to offset taxes, following the approval of each compensation.

The STJ's decision, to be made under the system of repetitive appeals, will establish a uniform criterion for all courts in the country. This ruling will have a direct impact on companies that perform tax compensations, potentially affecting their tax burden and financial strategies. 
In anticipation of the judgment, experts recommend that companies:

• Review existing tax credits: Map out authorized credits and those pending compensation to assess potential financial impacts.
• Evaluate different tax scenarios: With the assistance of tax consultants, simulate various outcomes based on possible decisions to prepare for adjustments in cash flow.
• Strengthen accounting and tax controls: Maintain organized records to demonstrate precise amounts recovered and compensated, especially if taxation is required upon credit authorization.
• Monitor the judgment and potential legislative changes: Stay informed about updates to ensure compliance and avoid penalties.
• Consider legal strategies: Depending on the outcome, assess the feasibility of judicial measures to challenge undue charges or explore alternatives to mitigate financial impacts.
  By proactively planning, companies under the Real Profit regime can reduce risks and adapt swiftly to any changes resulting from the STJ's forthcoming decision.

Royalties Payments for Software Are Not Deductible, Decides CARF

By a tie-breaking vote, CARF's 2nd Panel of the 1st Chamber ruled that Microsoft Brazil cannot deduct royalties paid for software licensing from its Corporate Income Tax (IRPJ) base. The case involves a contract where Microsoft Corporation (USA) allowed Microsoft Brazil to sell Xbox game consoles, games, and access codes for the Xbox Live platform on cards.

In 2014, the tax authorities determined that payments made to Microsoft’s U.S. branch were royalties for software licensing, disallowing Microsoft Brazil from deducting these as expenses for IRPJ purposes. Microsoft’s defense argued that these payments should be considered as merchandise imports since they involved "off-the-shelf software." The company’s lawyer emphasized that the expense was a purchase cost related to the sale of games in Brazil, not a royalty, arguing that this could lead to a shift from income taxation to revenue taxation.

The main issue in the case was the legal nature of the payments—whether they were royalties or compensation for copyright exploitation. The council majority, led by Fenelon Moscoso de Almeida, ruled they were royalties, while the rapporteur, Fredy Gomes de Albuquerque, argued they were payments for copyright exploitation. The case was influenced by the evolving legislation on transfer pricing, clarifying that payments to foreign entities cannot be classified as royalties when they are for collective copyright exploitation, as per Article 22 of Law #4506/64.