Ana Carolina Rovida de Oliveira
Lawyer at Marcos Martins Advogados
I- HISTORICAL INTRODUCTION AND CONCEPTS
Since the 1980s, and with the advent of new forms of communication, especially the Internet in the 1990s, the world has become increasingly globalized, and inexorably, the increased exchange of information has had consequences.
Until the 1990s, countries did not have an established network for exchanging information on the assets of companies and people, and since the Second World War, there had been no concern about the transit of goods and people, which began incipiently with the economic crises that crossed national borders at the end of the 1990s, with the advent of the growth of multinationals, and the exponential enrichment of their owners who began to become billionaires.
At the end of the 1990s, the world’s developed countries considered banking secrecy to be the norm, and countries like Switzerland and classic tax havens like Luxembourg, Monaco and other European principalities couldn’t imagine making any kind of exception to the non-disclosure of their account holders’ data. Even so, since its inception in 1961, the OECD[1] has promoted transparency and the exchange of information. In 1998, the OECD succeeded in approving the first report on harmful competition in relation to taxation.
From the beginning of the 21st century, new attempts were made by the OECD until, with the financial crisis of 2008 and its almost global impact, there was a change in the world environment and a greater questioning by those who had large financial losses but saw that large corporations (multinationals) chose the country with the most favorable taxation in order not to pay taxes in developed countries, which traditionally tax their nationals more.
The first explicit mention of the need to revise the global taxation model, in view of the favoring of large multinationals and global billionaires, as well as aggressive tax planning schemes involving complex structures and in many jurisdictions, was at the G20 meeting[2] in April 2009, which was repeated at the G8 meeting in L’Aquila, Italy in July 2009.
In response to the increased pressure from representatives of the world’s leading countries, the OECD revised its Multilateral Convention on Assistance in Tax Matters (the “Convention”), initially established in 1988, to include the most modern provisions, creating the model that has prevailed in the world since its entry into force in June 2011, of exchanging information first by request between administrations in each country, and then automatically between tax administrations worldwide, without distinction.
Even before this reformulation of the Convention, the OECD, in response to the call from the G20, reformulated its Global Forum and renamed it the Global Forum on Transparency and Exchange of Information for Tax Purposes, and from September 2009, it began to accept member states even if they were not participants in the OECD, to encourage the exchange of information, and by the end of 2017 it had 150 member states[3], thus becoming a relevant forum for the adoption of new global rules and recommendations.
Some concepts are necessary to clarify the entity structures adopted by different countries around the world. In several jurisdictions, “onshore” companies[4] are those that conduct regular business within their territories and offer their results to local taxation without any tax benefit, and “offshore” companies[5] are those registered in jurisdictions where they do not conduct regular business in such territories and which for this reason receive differentiated, more beneficial tax treatment or exemption from taxation.
More recent are the so-called “midshore” companies[6], which have been better accepted because, although their host countries grant tax benefits, there are very clear rules on transparency and exchange of information, including the need for annual audits and reviews by government bodies.
The adoption of corporate chains in various jurisdictions was very popular in the US until the advent of FATCA[7], which was enacted in 2010 and required foreign financial institutions to report movements of people and entities considered to be North American to the US government. This information led to the knowledge that large multinationals such as Apple, Facebook and others were keeping their profits in countries with more favorable taxation in order to avoid paying taxes in the US.
The movement for more detailed identification of corporate chains, their effective final beneficiaries and the consequent revision of global taxation rules has been gaining many supporters, due to the serious economic crises and reformulations of the use of countries with lower tax burdens as a way not only to avoid paying taxes, but also to finance criminal acts, finance terrorism and launder money from acts of corruption around the world.
II – BRAZIL’S POSITION IN THE GLOBAL CONTEXT
Brazil is a strategic partner of the OECD and recently[8] applied to join the organization’s active membership. Brazil has signed FATCA with the United States of America since 2014, and as of 2017 it began to exchange the automatic information provided for in the Convention, since it ratified it in 2016 and it came into force in October of that year.
Brazil has participated in the OECD Global Forum since its resumption at the end of 2009. The Global Forum has already verified Brazil’s compliance with the exchange of information requirements by request, and as of January 1, 2018, Brazil will be among the jurisdictions included in the automatic exchange of information for tax purposes without distinction.
III – ADOPTION OF RFB NORMATIVE INSTRUCTIONS 1634/2016, 1729/2017 AND COCAD EXECUTIVE DECLARATORY ACT No. 9/2017
The complete identification of each corporate interest, down to the data and information of the final beneficiaries of legal entities and legal arrangements, has proved to be an obstacle to better identification in international information exchanges within the OECD. As a result, the various countries participating in the Global Transparency Forum have committed themselves to implementing measures in their jurisdictions to facilitate the analysis of the information exchanged.
The concepts initially established in IN/RFB 1634/2016[9] were the result of studies and debates carried out by federal bodies as part of the National Strategy to Combat Corruption and Money Laundering (ENCCLA), promoting transparency and identifying the real beneficiaries of companies and resources invested in the country, in order to apply the international standards to which Brazil has adhered to the national legal system.
Under the terms of article 8 of IN/RFB 1634/2016, Brazilian business entities and entities domiciled abroad that own real estate, vehicles, current accounts, shareholdings or investments in the financial and capital markets, when submitting their registration information, must identify the chain of shareholdings until they reach the final beneficiary, or the entities listed in paragraph 3.
Final beneficiaries were better defined as “the natural person on whose behalf a transaction is conducted” or “the natural person who ultimately, directly or indirectly, owns, controls or significantly influences the entity” in amendments to IN/RFB 1634/2016“[10].
Entities that registered with the CNPJ[11] as of July 1, 2017 were already obliged to provide information on final beneficiaries. Entities already registered before July 1, 2017, were also already obliged to provide the information when they made any registration changes, and this deadline will be extended until December 31, 2018. After this deadline, i.e. from January 1, 2019, Brazilian and foreign entities that have not provided the information on their final beneficiaries will have their CNPJs suspended until they are regularized. However, the Federal Revenue Service’s system for registering or changing CNPJ records, called ColetaWeb, was only updated to allow the inclusion of information on the final beneficiaries of Brazilian and foreign entities, with the publication of ADE COCAD No. 9[12] well after the start of the aforementioned obligation.
Legal Entity Identifier (LEI) information was also required for entities that have this identifier, which is part of an international register used by several countries and will be used for security purposes in relevant international financial transactions.
IV – CONCLUSIONS
In view of the extensive exchange of information currently made possible by the evolution of the means of communication, the countries participating in the Global Forum for Transparency in Tax Matters have, over the last decade, created instruments and recommendations so that knowledge of banking and tax information can be shared and thus reduce tax evasion and curb aggressive tax planning, as well as criminal practices such as money laundering, embezzlement resulting from corruption, among others.
The evolution of the exchange of information between countries from a bilateral request to an automatic exchange of information without distinction proved to be incomplete due to the lack of identification of the effective final beneficiaries of the structures, entities and legal arrangements in various jurisdictions.
Thus, the next step was the recommendation, in 2016, to create rules aimed at fully disclosing this information to government authorities in each jurisdiction.
Brazil is part of this context, and in order to comply with the recommendations of the Global Forum for Transparency, it created the obligation to disclose the chain of corporate participation and its final beneficiaries through IN/RFB 1634/2016, and its subsequent amendments.
Marcos Martins Advogados is prepared and puts its up-to-date Corporate and Advisory Law team at your disposal to deal with issues regarding new Brazilian and Foreign Companies and existing Brazilian and Foreign Companies to review and update their registrations, and is ready to answer questions, presenting creative and safe solutions for its clients and interested parties.
[1] Organization for Economic Cooperation and Development – multilateral organization based in France.
[2] The 20 most developed countries as ranked by the OECD.
[3] Information taken from the Global Forum website – Available at: <http://www.oecd.org/tax/transparency/>. Accessed on: 02 Apr. 2018.
[4] A company that is incorporated in a country or jurisdiction with a reputation for conducting business within its borders and with the intention of submitting to all the legal requirements of local taxation.
[5] A company that is normally prohibited from doing business within the borders of its host country, which in exchange for providing zero or minimal taxation, demands that it operate only outside its territory. Normally, the host country grants these types of companies privacy benefits in terms of access to information and finances, and does not require audits or that their owners reside or have any registration in its territory.
[6] The jurisdictions currently considered midshore are Hong Kong, Singapore, Malta, Ireland and Liechtenstein. The company models in these jurisdictions are considered a hybrid between offshore and onshore, as they can have businesses in the territories of their headquarters with local taxation and businesses outside their headquarters with favored or lower taxation.[7] FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA). Foreign Account Tax Compliance Act. Available at: <https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca>. Accessed on: 03 Apr. 2018.
[8] In February 2018.
[9] Normative Instruction of the Brazilian Federal Revenue Service, No. 1634, published on May 6, 2016, and subsequently amended.
[10] IN RFB No. 1729/2017 was published on August 14, 2017, detailing the concept of final beneficiary and its exceptions.
[11] National Register of Legal Entities.
[12] BRAZIL. COCAD Executive Declaratory Act No. 9, of October 23, 2017. Federal Revenue Service. Available at: <http://normas.receita.fazenda.gov.br/sijut2consulta/link.action?visao=anotado&idAto=87392>. Accessed on: April 3, 2018.
