21 January 2023
The UK already has one of the most comprehensive tax treaty networks in the world, but consultation with businesses and other stakeholders over recent years has highlighted that there are several areas where government action is required if the UK is to continue being an attractive location for inward investment from overseas and as an international holding company location, especially with emerging economies such as Brazil.
A growing trading relationship
One such is example is the UK’s trading relationship with Brazil. UK and Brazilian businesses have, for a long time, petitioned their respective governments to negotiate a full double tax treaty between the two countries, to reduce the economic and administrative obstacles to trade.
In 2005, a limited bilateral agreement was reached to relieve taxes with respect to shipping and air transport. However, there has been a significant expansion of trade between the UK and Brazil since 2005, so much so that Brazil is now a key trading partner for UK businesses. According to the office for national statistics, Brazil was the UK’s 36th largest trading partner in the four quarters to the end of Q2 2022, accounting for 0.4% of total UK international trade.
Whilst exploratory discussions commenced in 2017, detailed negotiations only started in September 2022, but by the end of November 2022 a full double tax treaty was signed. Some of the key features of the newly agreed treaty that will be most relevant for many businesses when it comes into force are that:
- withholding tax on interest payments will be capped at 15%, but this may be reduced to 10%, 7% or even zero in certain circumstances;
- withholding tax on royalties will be subject to a cap of 10%;
- fees for technical services will be subject to a maximum withholding tax rate of 8% for the first two years that the treaty is in force, 4% for the following two years, and zero for subsequent years; and,
- the inclusion of a non-discrimination clause now permits affected businesses to avail themselves of certain provisions in domestic tax law, including, as an example, the SME exemption for UK transfer pricing purposes.
What happens now?
As well as minimising double taxation, both governments hope that the new treaty will provide tax certainty to businesses, which will in turn provide the comfort businesses need to commit to long-term investments, whilst intensifying and strengthening the trading relationship between the two countries. It is also anticipated that the new agreement will help tackle tax evasion by providing for the exchange of information between the relevant authorities.
It should be noted, however, that although both countries agreed the treaty on 29 November 2022, it has not yet entered into force, so businesses cannot yet rely on its provisions. The completion of the formal procedures required under the respective laws of each country to enable the treaty to enter into force will likely take significantly longer than the two months taken to negotiate the treaty, but should ultimately make the Brazilian market more attractive to UK businesses and help attract Brazilian investment to the UK.