Deductibility of royalties in the seed sector

The growth of agribusiness has directly resulted in an increase in revenue for seed companies

06.09.2022 | 13:12 (UTC -3)
Lawyer Graciele Mocellin leads studies on the soybean seed chain — Photo: EFCAN Advogados archives
Lawyer Graciele Mocellin leads studies on the soybean seed chain — Photo: EFCAN Advogados archives

The sustainability of many Agro companies is being threatened, paradoxically, by the positive growth of the sector, with these companies being the main drivers of the national economy.

The growth of agribusiness has directly resulted in an increase in revenue for seed companies which, upon reaching the limit of R$78 million/year, are legally obliged to adopt the Real Profit regime. So far, we're doing very well.

The problem is that the Tax Authorities, when calculating Real Profit, are disregarding the percentage that varies from 30% to 50% of production costs represented by the value of royalties. In the case of soybean seed, there is, as a consequence, an increase in apparent profit and, therefore, the amount of Corporate Income Tax (IRPJ) to be collected. Something that compromises the sustainability of these companies.

The objective of this work is to generate a framework of understanding between the actors involved, such as companies obtaining biotechnology and germplasm, seed producers, Federal Revenue, lawyers and accountants, which enables an adequate understanding of the legislation, with a view to providing continuity and perpetuity of these companies.

In this system, the first question that is asked is: why has the Tax Authorities prevented companies from deducting royalties for the purpose of calculating IRPJ when calculating Real Profit?

In practice, what we see are tax assessments, amounting to millions, based on arguments that even differ within the federal collecting/inspecting body. In other words, we can state that there is no uniformity of understanding in the interpretation of legislation that supports actions within the scope of the Federal Revenue Service. Therefore, we have basically responded to assessments in which the supervisory agent limited the deductibility of royalty costs to 1% of the revenue from the product sold. And in other cases, even worse, they completely disallowed the deducted amount.

The reasons are based, briefly, on the interpretation of article 365 of the Income Tax Regulation (2018), which limits the deduction of amounts paid as royalties from the IRPJ base when these amounts are paid: (i) in the exploitation of invention patent and/or (ii) in the event that contracts granting exploitation are not registered with the National Institute of Intellectual Property (INPI).

However, when we deeply study the intricacies of the seeding chain, we find that this form of legislative interpretation by the Federal Revenue Service cannot be applied to these companies due to the nature of their operation. This is because seed companies do not exploit invention patents and the contracts they have for licensing the use of technology with biotechnology breeders are prohibited, by law, from being registered with the INPI.

When we check the organization chart in the text, we see that seed producing companies have a licensing agreement for the use of technology and use of cultivars with the breeding companies, respectively, of biotechnology (OB) and germplasm (OG) with the sole purpose of multiplying the technology that is already inserted in the seed. There is, therefore, no access to the genetic code on the part of the multiplier that frames the operation as exploiting an invention patent and creates any obligation for these companies to register their contractual instruments with the body responsible for the protection of intellectual property.

In this sense, the operation of seed companies is outside the scope of the legal limitation of article 365 of the RIR/2018, and royalties paid for licensing the use of technology must be fully deducted as a cost for the purposes of calculating IRPJ.

To reinforce the rationale, if the Federal Revenue's understanding prevails, we would also have the devastating effect caused by double taxation in the chain, since, by denying the deduction, the amounts arising from royalties in seed companies would be taxed and, subsequently, taxed again on companies that obtain the technology, which would directly impact the price of food, having a direct impact on inflation. In addition, of course, double taxation directly violates the constitutional rights and guarantees guaranteed to taxpayers.

It is worth highlighting that the factual situation of seed companies is unprecedented and has not yet been assessed, from what is known, within the scope of the Administrative Council of Tax Appeals (CARF) – administrative judging body – and the Judiciary, which creates more legal uncertainty and, as stated, it calls into question the continuity of the seed multiplication sector.

At the legislative level, Bill No. 947 of 2022, presented to the Chamber of Deputies on April 19, 2022, authored by deputy Sérgio Ramos, aims to provide “the appropriate interpretation of the legislation on Income Tax and Profit Any Nature of Legal Entities with regard to royalty expenses in the seed multiplication process.”

In this sense, the project aims to amend article 13 of Law No. 9.249, of December 26, 1995, with the inclusion of a third paragraph with the following content: “For the purposes of interpreting and calculating the taxable profit of the legal entity that operates in the multiplication of seeds, the deductibility limits (…) do not apply to cases of payments or transfers made to an unrelated legal entity (…), domiciled in the country, for the exploration or use of transgenic technology or license of cultivars by third parties (…).”

As stated in the justification of this Bill, “the change will clarify and make the functioning of the industrial property system and the taxation of royalties in the case of operations between unrelated parties at a national level simpler and more transparent”.

Currently, the aforementioned Bill is being processed in the Chamber of Deputies.

In conclusion, this situation of legal uncertainty for companies representing the seed multiplication sector is extremely worrying, as technology royalties make up a significant part of the cost of the product. By limiting the deduction of this expenditure, it would end up burdening and making it impossible to carry out the activity of seed multiplication.

By Graciele Mocellin, Amanda Stachera France, Guilherme Augusto Santos, Gabriela Good, EFCAN Lawyers

Mosaic Biosciences March 2024