Argentina and Brazil signed a protocol on several significant amendments on the bilateral tax treaty between the two countries during the Mercosur Summit. The new version, however, is not in force yet, as future feedback from the public may be needed.
The first notable change in the protocol is taxation on positive income from permanent establishments, with the source state being allowed to collect tax amount equals to 10% of gross income of the PE under the protocol. As regards withholding tax on passive income, new rate is given:
Exemption method to relief double taxation in the existing treaty is no longer applied and a credit method is introduced in the protocol.
The protocol absorbs several suggestions in the BEPS reports, in particular mainly the revision suggested by Action 6 (treaty abuse), Action 7 (PE status), and Action 14 (dispute resolution). The principal purpose test and limitation on benefits are both employed in the protocol to addressee treaty abuse issue. The concept of PE is also redefined in the protocol to tackle artificial avoidance being recognized as tax presence. Practice as such including fragmentation of activities in commission contracts.
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