Although it is part of the Base Erosion and Profit Shifting (BEPS) Project to counteract multinationals’ tax planning that uses the loopholes of the international system to reduce their overall tax burden, Brazil has not signed the Multilateral Instrument (MLI) to implement the changes suggested in bilateral treaties to avoid the double taxation (double tax treaties) in the form of a single negotiation.


In the case of Brazil, the policy adopted thus far is the individualized amendment of each of the existing double tax treaties through new bilateral ones, which is also one of the possibilities provided by the BEPS Project, conducted by the Organization for Economic Cooperation and Development (OECD) and the Group of 20 (G-20).


To commence this process, Brazil signed, on July 24, 2017, the protocol of amendment to the bilateral agreement entered into with Argentina on May 17, 1980. In addition to other measures for alignment with the OECD and United Nations (UN) models and the treaty enforcement policies of one or other country, the text of the protocol can be seen as the beacons of the Brazilian position within the scope of the BEPS Project, which are:

  1. Inclusion of the intention to avoid double non-taxation, as in situations of tax evasion and avoidance, and to restrain situations of abuse of the treaty;

  2. Mention of the objective of cooperation in tax matters, one of the pillars of the BEPS Project;

  3. Introduction of the concept of "person closely related to a company”, a relationship of control of a person over a company, of a company over a company, or of companies under common control;

  4. Modification of the list of scenarios that do not qualify as permanent establishment, including the situation of "maintaining a fixed place of business solely for the purpose of carrying out, for the enterprise, any other activity" of an auxiliary and preparatory nature;

  5. Introduction of the concept of a dependent agent, one who serves in one of the signatory States on behalf of a company of another signatory State and enters into contracts in the name of the company, with respect to goods of that company or for the provision of services by that company;

  6. With respect to the distribution of dividends, to qualify for the reduced income tax rate at 10%, the following requirements must be fulfilled: hold at least 25% of the company's capital for at least 365 days, including the dividend payment day;

  7. With regard to methods to avoid double taxation, an amendment was put in place to adopt the credit system to replace the exemption in Brazil for dividends from companies in the same group in Argentina and exemption in Argentina for all types of taxable income received in Brazil;

  8. Access to the mutual agreement procedure in any of the signatory States;

  9. Access to the mutual agreement procedure to discuss situations of abuse of the double taxation agreement;

  10. Implementation of the resolution achieved through a mutual agreement procedure regardless of the deadlines provided in domestic legislation;

  11. Adoption of the Principal Purpose Test (PPT), on the basis of which the benefits of the double tax treaty will not be applicable whenever it is reasonably concluded that obtaining such benefits was one of the main objectives of the transaction under the agreement;

  12. Limitation of benefits of the double taxation agreement to situations where a company resident in a signatory State which has received income from the other signatory State has more than 50% of its actual holding held by a beneficial owner non-resident of the first signatory State (an exception for the event that that company exercises substantive economic activity in the country in which it is resident); and

  13. Introduction of an anti-abuse clause for permanent establishments located in a third State.


In light of these elements of the protocol, it can be concluded that the most significant changes are those that seek to counteract abuse of treaties and non-taxation situations, mainly by including the PPT, which brings in a subjective analysis to the scenarios for application of the double taxation agreement, in line with the interpretation currently adopted by the Brazilian Federal Revenue Service (RFB), which considers the “business purpose" or the "real intention of the parties" in transactions.


Regarding the changes in the permanent establishment qualification, there will apparently be no significant changes in Brazilian tax policy, as this criterion of withholding tax is not used by the domestic rule.


With regard to dispute settlement methods, Brazil maintained its position of not adopting mandatory and binding arbitration. The inclusions made in the protocol regarding the mutual agreement procedure represent only alignment with the minimum standards of action 14 of the BEPS Project. In this context, although Brazil has committed itself to guaranteeing access to the mutual agreement procedure in cases involving the application of transfer pricing legislation, the adoption of a system of fixed margins under Brazilian law may in practice make resolution of a conflict unfeasible.


The Brazilian government did not adopt all the solutions proposed by MLI in negotiating the double tax treaty with Argentina. Recommendations have been elected that essentially maintain Brazil's tax policy. Along these lines, an article was included in the protocol to equate technical service and administrative assistance to royalties, calling for the application of withholding tax, under the terms of Interpretative Declaratory Act of the General Coordination of Taxation (Cosit) No. 5/2014.


The protocol is currently under review y the Chamber of Deputies and, after its approval, will be sent to the Senate and for enactment by the President of the Republic for it to become part of the Brazilian legal system.