Originally published in the July 17 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
After years of controversy and legal battles, a tax authority ruling in Brazil has held that off-the-shelf software is not subject to withholding tax or the 10 percent royalty tax (CIDE).
Brazil’s Federal Revenue Department has officially accepted that it has lost the battle. The Tax System General Coordination Office (Coordenação-Geral do Sistema de Tributação, or CST) ended the controversy with a ruling published June 9 in Brazil’s official gazette.
Ruling CST 27/2008, dated May 30, states that amounts remitted outside Brazil for acquisition or license of off-the-shelf software are not subject to withholding tax or the 10 percent CIDE. The ruling is a victory for software giants like Microsoft.
For years, the Brazilian Association of Software Companies fought to exempt payments remitted outside Brazil for off-the-shelf software from withholding tax and CIDE. Major battles began after the withholding tax rate was reduced from 25 percent to 15 percent and the 10 percent CIDE was created. In late 2001, Law 10,332/2001 subjected any type of royalty, including that for software licenses, paid abroad to CIDE taxation.
Regarding the CIDE, the ruling has a smaller effect because Law 11,542, of February 27, 2007, exempted off-the-shelf software from CIDE and made the exemption retroactive to January 1, 2006.
However, because Ruling 27 is an interpretation of existing rules (even predating Law 11,542/2007), its position should also be retroactive. This is based on an interpretation of article 106 of the National Tax Code, which provides for the retroactive application of a tax law whenever it is expressly interpretative. Ruling 27 is not a formal law; it is the official interpretation by the tax authorities of existing rules and regulations.
Under Ruling 27, taxpayers that have paid withholding tax and CIDE in the last five years may consider filing for refunds. Since Ruling 27 is the Federal Revenue Department’s official position on the nonapplication of withholding tax and CIDE on software licenses for off-the-shelf software, the government should not try to deny the refund.
Administratively, however, refunds may not be granted, so taxpayers should consult with tax advisers and attorneys to evaluate their chances of successfully requesting tax refunds before a court of law.
David Roberto R. Soares da Silva