GLOBAL TAX WEEKLY a Closer Look

GLOBAL TAX WEEKLY ISSUE 185 | MAY 26, 2016 a closer look

SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATE TAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCAL GOVERNANCE BUDGETS COMPLIANCE OFFSHORE

SECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONS RESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING AND MINERALS ENTERTAINMENT AND MEDIA OIL AND GAS

COUNTRIES AND REGIONS EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLIC DENMARK ESTONIA FINLAND FRANCE GERMANY GREECE HUNGARY IRELAND ITALY LATVIA LITHUANIA LUXEMBOURG MALTA NETHERLANDS POLAND PORTUGAL ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOM EMERGING MARKETS ARGENTINA BRAZIL CHILE CHINA INDIA ISRAEL MEXICO RUSSIA SOUTH AFRICA SOUTH KOREA TAIWAN VIETNAM CENTRAL AND EASTERN EUROPE ARMENIA AZERBAIJAN BOSNIA CROATIA FAROE ISLANDS GEORGIA KAZAKHSTAN MONTENEGRO NORWAY SERBIA TURKEY UKRAINE UZBEKISTAN ASIA-PAC AUSTRALIA BANGLADESH BRUNEI HONG KONG INDONESIA JAPAN MALAYSIA NEW ZEALAND PAKISTAN PHILIPPINES SINGAPORE THAILAND AMERICAS BOLIVIA CANADA COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA PANAMA PERU PUERTO RICO URUGUAY UNITED STATES VENEZUELA MIDDLE EAST ALGERIA BAHRAIN BOTSWANA DUBAI EGYPT ETHIOPIA EQUATORIAL GUINEA IRAQ KUWAIT MOROCCO NIGERIA OMAN QATAR SAUDI ARABIA TUNISIA LOW-TAX JURISDICTIONS ANDORRA ARUBA BAHAMAS BARBADOS BELIZE BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS COOK ISLANDS CURACAO GIBRALTAR GUERNSEY ISLE OF MAN JERSEY LABUAN LIECHTENSTEIN MAURITIUS MONACO TURKS AND CAICOS ISLANDS VANUATU GLOBAL TAX WEEKLY a closer look

Global Tax Weekly – A Closer Look

Combining expert industry thought leadership and team of editors outputting 100 tax news stories a the unrivalled worldwide multi-lingual research week. GTW highlights 20 of these stories each week capabilities of leading law and tax publisher Wolters under a series of useful headings, including industry Kluwer, CCH publishes Global Tax Weekly –– A Closer sectors (e.g. manufacturing), subjects (e.g. transfer Look (GTW) as an indispensable up-to-the minute pricing) and regions (e.g. asia-pacific). guide to today's shifting tax landscape for all tax Alongside the news analyses are a wealth of feature practitioners and international finance executives. articles each week covering key current topics in Unique contributions from the Big4 and other leading depth, written by a team of senior international tax firms provide unparalleled insight into the issues that and legal experts and supplemented by commentative matter, from today’s thought leaders. topical news analyses. Supporting features include a round-up of tax treaty developments, a report on Topicality, thoroughness and relevance are our important new judgments, a calendar of upcoming tax watchwords: CCH's network of expert local researchers conferences, and “The Jester's Column,” a lighthearted covers 130 countries and provides input to a US/UK but merciless commentary on the week's tax events.

FEATURED ARTICLES

e New Permanent Establishment Topical News Brieﬁng: TPP-ing e Balance Status After BEPS: Déjà Vu In France? &e Global Tax Weekly Editorial Team 25 Stéphane Gelin, CMS Bureau Francis Lefebvre 5 US Parent Corporations Sending e Panama Papers And e Employees To Quebec US Response: New Risks For Financial Emmanuel Sala, Partner, Dentons Institutions, Clients And Advisors Canada LLP, Montreal 27 Mark E. Matthews, Scott D. Michel and Cono R. Namorato, Caplin & Drysdale 11 Topical News Brieﬁng: Another Bite At e Apple? 2016 Anti-Inversion Regulations – More &e Global Tax Weekly Editorial Team 38 Questions an Answers? Stuart Gray, Senior Editor, Global Tax Weekly 13 City Of São Paulo Issues Ruling On Tax On Services Exported Outside Brazil UK Finance Bill 2016: Royalty Withholding Tax Matheus Bertholo Piconez and Paul Rutherford, Mark Burgess, David &ompson, Hermano Notaroberto Barbosa, BMA Law 39 Richard Woolich and Neville Wright, DLA Piper 22

NEWS ROUND-UP

BEPS 42 International Trade 46 UK Interest Deductibility Rules Could Increase Mexico, EFTA Begin Talks To Expand Free Trade Deal Business Burdens China Con(rms Export Support, As US Hikes Steel Duties US Urged To Oppose BEPS Project TPP To Slash Taxes For US Exporters Ireland Still Con(dent On Apple Ruling Legality Ukraine Continues E*orts To Reform Customs TAXE2 Urges Further EU Action On MNE Tax, BEPS Tax Reform 50 Compliance Corner 59 Hatch Holds Hearing On US Corporate Tax Integration Cypriot Firms Guided On Panama Paper Response Levin Introduces Further US Bill To Curb Inversions French Tax O+cials Raid Google In Paris European Commission Calls For Broader Irish Tax Base South Africa Introduces Single Taxpayer-Registration System Italy Welcomes EU Approval Of Budget Flexibility No US Tax Credits In Puerto Rican Congressional Legislation TAX TREATY ROUND-UP 61

CONFERENCE CALENDAR 63 VAT, GST, Sales Tax 55 IN THE COURTS 70 VAT Experts Respond To EU VAT Action Plan THE JESTER'S COLUMN: 74 South Africa Expands Tax Waiver For Unsolicited Gifts &e unacceptable face of tax journalism

Environmental Taxes 57 Germany Charges Up Electric Car Tax Breaks

British Columbia Urged To Hike Carbon Tax

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City Of São Paulo Issues Ruling On Tax On Services Exported Outside Brazil by Matheus Bertholo Piconez and Hermano Notaroberto Barbosa, BMA Law

&e Treasury Department of the city of São Paulo, the largest Brazilian city, issued an arguable ruling on April 27 ( Parecer Normativo No. 2/2016 – "Ruling") regarding the imposition of tax on services ("ISS") on exports of services. &e Ruling will a*ect multinationals and their Brazilian subsidiaries because it impos- es an undue restriction on the application of the tax exemption rule set forth in Supplementary Law No. 116/2003 (LC 116/2003) for the performance of services to non-residents.

ISS is a local tax levied on most services (with the exception of a few services that are subject to the ICMS, a State Value Added Tax), the general provisions of which are set forth by the Federal Constitution (Article 156) and by LC 116/03 (a Federal law that rules, in general terms, the as- sessment of ISS by local tax authorities).

In this regard, Article 156 of the Federal Constitution sets forth the power for cities to impose ISS upon the performance of services. In line with the Federal Constitution, LC 116/03 provides an exhaustive list of the services subject to ISS (which cannot be broadened by local legislation). &is list of services subject to ISS is usually reproduced by local legislation, which establishes the rates applicable for each type of service.

As a general rule, ISS rates can range from 2 percent to 5 percent according to the service rendered, and the taxable basis is the price paid for the services. &e taxpayer is the service provider, which should also collect the tax in the city where the service is performed and/or where it is established, pursuant to the local legislation in force.

At the same time, the Federal Constitution, in its Article 156, paragraph 3, section II, has left room for subsequent Federal law to exempt ISS on export of services abroad. In this sense, LC

39 116/03 contains a speci(c provision that exempts from ISS the export of services, providing that ISS shall not be levied upon the export of services abroad, unless the result of the service is veri$ed in Brazil , even if such service is paid by a source located outside Brazil. For instance, this situation is di*erent from when a service is fully performed abroad to a bene(ciary located abroad, whereas the Constitution does entitle the local government the power to impose taxes.

Based on that, we can infer that the exemption of ISS on export of services has to pass a three- pronged test, as follows:

(i) Services shall be rendered in Brazil; (ii) To a foreigner bene(ciary; and (iii) &e result of the service shall be veri(ed abroad.

Nonetheless, the imprecise terms of the legislation create considerable room for controversy. As a matter of fact, the lack of clear guidance on the precise meaning of "result" leaves the application of the ISS exemption rather uncertain. In this sense, the "result" of the service could be construed as, for instance:

(i) Its completion; (ii) Its (nancial result; or (iii) &e bene(t arising from such services (consisting in the utility for or the ful(llment of the service needed by the recipient encompassed in the service agreement).

Notwithstanding this uncertainty, in our view, the ISS tax exemption shall be applicable to all services rendered within Brazil that result in bene(ts to the non-Brazilian bene(ciary. In other words, for the relevant service to qualify for the ISS exemption, its recipient shall bene(t from the result of the service (performed in Brazil) abroad.

Note that the complexity and variety of services that are subject to ISS entail a detailed analysis of the facts and circumstances in order to determine whether they should be exempt or not under the ISS tax exemption requirements, such as what tasks are required for the performance of the services, where the service performers are located, among others.

&e city of São Paulo determined on the Ruling that for purposes of the ISS tax exemption on exports, the word "result" means the performance of the service itself, " being irrelevant that any bene$ts or derivations arising from this activity are enjoyed or veri$ed abroad or by a non-resident ."

40 &e Ruling also determined that " it shall not be considered an export of services the mere delivery of its product, such as a report or a memorandum, as well as isolated steps performed abroad that do not constitute the e&ective performance of services abroad ."

As we can infer, the term "result" was construed with reference to the act of carrying out the services and its completion. Consequently, in line with the opinion of the tax authorities, only services completely carried out and/or concluded abroad would be exempt from ISS.

&e Superior Court of Justice ("STJ") issued a non-binding decision 1 in which it analyzed whether the services of repairing aircraft jet engines performed by a Brazilian company, resident in Petropolis, a city of the State of Rio de Janeiro, to a foreign company (owner of the airplanes) would be exempt from ISS.

&e reporting justice, José Delgado, held that the case under analysis did not qualify as an "export of services" since " the result is the actual repair of the equipment, which was fully concluded within the Brazilian territory "; therefore there would be no " quali$cation of the service as being carried out abroad, remaining without doubt the imposition of ISS. "

In our view, the case law opinion in this matter is still inconclusive on the judicial courts. &is only precedent from the STJ did not completely grasp all the aspects of the issue, mistakenly es- tablishing that only the service fully rendered or concluded abroad is exempt from ISS.

Irrespective of such decisions, if we analyze the issue under a constitutional perspective, if a service is fully performed and completed abroad, to the bene(t of non-residents, the cities are prevented from imposing tax on such events at all. For that reason, there would be no grounds for the taxpayer to claim any exemption, since this service was not even subject to the city's taxing powers in the (rst place. Because of that, we cannot agree with the position taken by the STJ and the city of São Paulo.

Despite the approach taken by them, in our view, there are good grounds to sustain that the performance of services in Brazil which produce results abroad quali(es for the ISS exemption.

Note that the Ruling is only binding on taxpayers that are located or perform services within the boundaries of the city of São Paulo, depending on the type of service performed. &ere are not other rulings issued by di*erent cities regarding ISS tax exemption on export of services so far, but when issued, it is likely that they follow the opinion of the city of São Paulo.

ENDNOTES

1 Special Appeal ("RE") No. 831,124, published on September 25, 2006.