The Characterization of the Deemed Tax Credit Granted by Law no. 12973/2014 as a Prohibited Subsidy in the Scope of WTO

Abstract

This paper analyses the tax credit granted to Brazilian companies investing outbound supported by capital export neutrality in order to avoid the double taxation of income in international transactions. It focusses in the deemed tax credit granted by article 87 of Law n. 12973/2014 to the Brazilian companies to be deducted to the amount of corporate income tax and social contribution due in Brazil levied on the income earned abroad by controlled or associated foreign companies that develop specific activities. This deemed tax credit of 9% is an exemption of social contribution levied on foreign income. Thus, the alm is to analyse whether this tax subsidy, when combined with safe harbour rule on exportation, which under Brazilian law allows margin of divergence of up to 5% on transactions between related parties, may characterize a prohibited subsidy barred by article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (ASCM) of WTO.