The Brazilian group Marcopolo assembles bus bodies in Brazil for export. It used two related offshore companies, Marcopolo International Corporation, domiciled in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, in a re-invoicing arrangement whereby the product was shipped from Marcopolo to the final customers but the final invoice to the customers was issued by the offshore companies.
The tax authorities found that the arrangement lacked business purpose and economic substance and, on this basis, disregarded the transactions.
Decision of the Administrative Court of Appeal
The Court ruled in favour of Marcopolo.
According to the Court, the transactions with the offshore companies had a business purpose and were therefore legitimate tax planning.
Excerpts
“6. The absence of an operational structure of the companies controlled by the Appellant, capable of supporting the transactions performed, even if, in isolation, it could be admitted within the scope of a “rational organization of the economic activity”, in the case at hand, gains greater significance because a) it constituted only one of the elements within a broad set of evidence presented by the tax authority; b) considering the size of the business undertaken (voluminous export), such absence cannot be such that one can even speculate on the very factual existence of such companies; and c) there is no effective evidence in the case records of the performance of the transactions of purchase and resale of products by such companies;
7. even if it can be admitted that the results earned abroad by the companies MIC and ILMOT were, by equity equivalence, reflected in its accounting, the Appellant does not prove having paid Income Tax and Social Contribution on Net Profits on those same results, thus not contradicting the arguments presented by the tax authority authorizing such conclusion;
8. There is no dispute in this case that a Brazilian transnational company cannot see, in addition to tax benefits, other reasons for conducting its operations through offshore financial centres. What is actually at issue is that, when asked to prove (with proper and suitable documentation) that its controlled companies effectively acquired and resold its products, the Appellant does not submit even a single document capable of effectively revealing a commercial relation between its controlled companies and the end recipients of said products;
9. it is also not disputed that the Brazilian economic environment, especially in the year submitted to the tax audit, is likely to lead to higher costs for national companies operating abroad, both in relation to competitors from developed countries, and in relation to competitors from other emerging countries. What is being questioned is that, specifically in the situation being examined herein, at no time did the Appellant at all materialize such costs, demonstrating on documents, by way of example, that in a given export transaction, if the transaction were effected directly, the cost would be X, the profit would be Y, and the tax paid would be Z, whereas, due to the form adopted, the cost would be X – n, the profit would be Y + m, and the tax paid represented Z + p. No, what the Appellant sought to demonstrate is that, considering a historical series of its exports, there was a significant increase in its revenues and, consequently, in the taxes paid. As already stated, if a significant capitalization of funds through evasive methods is admitted, no other result could be expected.
(…)
Thus, considering everything in the case records, I cast my vote in the sense of: a) dismissing the ex-officio appeal; b) partially granting the voluntary appeal in order to fully exempt the tax credit related to the withholding income tax, fully upholding the other assessments.”
“I verify that, when doing business with companies or individuals located in Countries with Favorable Tax Treatment, the legislation adopted minimum parameters of values to be considered in exports; and maximum parameters in values to be considered in payments made abroad, under the same criteria adopted for transfer pricing.
Here, it is important to highlight that the legislation did not equalize the concepts of business carried out with people located in Countries with Favorable Tax Regime and transfer pricing. What the law did was to equalize the criteria to control both, but for conceptually distinct operations.
Thus, based on the assumption that Brazilian law specifically deals in its legislation, by means of a specific anti-avoidance rule, with transactions carried out with companies in countries with a favored tax regime, I cannot see how one can intend to disregard the transactions carried out by a Brazilian company with its foreign subsidiaries, since these are deemed to be offshore companies in the respective countries where they are incorporated.
In fact, every country with a Favorable Tax Regime has, as a presupposition, the existence of offshore companies, in which the activities are limited to foreign business.
In the case at hand, there are two wholly-owned subsidiaries of the Appellant, namely, MIC – Marcopolo International Corporation, located in the British Virgin Islands, and ILMOT International Corporation S.A., incorporated as an investment finance corporation – SAFI, in Uruguay.
From what can be extracted from the case records, the deals carried out by the Appellant with the final purchasers of the products were intermediated by both companies, and the tax assessment charged, as income of the Appellant, the final values of the deals carried out by those intermediary companies with the purchasers abroad.
However, this was not the legal treatment given by Brazilian law to business deals made with offshore companies established in Countries with a Favorable Tax Regime. Law 9430/96 is limited to checking whether the price charged is supported by the criteria set out in articles 18 to 22 thereof; once such minimum parameters are met, the business plan made by the taxpayer must be respected.
Therefore, in this case, I believe that the Tax Authorities could not disregard the business carried out by the Appellant with its wholly-owned subsidiaries beyond what Law 9430/96 provides for the hypothesis of companies located in Countries with Favorable Tax Regimes.
Moreover, I also do not see the possibility of the Tax Authorities seeking, in the companies MIC and ILMOT, evidence of, for instance, the existence of employees and operational structure compatible with the amount of business done, or even inquiring, on their own initiative, the effective existence of their address in the foreign country. Now, these are trading companies incorporated offshore in countries with a favoured tax regime. It is obvious that they do not have the structural and organizational format of an ordinary trading company. It should also be emphasized that the way Brazilian law dealt with this category of companies was not to disregard the business dealings they carried out with resident companies, but rather to control the prices charged in transactions carried out with these companies.
If this were not enough to recognize the dismissal of the assessment, I also verify that the companies MIC and ILMOT had, even if partially, their profits taxed in Brazil due to the residence of the controlling company, the Appellant.
In fact, as these companies are wholly-owned subsidiaries of the Brazilian company, the taxation of their income takes place when the profits are made available or through equity accounting. Therefore, when disregarding the business carried out by the taxpayer, the inspection cannot fail to consider the reflection that such income caused in the company’s bookkeeping over the years. This is because this disregard ends up causing the income tax to be levied twice on the same income, a situation that is absolutely contrary to the law and to the systematic operation of the tax in question.
The same may be said with regard to the consideration of the expenses of the companies MIC and ILMOT in the formation of the taxable income. In fact, the assessment notice partially disregarded the Appellant’s business with its subsidiaries: if on the one hand, it imputed as income of the resident company the result of the sales of the foreign subsidiaries; on the other hand, it did not take into account the deductible expenses that these companies recorded in their accounting records.
As satisfactorily demonstrated by the Appellant, the subsidiaries MIC and ILMOT, in addition to intermediating business as trading companies, also rendered auxiliary and after-sales services of the Appellant’s products, such as, for instance, providing guarantees, paying commissions to end-sellers, etc. If the Inspection intended to integrate the revenues of the subsidiaries in the formation of the Appellant’s taxable income, the referred costs should also necessarily be considered, under penalty of taxing “revenue” as if it were “income” of the legal entity.
For these reasons, I beg the opinion of the Reporting Councilor and grant the appeal in order to dismiss the assessment.”
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