Brazil Tax Update

JOSÉ MAURÍCIO MACHADO
ISABEL A. BERTOLETTI
LUÍS ROGÉRIO G. FARINELLI
MIGUEL A. VALDÉS
JÚLIO M. DE OLIVEIRA
ANA MARIA NAKAZA
ANTONIO CARLOS SALLA
SÓCIO RESIDENTE (CHICAGO)
CARLOS AUGUSTO DA CRUZ
EDIMILSO GOMES DA SILVA
CRISTIANE M. S. MAGALHÃES
CONSULTORES
ROSIENE SOARES NUNES
MARIA CRISTINA BRAGA E SILVA
MAURI BÓRNIA
LISIANE B. H. MENOSSI PACE
RICARDO M. DEBATIN SILVEIRA
DANIEL LACASA MAYA
JOÃO CAIO GOULART PENTEADO
RENATA ALMEIDA PISANESCHI
FABIO F. LANZANA PEREIRA
FABIO MEDEIROS
ELEN PEIXOTO ORSINI
MARCIO ROBERTO ALABARCE
ERIKA YUMI TUKIAMA
PAULO ROGÉRIO GARCIA RIBEIRO
FERNANDO FABRETTI
EDUARDO MOLAN G ABAN
SORAIA MONTEIRO DA M ATTA
FABIA ELAINE DA SILVA MOREIRA
CAROLINA ROMANINI MIGUEL
ANDRÉA DE OLIVEIRA RAMOS PUPPI
JULIANA MARI TANAKA
PATRICIA M ARTIN DE MEDEIROS
CECÍLIA YOKOYAMA
IARA M. S. SOUSA DO AMARAL
FABÍOLA C. GIRÃO
ROBERTO FLEURY A. CAMARGO
VICTORIA ROZSAVOLGYI BORTOLIN
ROCHELLE RICCI
FABIANO ABUJADI PUPPI
LANA PATRÍCIA PEREIRA
ANGÉLICA TAÍS P. SANTOS TORRES
MAURO TAKAHASHI MORI
JULIANA DE AGUIAR ALIOTI PASSI
TICIANA CARNEIRO DA CUNHA
HENRIQUE F. MUNIA E ERBOLATO
PATRÍCIA R. PAIVA BUGELLI SUTTO
TATIANA GALVÃO VILLANI
JAQUELINE AP. FERREIRA SLUIUZAS
ANDRÉ LUIZ DOS SANTOS PEREIRA
MARCEL AUGUSTO SATOMI
ANA LÚCIA CASTAGNARI M ARRA
SIMONE CAMPETTI AMARAL
SUZANA CAMARÃO CENCIN
EDUARDO AMIRABILE DE MELO
PEDRO ALMEIDA SAMPAIO LIMA
ROGER HIDEYUKI NAKAGAWA
RENATA FERRAIOLI
ALEXANDRE R. GENTIL FERREIRA
ROGERIO PINTO LIMA ZANETTA
PRISCILA JACOBER PASQUALIN
RODRIGO DALLA PRIA
OSÓRIO SILVEIRA BUENO NETO
JULIANA R. FREDERICO CERAVOLO
RENATO SILVEIRA
ANGELICA ANDRADE BENATTI
MARIA FERNANDA M ARABIZA SOARES
ANNA CECÍLIA BRASIL E BRASIL
EDUARDO FERNANDES ARANDAS
BÁRBARA MOREIRA
MATHEUS BARBOSA VIOLA
ÁTILA CARVALHO BEATRICE CONDINI
JONSON CHUNG
ROGÉRIO G AVIOLLE
RENATO DE OLIVEIRA VALENÇA
DANIEL G. ORSINI MARCONDES
TATIANA S. OCTAVIANO FALCÃO
HELENA A. LEITE PENTEADO MORAES
RENATO TEIXEIRA MENDES VIEIRA
BRUNO PERES CARBONE
MARIANA ALVES KOEZUKA
CAROLINA RONCATTI TRIGUEIROS
CAMILA DE OLIVEIRA G ARCIA
APOENA JOELS
FERNANDO FARINELLI
VICTOR BULCÃO M ARTINELLI PINTO
AMANDA VIEIRA DA SILVA
ANDRÉ A. T. JUNQUEIRA AMARANTE
PEDRO TRENCH G. DE MORAES
RAPHAEL OKANO P. DE OLIVEIRA
GIAMPAOLO RICCIO M ARZULLI
STEPHANIE JANE M AKIN
RENAN LOPEZ SILVA
JOYCE MORAES BENEGAS
MARIANA CALVELO GRAÇA
CARLO LUGLI
JÉSSICA NUNES DE SOUZA
BRUNO D. MAGALHÃES SANTOS
TAMIRIS GOMES BERGSTROM
CAROLINE ZANOTTI
GIOVANNA K AMEI TAWADA
OBEDE FRANKLIN M. E SILVA JUNIOR
MAURÍCIO OLIVEIRA GOMES
LORRANE OLIVEIRA VASCONCELOS
MARINA PACHECO DE A. PACIULLO
PALOMA YUMI DE OLIVEIRA
SÃO PAULO
AV. BRIG. FARIA LIMA, 1656
11º ANDAR (01451-918)
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BRASÍLIA
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4th QUARTER 2010 – GLOBAL TAX BRIEFING – CCH
BRAZILIAN TAX UPDATE
Luis Rogério Farinelli, Ana Lúcia Marra, Tatiana Villani1
I.
RECENT CHANGES IN FEDERAL LEGISLATION TO FOSTER LONG-TERM INVESTMENTS
On December 30, 2010, the federal government implemented several changes to the federal
legislation by means of Provisional Measure No. 517/2010 (“MP 517/10”), Law No. 12,375/10
(“Law 12375/10”) and Decree No. 7,412/10 (“Decree 7412/10”), which encompass not only tax
matters but also alterations to the corporate and civil legislations.
Said acts are part of the tax package disclosed by the federal government on December 16, 2010
aiming to foster the long-term financing of the Brazilian economy. We summarize below the
main tax aspects of each of these acts.
MP 517/10
INVESTMENTS IN BONDS, SECURITIES, DEBENTURES AND INVESTMENT FUNDS
Income2 derived from bonds and securities that are (i) acquired as of January 1, 20113, (ii)
publicly placed; (iii) issued by a private legal entity (not a financial institution), (iv) governed by
1
Members of MACHADO ASSOCIADOS ADVOGADOS E CONSULTORES
Meaning “any amount that consists in remuneration of funds invested, including those from variable income
investments, such as interest, bonus, commissions, premium, discount and profit sharing, as well as the positive
results derived from investment funds and investment clubs referred to in article 73.”( “a” of paragraph 2 of article
81, Law No. 8,981/95)
3
The investments made before January 1, 2011 may also benefit from the 0% rate as long as they meet the
requirements established in MP 517/10.
2
the Brazilian Securities and Exchange Commission (“CVM”) and by the National Monetary
Council (“CMN”), (v) remunerated at a prefixed interest rate or pegged to a price index or to taxa
referencial (“TR”4), shall be subject to a 0% withholding income tax rate provided some
conditions described in the law are cumulatively met, amongst which we highlight: (a) income is
paid to a beneficiary that resides or is domiciled abroad (payments to tax havens5 are excluded
from this benefit) and (b) such bonds and securities have a weighted average term of more than 4
years.
Besides, income from debentures issued within the date of the regulation’s publication up until
December 31, 2015, by special purpose companies (“SPE”) set up to implement infrastructure
projects6, shall be subject to an income tax, to be withheld exclusively at source7, at a rate of:
(i)
0%, when paid to an individual resident or domiciled in Brazil; and
(ii)
15%, if the beneficiary is a legal entity (exempt or subject to any of the tax
calculation methods - SIMPLES, actual, deemed or arbitrated profit regimes).
It is important to note that MP 517/10 has also modified some provisions of Law No. 6,404/76
(Corporate Law) regarding the issuance, amortization and redemption of debentures and of
debenture holders’ trustees. Apparently these changes were made to harmonize the corporate
legislation with the modifications introduced in the taxation of debentures income.
With regard to investment funds, MP 517/10 established that the income arising from quotas of
funds which invest at least (i) 85% of its net worth in debentures issued by an infrastructure
project SPE (as described above) or (ii) 95% of its net worth in fund quotas that comply with the
requirement of item (i), shall be subject to an income tax, to be withheld exclusively at source, at
a rate of:
(i)
0%, when paid to:
- beneficiaries resident or domiciled abroad (except for tax havens); and
- individuals resident or domiciled in Brazil; or
(ii)
15%, if paid to a legal entity (exempt or subject to any of the tax calculation
methods - SIMPLES, actual, deemed or arbitrated profit regimes).
On the other hand, gains resulting from the alienation of quotas of infrastructure private equity
investment funds (“FIP-IE8”) or quotas of an investment fund that invests in FIP-IE quotas, in
transactions performed or not in the stock exchange, shall be taxed at:
4
Rate calculated based on an average of some bonds issued by commercial banks.
Federal Revenue Service Normative Instruction No. 1037/10 lists the countries and jurisdictions that are considered
as tax havens.
6
Considered a priority by the regulation to be issued by the Executive branch.
7
Meaning that the income will not be computed in the income tax return and, thus, the tax withheld cannot be
compensated in such return.
5
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(i)
0% rate when earned by an individual. It is no longer necessary to maintain these
quotas for at least 5 years to make use of this benefit; and
(ii)
15% rate when earned by a legal entity, with no modification of the previous rule.
LAW 12375/10
EXTENSION OF THE DEADLINE FOR THE APPLICATION OF CUMULATIVE PIS AND COFINS REGIME
ON CIVIL CONSTRUCTION WORKS REVENUES
As per Law 12375/10, revenues from the performance of civil construction works, by
management, contracting or subcontracting, will remain excluded from the non-cumulative PIS
and COFINS regime until December 31, 2015. Before such law, the deadline for the application
of such regime on these revenues was December 31, 2010.
DECREE 7412/10
Decree 7412/10, in force as of January 1, 2011, consolidated and introduced some changes on the
regulation of the tax on financial transactions (“IOF”), more specifically on the rates of the IOF
due on exchange operations (“IOF-exchange”). Although the general 0.38% IOF-exchange rate
has been maintained, the main modifications concern the following:
(i)
the outflow of funds related to foreign loans and financing raised prior to October
23, 2008 now benefits from a 0% rate, as Decree 7412/10 eliminated the
requirement that the inflow of such funds should have occurred before this date;
(ii)
extension of the 0% rate to all foreign exchange transactions for the remittance of
interest on equity and dividends to a foreign investor, which previously did not
apply to the direct foreign investments;
(iii)
application of a 2% rate on exchange transactions carried as of January 1, 2011 for:
a) the inflow of funds (including simultaneous transactions) carried out by a
foreign investor for the acquisition of quotas in private equity investment
funds, in emerging companies investment funds and investment funds in
quotas of said funds, set up as per CVM regulations;
8
FIP-IE is a closed fund for qualified investors, whose portfolio is formed by shares of privately held or publicly held
Brazilian corporations with investments in certain infrastructure projects.
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b) simultaneous transactions for the inflow of funds for the cancellation of
depositary receipts for the purpose of investing in shares traded in stock
exchanges;
c) simultaneous transactions for the inflow of funds for the purpose of
changing the foreign investors regime (from a direct investment to an
investment in shares traded in the stock exchange), as per the CMN
regulations;
(iv)
the 0% rate applicable to foreign exchange transactions carried out by a foreign
investor for the outflow of funds invested in the financial and capital markets was
extended to the situations mentioned in item (iii) and to those related to the inflow
of funds by a foreign investor for depositing the collateral margin required by the
stock exchanges, commodities and futures exchanges; and
(v)
restriction of the 0% rate on the simultaneous exchange transactions performed by
an institution operating in the foreign exchange market to the situations listed in
item (iii) and to the liquidation of foreign exchange transactions for the inflow of
funds by a foreign investor for: (a) depositing the collateral margin required by the
stock exchanges, commodities and futures exchanges; or (b) investing in the
financial and capital markets.
II . TAX INCENTIVE PACKAGE FOR THE 2013 FIFA CONFEDERATIONS CUP AND 2014 FIFA
WORLD CUP
Brazil will host the 2013 FIFA Confederations Cup and the 2014 FIFA World Cup. In order to aid
the preparation of these soccer events (“events”), the federal government has published, on
December 21, 2010, Law No. 12,350, which grants certain tax benefits.
In overall, exemptions of federal taxes and import duties are granted to FIFA itself and to any of
its related institutions (such as its subsidiaries, confederations and foreign associations that are
members of FIFA, domiciled abroad or in Brazil) on commercial transactions related to said
events carried out between January 1st 2011 until December 31st 2015 such as:
(i)
excise tax (IPI), import tax (II), social contributions on imports (PIS/COFINSImportação), contribution for intervention in the economic domain (CIDE) and
some import duties on the import of goods9 to be used or consumed on the
organization and preparation of the events (such as trophies, flags, marketing
material, food, medicine, fuel, amongst others);
9
As for durable goods and equipment (to be listed by a forthcoming regulation), the Law provides for the suspension
of federal taxes and duties if they are imported under a special customs regime.
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(ii)
income tax (IRPJ), social contribution on net profit (CSSL), withholding income
tax (IRRF), tax on financial transactions (IOF), social contributions due by the
employer (INSS) amongst others (including taxes mentioned in item (i) above)
with regard to eligible taxable events arising from the performance of the
activities directly related to the organization and preparation of the events,
such as income and profits deriving from such activities, as well as on remittances
made by the beneficiaries to foreign service providers. Income and capital gains
derived from financial transactions or from the sale of goods and rights are
generally excluded from this tax exemption;
(iii)
income tax and IOF due on payments made to foreign resident individuals that
are engaged to work on the events. Referees, soccer players, and other delegation
members also benefit from such exemption exclusively in relation to
premium/bonus payments related to the events; and
(iv)
IPI and social contribution on revenues (PIS/COFINS) due on the purchase of
goods from a Brazilian company (i.e., sale transactions within the Brazilian
market), provided some conditions are met.
It is important to note that third parties that comply with the requirements imposed by Law - such
as be licensed or nominated by contract to render services or to act as FIFA’s business partners may also benefit from some of these tax exemptions in some circumstances. The Brazilian
Federal Revenue Service shall issue a list of the beneficiaries, based on the information to be
provided by FIFA.
Furthermore, Law No. 12,350 instituted ‘RECOPA’, a special taxation regime for some legal
entities that have their projects approved by the Sports Ministry for the construction or
modernization of soccer fields to be used at FIFA cups’ matches. In this case, federal taxes (IPI,
PIS-COFINS, II, PIS/COFINS-Importação) levied on the sale or rent or import of related
machines, instruments, goods, equipments and construction materials will be suspended and/or
subject to a 0% rate. Projects approved by December 31, 2012 can make use of this tax regime up
until June 30, 2014.
Law 12,350 is pending of regulation and there are several uncertainties about the scope and use of
tax benefits provided therein.
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III . TRANSFER PRICING HIGHLIGHTS
NEW DECISIONS ON TRANSFER PRICING RULES
A recent and unpublished decision by the Administrative Council of Tax Appeals (CARF) is
creating controversy in the transfer pricing field. This was the first case where CARF had to
decide on the validity of a tax assessment grounded on the rules Normative Instruction 243 (NI
243) established for the Brazilian Import Resale Minus Method with a 60% profit margin (PRL
60), applicable when the imported item is used in the production.
The general expectation was that the rules of NI 243 defining how the value added in Brazil
should be considered in the benchmark calculation would be considered unlawful because these
norms deviated from the wording of Law 9430. Therefore, a tax assessment with such grounds
would also be deemed unenforceable.
The decision, however, surprised most tax practitioners. Although we have not had access to the
full text of the decision, we are aware that the tax assessment was considered valid by the casting
vote of the presiding judge, who is always a representative of the tax authority. It is also
noteworthy that some important aspects of the controversy might not have been analysed due to
particularities of the case.
Furthermore, when the Regional Federal Court in São Paulo analysed the same matter, the
outcome was completely different. On that occasion, the judges decided that NI 243 was indeed
illegal, as it had set forth rules that were not prescribed in law.
As a consequence, Brazilian taxpayers are still uncertain of the formula to calculate the PRL 60.
CURRENCY EXCHANGE VARIATION ADJUSTMENT
Finance Ministry Ordinance No. 4, issued on January 17, and Normative Instruction 1124 (NI
1124), issued on January 21, allow 2010 export revenues to be multiplied by 1.09 in the following
cases: (i) Domestic Market Safe Harbor, which establishes that controlled export transactions
shall only be subject to a transfer pricing method if their price is less than 90% of the domestic
market price for the same goods, services or rights; (ii) the Minimum Profitability Safe Harbour,
which relieves Brazilian taxpayers from applying one of the export methods, if their net profit in
controlled export transactions is equal to, or is more than, 5% (this does not apply to low tax
jurisdictions); and (iii) the Brazilian Cost Plus Method applicable to exports (CAP method).
The main purpose of this adjustment is to counterbalance the increase in the real/dollar rate,
which may have adverse transfer pricing effects. Therefore, by increasing the values of export
revenues, meeting the required standard becomes easier and, consequently, Brazilian export
transfer pricing adjustments can be reduced or eliminated accordingly.
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Furthermore, as in previous years, NI 1124 allows the Minimum Profitability Safe Harbour of
2010 to be calculated based exclusively on data from that year, instead of the triennial average
required by NI 243, as amended. Lastly, NI 1124 clarifies that both calculations (annual and
triennial) may benefit from the 1.09 factor for 2010 export revenues.
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