The CARF – Administrative Council of Tax Appeals (Conselho Administrativo de Recursos Fiscais) overturned the Tax Assessment Notice (Auto de Infração) issued against Mercado Pago that disallowed the expenses excluded from the IRPJ/CSLL calculation related to the contracting of technology services from related companies based abroad.
Understand below what you need to know about this case.
What was discussed? The case addressed the deduction of expenses incurred with payments to four foreign companies of the Mercado Livre group for the development of 16 technology projects. The companies are based in Argentina, the United States, and Uruguay, and provided platform and data hosting services, software development, platform maintenance and updates, as well as the development of technological solutions to increase competitiveness and productivity.
What are the requirements for the deductibility of expenses? For an expense to be considered deductible, it must be necessary, usual (or normal for the type of activity carried out by the company), and effective (the cost or expense must be real). To that end, it is essential that it be documented, through valid, reliable, and lawful documents (invoices, bills, contracts, receipts) that clearly identify the parties, the transaction, and the amounts. Finally, the expense must also have a connection with the company’s activity.
Why were the expense deductions disallowed? When issuing the Tax Assessment Notice, the tax authority understood that the expenses could not have been deducted for three reasons: the legal obligations provided for the deduction of royalty expenses were not met, the effectiveness of the services rendered was not proven (evidence that they actually occurred), and the payments were not proven.
What did the administrative court decide? After a detailed review of the documents, the CARF concluded that the necessary documentation had been presented to prove the effective provision of the services, their nature, and the making of the respective payments.
What is the impact on your company’s activities? This ruling demonstrates that, in order to deduct expenses for IRPJ/CSLL purposes, it is essential that the expenses be duly documented, and that there must also be proof that the services were effectively rendered.
We recommend that your company keep all documentation organized so that it can be presented in the event of any challenge by the tax authorities.
