Provisional Measure 627/2013 – Several Changes to Federal Taxes
Provisional Measure 627/2013 was published on November 12. It makes a number of changes to federal taxes, including the income tax, Social Tax on Net Profit (Contribuição Social sobre o Lucro Líquido), or CSLL, Social Integration Program Tax (Programa de Integração Social), or PIS, and the Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS. The purpose of these changes is to harmonize Brazilian tax law with the IFRS and end the Transitional Tax System.
The new rules become mandatory on January 1, 2015. However, taxpayers may choose to adopt them on January 1, 2014. Until then, the Transitional Tax System rules will remain effective.
The main changes are:
i) The adaptation of the corporate income tax and CSLL calculation basis to the IFRS. This includes several adjustments to net income to make the new accounting standards for the corporate income tax and CSLL neutral in regard to:
Fair value adjustments;
Payment of goodwill on share acquisition;
Goodwill valuation;
Gross income from real estate activity;
Initial public offering expenses;
Adjustments to present value (long-term assets or liabilities);
Preoperational expenses;
Long-term construction agreements;
Public subsidies for investments;
Premiums in the issuance of debentures;
Impairment test on assets;
Stock option plans;
Concession contracts for public services;
Depreciation and amortization of assets and intangibles; and
Financial leasing.
ii) PIS and COFINS calculation basis – new definition of “gross revenue” for PIS and COFINS calculation purposes.
iii) Dividends and interest on shareholder equity (IOE) payments between 2008 and 2013 – Dividends and IOE payments during the Transitional Tax System were required to be based on “tax financial statements” (old Brazilian GAAP), rather than on “business financial statements” (IFRS). However, the Provisional Measure states that the tax authorities will not challenge entities that paid dividends and IOE based on “business financial statements” between 2008 and 2013.
iv) Worldwide income taxation (CFC Legislation) – new guidelines on income taxation of Brazilian subsidiaries abroad.
New Interpretation on Cost-Sharing Agreements
Tax aspects of cost-sharing agreements have always been a controversial matter in Brazil because Brazilian law has never properly addressed them.
To end this problem, the General Tax Coordination Office of Brazilian Federal Revenue has issued a ruling stating its interpretation of these transactions.
Ruling 23/2013 says Brazilian legislation allows Brazilian companies from the same economic group to share administrative expenses by means of cost-sharing agreements, as long as certain requirements are met.
In summary, this ruling says that expenses shared through cost-sharing agreements are tax deductible for the participating companies as long as these companies meet certain requirements, including: (i) the expenses must be for goods or services actually provided or received; (ii) the shared services or costs must be expenses that are necessary to support the companies’ primary activities and their ability to generate profit; (iii) the cost-sharing agreements must establish reasonable and clear criteria for allocating expenses among the participating companies and the amounts reimbursed cannot include a profit margin; (iv) the centralizing company can only record its share of the expenses as an expense on its income statement.
As long as these requirements are met, the amounts the centralizing company receives are not subject to PIS and COFINS taxes. Additionally, each participating company can calculate the PIS and COFINS non-cumulative credits on its share of the expenses, where these credits apply.
Brazilian Federal Revenue has issued a similar ruling on cross-border arrangements. In this regard, Ruling 8/2012 changed the previous Brazilian Federal Revenue opinion to allow corporate income tax and CSLL tax deductibility. In addition to having the same requirements as Ruling 23/2013, in this case the extent to which the shared expenses can be deducted for tax purposes is limited to the arm’s-length price, calculated using transfer pricing methods.
Superior Court of Justice decides Excise Tax (IPI) is levied on sales of imported goods
After a favorable decision issued by its First Panel, the Second Panel of the Superior Court of Justice recently held that sales of imported goods are subject to the Excise Tax (Imposto sobre Produtos Industrializados), or IPI. The earlier case, which was decided by the First Panel, held that only the IPI tax levied at the time of customs clearance of imported goods would be valid under Brazilian rules and the National Tax Code. This holding stated that taxing imported goods on customs clearance and on their later sale would result in double taxation for the same product.
Because of the divergence between the holdings, this issue will probably be decided by the First Section of the Superior Court of Justice. The First Section includes justices from both the First and Second Panels.
Supreme Court holds ICMS is due on imports by non-taxpayers after 2002
The Supreme Court has recently decided that the Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, is due on imports by non-taxpayers after Constitutional Amendment 33/2001 and Complementary Law 114/2002.
Since the ICMS is a state VAT that is levied only on transactions by manufacturers and traders/sellers, those who are not ICMS taxpayers (natural persons and services providers) have always attempted to not pay this tax on imports, even though it is provided for in the law of each Brazilian state.
However, since this taxation was introduced in the Federal Constitution through Constitutional Amendment 33/2001, the Supreme Court considered it constitutional, regardless of the category of the taxpayer. Nonetheless, the Supreme Court held that this tax is valid only if the state included its tax triggering event in its internal rules after the passage of Complementary Law 114/2002.
New export clearance procedures
Brazilian tax authorities issued Normative Instruction 1,407/2013 in November 2013. This Normative Instruction changes export clearance procedures. Most of these changes are intended to reduce the time and costs involved in exporting.
The main changes include a new procedure for inspecting the exporter’s documentation that avoids appearing in person. In most cases exporters will no longer need to submit all documentation to customs authorities and, even if they do, the documents can now generally be delivered over the Internet. This reduces bureaucracy in export transactions.
