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This ruling provides welcome guidance for Brazilian service providers. Taxpayers, however, should carefully analyze how these guidelines affect their business transactions.

The Brazilian tax authorities have published important guidelines for the classification of a given transaction as an "export of services" in Normative Ruling COSIT 1/2018 (October 16, 2018).

Brazilian tax law generally grants favorable treatment for the export of services — e.g., by exempting or reducing to zero the applicable tax rates, such as the financial transactions tax due on foreign exchange transactions (IOF-FX) and withholding income tax due on interest related to the financing of export of services.¹ Brazilian law, however, does not clearly define "export of services." Normative Ruling COSIT 1/2018 provides insight into how the tax authorities intend to apply Brazilian tax law to the export of services.

Normative Ruling COSIT 1/2018 sets forth the following guidelines for classifying a transaction as an export of services:

1. Export of services is a transaction in which the service provider (a Brazilian resident) is engaged in the Brazilian market, with its own resources, and attends to a specific demand in another jurisdiction, benefiting the service recipient abroad, which is engaged in its own market, also abroad.
2. Engagement in the Brazilian market is verified to the extent that the service starts in the Brazilian territory by means of preparatory acts before the effective rendering of the service, such as planning, identification of the indispensable expertise or the mobilization of the corresponding resources (material and intellectual) necessary for the activity.
3. The Brazilian service recipient is deemed to be operating in the foreign market when the corresponding contractual demand arises from abroad and must be satisfied outside the Brazilian territory to benefit the nonresident service recipient.
4. If the services are performed for the service recipient inside a building or an asset is incorporated into a building, the demand is considered satisfied in the jurisdiction in which the building or asset is located.
5. If the service recipient acts in the foreign market and the activities are performed in a movable asset not incorporated into a building, the demand is considered to be completed within the territory/territories in which this asset is used (the taxpayer must demonstrate that the movable asset would be strictly used abroad).
6. Finally, if the service recipient acts in the foreign market and the services are rendered in connection with a movable asset not necessarily connected to a specific territory or rendered with no reference to any physical asset, the demand would be deemed to be attended to:

• a. At the place in which the provider is physically present
• b. Where the indirect presence (by subcontracting) or virtual presence (by compulsory access to local electronic services) of the service provider is required (i.e., cases in which the physical presence of the provider is not contractually demanded)
• c. At the service recipient's place (i.e., residence or domicile), in the event there is no territorial connection to the service rendered

This ruling is welcome because it provides guidance on a matter on which the tax authorities have not previously ruled. Taxpayers, however, should carefully analyze how the ruling affects their transactions.

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ENDNOTES

¹ While Normative Ruling COSIT 1/2018 seems to exclude social contributions PIS and COFINS from its scope, it leaves some room for a different interpretation.