Argentina - Brazil Tax Treaty: Latest Revision

Argentina and Brazil signed a protocol on several significant amendments on the bilateral tax treaty between the two countries during the Mercosur Summit. The new version, however, is not in force yet, as future feedback from the public may be needed.

Changes in Restriction on Taxing Right and Double Taxation Relief

The first notable change in the protocol is taxation on positive income from permanent establishments, with the source state being allowed to collect tax amount equals to 10% of gross income of the PE under the protocol. As regards withholding tax on passive income, new rate is given:

  • Withholding tax on dividend distributions should be no higher than 10% and 15%. However, the definition of dividend is not broadened thus the scope to apply the article regarding dividend is not extended.
  • Withholding tax on interest payment should be not higher than 15%;
  • Withholding tax on royalty payment should be no higher than either 10% or 15%;
  • Withholding tax on transfer of technology should be no higher than 15%, but a conditional low rate of 10% is possible based on the contract situation. The concepts of technical services and technical assistance are re-characterized in the revision as well.

Exemption method to relief double taxation in the existing treaty is no longer applied and a credit method is introduced in the protocol.

Response to BEPS

The protocol absorbs several suggestions in the BEPS reports, in particular mainly the revision suggested by Action 6 (treaty abuse), Action 7 (PE status), and Action 14 (dispute resolution). The principal purpose test and limitation on benefits are both employed in the protocol to addressee treaty abuse issue. The concept of PE is also redefined in the protocol to tackle artificial avoidance being recognized as tax presence. Practice as such including fragmentation of activities in commission contracts.

Sources: BrazilGovNews

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