The protective evil: limitation on the remittance of royalties in connection with ip licensing rights in Brazil

 

The Protective Evil: Limitation on the Remmitance of Royalties in Connection with I.P Rights in Brazil 

Whether you tend towards a more John Stuart Mill´s/utilitarian approach - I.P protection is vital for properly rewarding inventors/authors thereby promoting and inducing more invention and consequent more development, or if you favor a more Hegelian/naturalist rationale - creation is an expression of one's personality and reflect their own talents, feelings, experiences, there is no discussion of the need to properly protect these rights. 

It is not random that the Paris Union Convention for protecting Industrial Rights goes far back to 1883 and with 176 signatories it is one of the most adopted treaties worldwide. Ironically, Brazil is one of the 11 founding contracting parties. It seems, however that its vanguard approach towards IP protection is long gone. Instead of safeguarding worldwide I.P protection, Brazilian authorities and judicial bodies, in particular the Industrial Property National Institute (“INPI”), have been for a long time arbitrarily imposing obstacles and applying ungrounded rules on multinationals doing business in Brazil. One of the most controversial and prejudicial of them is the limitation on the remittance of royalties of up to 5% in connection with Technology Transfer Agreements between Brazilian subsidiaries and their foreign parent companies, which is the maximum legal rate permitted for deductibility of expenses relating to corporate income tax purposes. 

INPI classifies 5 agreements as “Technology Transfer Agreements”:

1. licensing of patent and design;
2. licensing of a trademark;
3. franchising;
4. licensing of know-how; and
5. rendering of technical and scientific assistance

According to INPI and Law No. 9279/1996, registration of these agreements with the INPI is required in order to be enforceable against third parties and allow tax deductibility and remittance of royalties.

Many authors have written about the legality of this remittance limitation which is based on Regulation No. 436/1958 and Law No. 4131/1962. The rationale behind the rule is the Import Substitution Industrialization policy based on the premise that in order to foster development, a country should attempt to reduce its foreign dependency through the local production of industrialized products, a policy widely common in the global south from the 1950s until the 1980s.

The legality of this limitation is still nonetheless ambiguous. In 2008 the Federal Regional Court- II Region (“TRF II”) based on a conservative approach, ratified the prevailing understanding that INPI has powers to limit remittance of royalties overseas, with prerogatives to determine and intervene in the terms and condition of the Technology Transfer Agreement before authorizing its registration (TRF 2ª Região, Apelação em mandado de segurança, Processo nº. 2006.51.01.511670-0, Segunda Turma Especializada, Relatora: Desembargadora Liliane Roriz, julgado em 21.10.2008, DJU 31.10.2008, p. 164).

However, in April 2009 the same TRF II, in a judgment rendered by a different judge, decided that INPI does not have such prerogatives: “INPI may not intervene in the free will of the contracting parties in its sole discretion, discuss the merits of private negotiations, impose conditions, in its sole discretion by making use of a percentage devised for other purposes - tax deduction - resulting, in my experience, in an insurmountable error of law enforcement. One, because it lacks the powers for meddling into private business; Two, because there is no law or public policy of price quotation; Three, because it is an act of pure speculation, given that INPI absolute lacks the technical knowledge of market price policy and its effects on production and; Four, because under the aegis of the rule of law and freedom of business is not for the State to intervene where the parties do not feel disadvantaged, so as not to replace the rule of law by welfarism.. (...)." TRF2, AMS 71138 2007.51.01.800906-6, Segunda Turma Especializada do Tribunal Regional Federal da Segunda Região, por maioria, Des. Messod Azulay Neto, 28 de abril de 2009.

No other judgments on the subject have been rendered ever since and INPI has therefore continued to apply the 5% limitation based on the 2008 and other similar decisions. No agreements stipulating royalties’ percentage exceeding this sum are permitted to be registered with the INPI which prevents the parties from remitting sums overseas.

Since this is a matter of vital importance and that the current situation of legal uncertainty prevents multinational companies acting in Brazil to plainly organize their finances and budgeting, it is of utmost importance that this issue be solved before the Superior Court of Justice (“STJ”) or even by the Federal Supreme Court (“STF”), as soon as possible or alternatively that relevant legislation be passed clarifying and rectifying the situation.  

It is clear that Brazil is on the wrong side of progress. The use of INPI´s terminology to designate operations involving IP rights as “Technology Transfer Agreement” implies a twisted understanding of intellectual property motivated by an outmoded public policy and desire to force multinationals to irrevocably transfer to their Brazilian subsidiaries the technology developed overseas. 

In line with this approach, the overreaching intervention of INPI requires agreements whose purpose is the licensing of know-how and rendering of technical and scientific assistances to have a maximum term of 5 years (extendable for additional 5 years at the sole discretion of INPI). According to INPI, this should be enough time for the subsidiary to “absorb” the technology with a complete outright transfer thereof.

No wonder Brazil ranks 118 in the 2015 Index of Economy Freedom, lagging behind countries such as Nicaragua, Honduras and Indonesia. The global supply chain requires companies to allocate among different countries their development, handling and distribution of goods and/or products based on cost benefits and strategic considerations. Companies shall have unfettered liberty on choosing how they wish to exploit and repatriate their royalties to accommodate their logistic needs and better serve the market, thereby generating wealth both in their country of origin and of their subsidiaries.

Global modern economy is based on productivity which is ignited and boosted by the development and use of technology. Technology development usually requires great investments in R&D, business freedom and openness. Technology is fed of technology. Technology needs technology to create more technology. Inventorship/authorship needs to be properly rewarded so that it can further generate more creation and technology.

Exploitation of invention/creation is already balanced by theories of public domain, fair use and compulsory license. Further limiting and meddling into matters regarding attribution and repatriation of royalties can detrimentally affect the I.P equilibrium and surely have a negative effect of pushing away investment which implies less employment and development. The time for Brazil to leave behind failed backward public policies of meddling into private business of companies wanting to invest and generate wealth in Brazil is already long overdue.

Brazil Israel qualified lawyer with extensive experience and expetrise in handling local and transnational legal matters.