Following the execution of an agreement with Switzerland, on May 7, 2018 by virtue of the visit from the Brazilian Minister Aloysio Nunes to Singapore, the Brazilian and Singaporean governments signed the Agreement for Elimination of Double Taxation with Respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (DTT). This development reflects Brazil’s continuous efforts to expand its network of tax agreements. The DTT requires approval by the national Congress and ratification by the President to take effect in Brazil. Once in place, which shall facilitate investments and provide more certainty on business transactions between the taxpayers of the two countries.
Among other relevant provisions, the following aspects of DTT are particularly worth noting:
(i) In line with the agreement signed with the Swiss government, the DTT also has a specific article regulating the taxation of technical services, which may indicate a new trend for the treaties entered into by Brazil. Under Article 13 of the DTT fees for technical services will be subject to a maximum 10 percent withholding income rate in case the beneficial owner is a resident of the other contracting state. The definition of technical services is quite broad, as it includes any service of a managerial, technical or consulting nature, with a few exceptions.
Even though Article 13 provides for a 10 percent rate (lower than the statutory rate of 15 percent for non-tax haven jurisdictions), it may be seen as a clear attempt by the Brazilian government to depart from court rulings favorable to taxpayers in which consulting and technical services were considered business profits under Article 7 of other DTTs, taxed only by the contracting state providing such services (no withholding income tax applied). Once the DTT enters into force, it shall lead to interesting discussions between tax authorities and taxpayers in Brazil.
(ii) A robust Limitation of Benefits clause (Article 28) aiming to exclude from the treaty benefits entities operating as holding companies and cash pooling companies.
(iii) A 10 percent royalty rate (except trademarks).
(iv) Reduced rate of 10 percent on interest to banks granting funding for capital investments under certain conditions.
(v) A broader definition of permanent establishment, which includes consultancy services provided in one contracting state by a company of the other contracting state for a period of more than 183 in a 12-month period.
Observers are noting that Singapore had been included in Brazil’s blacklist as a tax haven. It was not until November 2017 that Singapore was removed from the list upon its latest update (Normative Instruction 1,773/2017 issued by the Brazilian federal tax authorities). Certain Singaporean entities remain on the Brazilian grey list as privileged tax regimes subject to transfer pricing rules and stricter deductibility rules.