Brazil: new cross-border payments tax treatment regulations are enforced

The act stipulates revised tax treatment measures applicable to cross-border payments for the use of data centers located abroad.

According to the Act, when the Brazilian source of payment hires data centers abroad for the use of storage systems and remote data processing, the transactions may not be characterised as rental, but as typical provision of services, which triggers withholding income tax at 15% (25% if the recipient is located in a tax haven jurisdiction), Cide-royalties at 10% and PIS/COFINS-Importation at 9.25% (in addition to the 0.38% financial tax levied on the foreign exchange transaction). The Act does not address Services Tax, since this is a municipal tax.

Prior to this Act, the IRS issued Ruling (Solução de Divergência) N. 6/2014, published in July 2014, in which it is mentioned that the performance of support activities, security, internet access, room temperature control and management services may not be segregated, for tax purposes, from equipment rental, since those services are embedded in data center activities.

Neither the Act or the Ruling have mentioned the new definition of “technical services” provided for in Normative Instruction IRS N. 1,455/2014, which now also comprises the performance of service derived from automated structures with clear technological content.

Thus, it is not clear whether this definition was taken into account in the IRS´ understanding.