Pursuant to a judgment dated August 18 2020 - Recurso Especial Nº 1.864.227 - SP (2020/0049097-0), the Superior Tribunal of Justice (STJ) unanimously confirmed that the mere accounting recognition of a debt (as an ‘accounts payable’) was not sufficient to constitute the triggering event for income withholding tax (WHT). Rather, it is necessary that the debt is enforceable by the foreign creditor, so that WHT should only be triggered when the debt matures or at the moment of payment, whichever comes first.
By way of background, over the years, there has been substantial debate in relation to the timing of the triggering event for WHT purposes. More specifically, whether the reference to ‘credit’ within the contemplated potential triggering events could be taken to mean the mere accounting ‘credit’ in the Brazilian entity's accounting books. At the other end of the spectrum, there exists the view that WHT should only be due upon actual payment/remittance. Finally, there exists a ‘middle ground’ being the view that the triggering event should be the earlier of the payment being made, or the obligation to make payment arising, whichever comes first. It is this latter view that was adopted by the STJ.
In summary, the facts of the case involved a Brazilian entity performing payments abroad in relation to a contract to distribute software. The Brazilian entity, as the responsible party for collecting the tax locally, withheld it on the maturity date or payment (where payment was anticipated prior to the maturity date), and was subject to challenge by the Brazilian tax authorities (RFB), who took the position that the WHT should have been collected on the date of the (mere) accounting recognition of the debt.
The judgment considered that according to Article 43 of the Law 5,172/1966 (Código Tributário Nacional), the triggering event for WHT is the acquisition of the economic or legal availability of income. Taking into account the doctrine on the difference between the concepts, it was considered that ‘economic availability’ is the ‘effective receipt’ of income, being the value that is added to the taxpayer’s assets. On the other hand, ‘legal availability’ stems from the value that the taxpayer can make use of as titleholder via such legal title.
Further, the judgment went on to consider that the accounting recognition of the future debt does not equate to economic availability, as the money is not yet within the direct possession of the creditor. Nor can it be understood as legal availability, considering that merely the accounting entry, prior to the maturity of the debt, provides no right or title for the creditor, as it is not possible to require payment of the amount.
The judgment concluded that Article 685 of Decree 3,000/1999 (the previous version of the Brazilian income tax regulations) determines that the incidence of WHT arises on income, capital gains and other earnings paid, credited, delivered, employed or remitted abroad. The accounting recognition of the debit does not correspond to any of the concepts referring to the economic availability (payment, delivery, employment, remittance) or legal availability (credit). Therefore, the accounting recognition cannot be considered as the triggering event for the WHT, which in this case only happens with the maturity or the anticipated payment of the debt.
Supporting this conclusion, the STJ acknowledged that on the due date the obligation to pay a certain amount becomes payable and the creditor can fully exercise all rights related to the debt, including the right to pursue legally, which demonstrates that it has ‘legal availability’ of the income. In relation to payment, the money comes within the immediate possession and control of the foreign legal entity, fully integrated with its assets, which falls within the concept of ‘economic availability’.
Finally, the judgment referred to Solução de Consulta 153/2017 dated March 2 2017, and published by the Brazilian tax authorities on March 22 2017, which expressly recognises that the mere accounting recognition of the credit, as a simple provision or early recognition of expenses does not characterise a taxable event for WHT if there is no economic or legal availability of the income, which only occurs when the consideration becomes due (or anticipated payment) for the services contracted. In this regard, see our previous article providing commentary on Solução de Consulta 153/2017.
It is important to note that while the STJ`s decision only contemplated WHT, the relevant Solução de Consulta 153/2017 referred to not only addressed WHT but also addressed CIDE, PIS/COFINS-importation. In this regard, instead of ‘income’, CIDE refers to ‘remuneration’, whereas PIS/COFINS refers to ‘consideration’, however the relevant triggering events also refer to ‘paid, credited, delivered, employed or remitted’. As such, while the decision does not create binding precedent, it does appear that the reference to Solução de Consulta 153/2017 could be viewed as providing further guidance for taxpayers in relation to how the STJ may interpret such situations going forward.
The combination of the STJ decision and Solução de Consulta 153/2017 appears to pacify the previous discussion in relation to whether the mere accounting recognition was sufficient to be a triggering event for WHT purposes (being confirmed that it was not).
However, in a cross-border context, circumstances will continue to exist where despite the maturity date arising (and passing), there is no legitimate expectation of the income actually arriving in the hands of the non-resident (in cash or kind) or the value of the debt being employed in favour of the non-resident beneficiary. In such cases, where the debt is never to be paid and the value of the debt never employed in favour of the beneficiary or at its direction, there appears to remain a question as to the appropriateness of the liability to tax. Considering this and contemplating the form of taxation (i.e. via withholding), further judicial discussion is expected.
Bruno Porto
Mark Conomy
