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HMRC internal manual

Double Taxation Relief Manual

Brazil: Treatment of Brazilian tax imposed on gross income

In some cases, Brazilian tax may be calculated not by reference to profits but on a percentage of the gross receipts of a business. Claims to tax credit relief in respect of Brazilian tax imposed on this basis should be considered critically.

In particular, the possibility of extraterritorial taxation, that is taxation in Brazil of income which by reference to UK principles would be regarded as having its source in the United Kingdom or in a third country, should beconsidered. Consequently, in cases where significant amounts of tax are paid in Brazil, it is important to ascertain what work was actually performed in Brazil and what profit, by reference to UK tax principles, was derived from that work. Only that part of the income from a contract which is derived from the performance of services in Brazil will be regarded as arising from trading in Brazil, as opposed to trading with Brazil.

The distinction is demonstrated for tax credit relief purposes in the case of Yates v GCA International Ltd (`the GCA case’ - INTM 161120 last sub- paragraph). The GCA case also shows the extent to which tax credit relief should be restricted where taxation is imposed extraterritorially on a gross basis even where the tax as such is, in principle, admissible for the purposes of unilateral relief.

The general rule derived from the terms of section 790(4) ICTA 1988 is that credit for foreign tax on foreign income must not exceed the lesser of the foreign tax and the UK tax charged on that income. This will frequently result, when the foreign tax is imposed on gross receipts, in a limitation of credit (as in the GCA case) to the amount of UK tax charged on the foreign income. Hence the importance, in the case of significant claims, of establishing the UK tax measure of the foreign income (see INTM163010 onwards and especially INTM163100 concerning management and technical fees).