Cost-sharing agreements are not about service rendering. The former only purpose is to allocate costs to legal entities within a corporate group. There is no rendering of services within the corporate group. For this reason, the reimbursement of costs should not be taxable. In Brazil, cost-sharing agreements are not regulated by law, but interestingly, a growing number of private letter rulings shape how Brazilian taxation should apply.
The most recently issued private letter ruling, PLR n.2005/2020, does not innovate or bring any changes to how the Brazilian tax authorities have previously viewed such arrangements. In said PLR, one corporation in the group takes charge of all expenses related to different administrative support departments to allocate the common costs and expenses among companies within the same corporate group. The PLR stated that this could be carried out under any legal entity’s name or TIN as long as it is done within the corporate group.
In summary, PLR 2005/2020 affirms the deductibility of the payments for IRPJ and CSLL purposes and sets out that the reimbursement of the legal entity centralizing the shared activities are not tax bases of either PIS/Pasep or COFINS.
PLR 2005/2020 is tied to PLR COSIT n.23/2013. Like the former, the latter is also about concentrating all costs in one corporate entity that controls the administrative departments’ expenses. In PLR n.23/2013, the administrative support included the legal department, IT, and human resources.
PLR 2005/2020 reaffirms the ruling in PLR 94/2019. The latter decided that the ruling in PLR 23/2013 regarding IRPJ also applies to CSLL. More specifically, for both IRPJ and CSLL purposes, the costs to be allocated must be deemed necessary, normal, and usual, in addition to being proved and paid. The calculation must be based on reasonable and objective assessment criteria, previously adjusted and formalized in a written instrument signed by the intervening parties. The applicable standards must correspond to each entity’s actual expenditure in the corporate group, and the global price paid for goods and services. The centralizing company of the operation and the decentralized companies that benefit from the goods and services can only book as expenses the amount that applies to them based on the apportionment criterion. The centralizing company must record the amounts to be reimbursed as credit rights to be recovered and keep separate bookkeeping for all acts directly related to administrative expenses allocation.
Regarding PIS/Pasep and COFINS, the PLR 2005/2020 only states that the amount reimbursed to the centralizing corporation to pay common expenses is taxed by neither.
PLR 2005/2020 did not repeat the other two conclusions of PLR 23/2013, which deal with non-cumulative credits of PIS/Pasep and COFINS. I.e., PLR 2005/2020 left out that each legal entity that is part of the corporate group must carry out its own credits calculation based on the allocated expenditures attributed to it. Besides, the allocation of common costs should list the items included in the amount allocated to each legal entity in the corporate group to identify the expense items that give rise to the credits right.
Understanding how cost-sharing arrangements in Brazil are treated for tax purposes requires analyzing other private letter rulings previously issued on this matter. In this regard, PLR n. 8/2012 is especially relevant as it lists the following as mandatory in any contract for sharing costs and expenses: a) allocation of costs and risks inherent in the development, production, or obtaining of goods, services or rights; b) the contribution of each company must be consistent with the benefits expected or received by each; c) provision for identifying the specific service to each group company. If it is not possible to assume that the company can expect any benefit from the activity carried out, such company should not be considered a party to the contract; d) reimbursement agreement, meaning the reimbursement of costs, directly related to the effort or sacrifice incurred in carrying out an activity. No portion of the reimbursement should be profits of the entity reimbursed; e) the resulting benefit should come as an advantage offered to all companies in the group; f) the activities’ remuneration, regardless of their actual use. It suffices for the activities to be made available for the benefit of the other companies in the group; g) the conditions under which any company, in the same circumstances, would be interested in hiring.
However, the list of mandatory requirements in PLR n.8/2012 has not been enough to stop the legal uncertainty because the “Receita Federal do Brasil” (Federal Revenue Service) has unilaterally established the essential features these contracts and also verifies whether such features are present and fulfilled in specific cases. In this regard, PLR n.276/2019 started by reinforcing the aforementioned requirements of PLR n. 8/2012 but highlighted the lack of mutual benefit and characterized the remuneration as direct remuneration for the advantage earned.
As for the mutual benefit requirement, PLR n. 276/2019 mentioned the OECD transfer pricing guidelines 2017 because, in this case, the conclusion was that that the parent company was performing the activities without any benefit expectation. On the other hand, possibly what mostly differentiates PLR n. 276/2019 is the tax authorities focus on the need for a separate benefit to be measured using indirect methods based on objective criteria, since any direct cost determination would be typical of service contracts. In this case, the direct cost determination, criticized in said PLR, was made considering the number of employees allocated to carry out the activities. For these two reasons, PLR n. 276/2019 concluded that the reimbursements were taxable because the arrangement was, in fact, a contract for the provision of technical services. Therefore, applicable taxes to be paid were the IRRF, Cide-Royalties, PIS/Pasep-Import, and COFINS-Import.
The Brazilian administrative court partially quashed hopes of diminishing the legal uncertainty surrounding cost sharing agreements for tax appeals (CARF) decision in judgment n. 1401-004.049. The case involved payments within the McDonald’s group. The decision authorized the withholding tax (IRRF) to be levied on the outbound reimbursement of costs of administrative support activities of the corporate group. The decision mentioned, as examples, the finance department, systems, human resources, marketing, and legal support. Further, the decision ruled out the applicability of PLR n. 378/2017, which included an IRRF analysis, and decided it was not applicable by stating that the purpose of the private letter ruling request was not the payments of the allocated portions of the expenses centralized in a legal entity abroad, but instead the payments of an expatriate individual’s work, who is a tax resident in Brazil and was hired by a company in Brazil. In summary, the CARF decision allowed taxation by IRRF even though it upheld the contract as a cost-sharing agreement.
Since Brazil plans to be admitted as an OECD member country at some point, ideally, the Brazilian tax treatment of cost-sharing agreements should be based on more consistent, predictable, and reliable rules, preventing these agreements from being subject to changes and surprises that eventually might adversely impact the business environment in Brazil.
Roberto P. Vasconcellos is a senior tax associate of Battella, Lasmar & Silva Advogados, in São Paulo.