The Brazilian Tax Authority (RFB) has released a private letter ruling on January 20th stating nonresident reinsurers operating in Brazil through representative offices should be taxed on an equal basis to reinsurers incorporated in Brazil, accounting firm EY reported.
The ruling takes immediate effect in Brazil as a private letter ruling is binding for RFB agents as of the date of its issuance and is not usually subject to appeal.
This represents an 11% taxation increase for representative offices of nonresident reinsurers who have until now paid a 34% corporate income tax while being generally exempt from PIS/COFINS on service fees received from nonresident reinsurers.
Brazilian incorporated reinsurers are subject to a 45% corporate income tax and a 4.65% PIS/COFINS on gross premiums.
The RFB changed the tax rate after stating that it views the activities of a Brazilian representative office of a nonresident reinsurer as reinsurance activities not as mere brokerage, preparatory or ancillary activities.
According to the RFB, under Brazilian reinsurance law – activities are seen as reinsurance activities if they have been allowed to operate in Brazil to issue reinsurance premiums whilst being incorporated under foreign law and if the reinsurer’s local representative has powers to bind the nonresident reinsurer with local insurers and reinsurers.
The RFB has advised nonresident reinsurers conducting business in Brazil to revisit their current practices to assess the scope of their Brazil representatives and how they measure up to the new ruling.
Companies could also take steps to narrow down the scope of their powers so they may be able to contest the ample powers criterion of the reinsurance regulatory/law parameters, says EY.
This could provide nonresident reinsurers with stronger arguments during litigation.
Nonresident reinsurers will be able to appeal to the Brazilian tax court or file a lawsuit to argue their case based on the scope of their operations in Brazil.
As a result of the RFB ruling nonresident reinsurers operating in Brazil will now have to reassess and possibly readjust Brazilian business practices to ensure they comply with the latest Brazilian reinsurance regulatory/law parameters or face higher taxation levels.