The Supreme Court Has Finally Decided the So-Called “Case of the Century”
The Supreme Court has finally decided the case that deals with the exclusion of ICMS tax from the PIS and COFINS tax calculation bases. Although a decision had been entered in March of 2017, a motion for clarification was pending.
By majority opinion, the Supreme Court decided that the ICMS tax to be excluded from the PIS and COFINS tax calculation bases is the amount stated on the tax invoice, rather than the ICMS tax amount actually paid by the taxpayer, i.e., after credits and debits.
Additionally, the Court limited the effects of the decision so that it only applies from March 15, 2017, except for the lawsuits filed before that date.
The decision was a major victory for taxpayers.
New Perspectives on Brazilian Tax Reform
The need for tax reform has been debated in Brazil for a long time, mainly aimed at simplifying tax law and achieving greater economic rationality.
Discussion of the subject have intensified over the last few months, and especially after the Supreme Court decision on the exclusion of ICMS tax from the PIS and Cofins tax calculation bases, the National Congress has moved forward with preparing reform bills.
As this is an issue that involves the need for alignment between the executive and legislative branches, it has been reported that the reform will likely be done piecemeal.
The reform will possibly deal with: (i) the establishment of a new contribution tax on goods and services, which would replace the PIS and Cofins taxes, and possibly the ICMS and ISS taxes over time, (ii) changes in income tax legislation, (iii) taxation of dividends and the end of interest on shareholder equity (Juros sobre o Capital Próprio), and (iv) the institution of a digital tax, among other things.
There are several ways forward being evaluated, but there is a lack of consensus on which reforms should have priority and, with many proposals for change in Congress, it is not possible to know which will be the path to be followed.
In this context, it is important for taxpayers to be aware of changes so they can assess the impacts of the reforms on their operations as early as possible.
Brazilian Government has Promulgated the Brazil-UAE Double Taxation Convention
The Brazilian Government has promulgated the Double Taxation Convention between Brazil and the United Arab Emirates, which was signed on November 12, 2018.
This Convention aims to eliminate or minimize the double taxation of income earned by residents in both countries, by means of defining the tax jurisdiction in relation to different types of income, such as profits, dividends, interest, royalties and services. Moreover, the Convention establishes the exchange of information between the tax authorities of the two countries, in accordance with internationally accepted standards.
From now on, the Convention is in effect, reflecting a balance between the interests of the signatory countries and favoring the increase of legal certainty and the improvement of the business environment.
Federal Government releases interpretation on taxation of exchange variation on investments abroad
Recently, the Federal Revenue Service, in response to a query made by a taxpayer, stated its opinion on the taxation of exchange rate variation arising from investment abroad (controlled company) by a Brazilian legal entity.
The case analyzed by the tax authorities concerned a Brazilian company in the oil and gas industry that was evaluating a share capital reduction in its subsidiaries abroad.
In the analysis, two points were questioned: (i) whether the positive exchange variations, calculated between the investment date and its settlement, are considered as cost for purposes of calculating the gain or loss at the time of the capital reduction and (ii) the understanding of the effects of variations for purposes of calculating income tax (IRPJ and CSLL) and social contribution taxes (PIS and Cofins).
In response to the taxpayer, the Revenue Service stated that the exchange variation of investments abroad is part of the cost of these investments for the purposes of income tax, maintaining its nature as a counterpart to the adjustment of the investment value.
With regard to the social contribution taxes, the position taken was that the positive exchange variation should be considered as taxable financial income.
The tax authorities’ position is important to avoid challenges on the taxation of exchange variations by the IRPJ and CSLL taxes, eliminating the risk of assessments, but there still remains the possibility of disagreement regarding PIS and Cofins taxes, in light of taxpayers’ position that this should not be considered taxable income for social contribution tax purposes.
Federal Government launches installment payment program for Profit Sharing Program debts
The National Treasury (Revenue Service and the Attorney General of the National Treasury) instituted an installment payment program that allows taxpayers to opt out of disputes at the administrative and judicial levels dealing with taxation of Profit Sharing Programs (PLR), with a discount of up to 50% and payment in installments.
This is a novelty that is being called a “litigation tax transaction” and which, according to the Treasury, aims to resolve conflicts with greater predictability and security.
The issue of taxation of PLR programs has been much discussed in recent years. On the one hand, taxpayers take the position that their programs are in accordance with the law and are not salary in nature, and, on the other hand, Brazilian Federal Revenue has been levying assessments because it takes the position that the payments are salaries per se.
Within the scope of the transaction, it is possible to pay the amounts subject to dispute in three ways. For all three, there is a requirement for a down payment of 5% of the total amount, without reductions, in five installments, with the remainder being payable: (i) in seven months with a reduction of 50% of fines, interest and other charges, (ii) in 31 months with a 40% reduction in fines, interest and other charges or (iii) in 55 months with a 30% reduction.
It is important to highlight that the taxation of Profit Sharing programs is a matter that is directly related to the practical situations of each specific case, with the individual parameters and criteria directly influencing the prospect of successful litigation, and should be carefully evaluated before deciding whether to pursue this settlement option.
Attorney General challenges states laws aiming at taxing gifts and inheritances abroad
In February 2021, the Brazilian Supreme Court ruled, as a binding precedent, on the non-application of the Gift and Inheritance Tax (ITCMD) to gifts and inheritances that occur abroad since the Brazilian Constitution requires a supplementary law to levy the ITCMD tax when the donor is domiciled or resident abroad, as well as when the deceased person owned assets abroad.
Under this decision, the states and Federal District have no legal capacity to establish the tax until its regulation.
Therefore, in May 2021, the Attorney General of the National Treasury of Brazil (PGR) filed 24 lawsuits challenging the constitutionality of state and Federal District laws that establish the taxation of donations or inheritances abroad. Those lawsuits are significant because these judgements will provide security to taxpayers that it will not be necessary to file a lawsuit to secure the right of not paying the unconstitutional tax.
The PGR also filed a lawsuit against the Brazilian Congress to require the promulgation of a supplementary law regulating the ITCMD over inheritances and gifts abroad.
Property transfer tax exemption on capitalization of assets in real estate company capital
The Supreme Court held that when real property is used to pay in capital contributions to a corporation, the transaction is exempt from the property transfer tax (ITBI) when the property value does not exceed the capital value paid in.
The case was not focused on real estate companies, but the majority of justices voted that paying in real estate companies’ capital with real properties is exempt from the property transfer tax, changing prior court decisions concerning the matter.
Despite this recent Supreme Court decision, some state courts are still holding that capital paid in to real estate companies is not exempt from ITBI. Because of this, the Supreme Court might be required to re-analyze and judge the case with a focus on real estate companies.
Wealth tax proposed in many bills in Congress
A wealth tax has been provided for in the Brazilian Constitution since 1998. However, it requires a supplementary law to be created, and such a law has not been enacted.
Currently, due to the political and economic crisis, especially aggravated by the coronavirus pandemic, there are several bills being discussed in Congress seeking to create a wealth tax in Brazil.
The most recent bill (Supplementary Law Bill No. 215/20) provides for the assessment of wealth tax on any individual with assets that exceed BRL 50 million (around USD 9.9 million).
In Europe, several countries have established a wealth tax, including Austria, Denmark, Finland, France, Germany, Iceland, Luxembourg, the Netherlands, Norway, Spain, Sweden, and Switzerland. However, in 2017 only four of these countries still had a wealth tax (France, Norway, Spain, and Switzerland) and in 2019 France had significantly reduced the scope of its wealth tax.
The lack of success of the wealth tax in those countries clearly raises concerns about its introduction in Brazil.
Brazilian Tax Authorities Move Forward in Offering Digital Services to Taxpayers
The Brazilian Tax Management Support Program (“PROFISCO”), financed and supported technically by the Inter-American Development Bank (IDB), has implemented the automation of administrative tax litigation, allowing both tax authorities and taxpayers to file all case documents exclusively digitally.
A software program called the Fiscal Administrative Procedure (PAT-e) allows the complete management of documents, defining and automating the control rules for the creation, maintenance, treatment and filing of the documents at all stages.
The results obtained so far with the implementation of PAT-e show that digitization is an essential tool for the state to increase tax collection and improve the provision of services to Brazilian taxpayers. It is also living proof of the transformative power of the PROFISCO Program, a partnership between the IDB and the Brazilian government that promises to continue promoting innovation in Brazilian tax management.
