Subsidies for investment – Issue 1.182.
On April 26, 2023, Brazil’s high tax court, the Superior Court of Justice (‘STJ’), defined the possibility of excluding tax benefits related to the State Value-Added Tax on the Circulation of Goods and Services (ICMS), such as reduction of the basis for calculation, rate reduction, exemption, deferral, among others, from the calculation basis of the Federal Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL).
A similar question was analyzed by the same Court in 2017, when it specifically judged the possibility of ICMS presumed credits – denominated “positive incentives or benefits – being excluded from the bases for the IRPJ and CSLL, without the need to adhere to the formal requirements of Law 12.973/14 and Complementary Law (LC) 160/17, thus becoming an important paradigm in relation to federal taxation of ICMS tax benefits.
Nonetheless, the same understanding was not settled in terms of being applied to the remaining ICMS benefits – denominated “negative incentives or benefits”– and was submitted to the STJ’s judgment through a series of repetitive appeals.
In this year’s case, the STJ set out the following interpretations: (i) ICMS benefits are only eligible for exclusion from the calculation basis of the IRPJ and CSLL if the company heeds the provision of Article 10 of Complementary Law 160 and Article 30 of Law 12.973/14 and the subsidy can be recorded in the equity of the company’s books; (ii) Proof of concession as stimulation for implementation or expansion of a project will not be required when the requisites of Article 30 of Law 12.973/14 are fulfilled; and (iii) The Brazilian Federal Revenue Bureau (RFB) may assess the company for IRPJ and CSLL if it is ascertained that the amounts arising from the tax benefits have been used for purposes foreign to the guarantee of the economic project’s viability, that is, if the gains arising from the benefit were distribute to the company’s shareholders.
The decision, despite being definitive, has generated numerous controversies of interpretation, both conceptual and accounting, which should be clarified by the Federal Government.
Brazilian Federal Government publishes Provisory Measure aimed at altering taxation of overseas investments
The federal government aims to change the taxation of assets maintained by Brazilian individuals abroad, as well as to expand the range of tax exemption from the Individual Income Tax (IRPF) in Brazil. These two matters are covered by Provisory Measure (MP) 1.171/2023, which was enacted on April 30, 2023.
The main innovation of the MP is applicable to the taxation of individuals shareholders which control entities abroad. Under the new rules, in case the subsidiary entity earn more than 20% of passive income (royalties, dividends, interests, rental property, or other among of passive income), or if it is set up in a tax haven, Brazilian taxation of the profits obtained abroad will take place at the end of each fiscal year (December 31), even if such earnings are not distributed to the shareholders.
Annual earnings of more than R$ 6,000 will be subject to a progressive rate, varying between 15%, if the earnings are below R$ 50,000, and 22.5%, if they are above this amount.
Moreover, the MP revoked provisions that called for exemption of capital gains accrued by the sale of goods acquired based on non-resident status, as well as the legal provision that exempted from taxation the gains resulting from exchange variation upon the sale of assets originally acquired in foreign currency.
The deadline for consideration of the MP ends on August 27, 2024, and, even if it becomes converted into a law, the original text should undergo changes, in that so far over one hundred amendments to the original text have already been presented.
Brazilian Senate approves Treaty to Eliminate Double Taxation between Brazil and Uruguay
Brazil’s Federal Senate approved on June 15, 2023, the text of the Brazil-Uruguay Convention for the Elimination of Double Taxation in Relation to Taxes on Income and Capital and to Prevent Tax Evasion.
This new Treaty introduces certain novelties. Among them is Article 13 – Technical Services, which authorizes taxation of this type of payment overseas, both by the nation of Residence and the nation of the Source. In the latter case, taxation is limited to 10%, in line with the new treaties signed by Brazil with the Arab Emirates and Singapore.
By and large, the treaties that follow the standard set by the Organization for Economic Cooperation & Development (OECD) determine that taxation of service earnings should be imposed only by the nation of Residence, based on the article dealing with Profits of companies (Article 7). Accordingly, Brazil is going against the grain of such interpretation, even given the country’s declared interest in following OECD policy and becoming part of the Organization.
Now, the text of the treaty should be approved by President Luis Inácio da Silva, for subsequent publication of the respective Legislative Decree, at which time the treaty will begin to produce effects.
RFB Alters Interpretation on Assessment of PIS/COFINS-Importation on Licensing of Overseas Software
Through the recent Resolution of COSIT Inquiry 107/23, the Brazilian Federal Revenue Bureau (RFB) changed its interpretation regarding the levying of the Social Integration Program and Social Security Finance Contribution (PIS/COFINS) on Importation of software licensing sourced from abroad.
Previously, the tax authorities believed that PIS/COFINS-Importation should not be levied on remittance of amounts abroad resulting from non-personalized software licensing, as they involved payment of royalties for the availability of an intangible asset, rather than consideration for a service provided.
However, based on the recent interpretation by the Federal Supreme Court (STF) on the levying of the municipal Service Tax (ISS) on software licensing, the tax authorities changed their orientation and now consider the licensing of computer software programs as importation of services subject to the PIS/COFINS-Importation.
It is important to stress that Resolutions of Inquiries are binding on the RFB, such that taxpayers who do not adopt their interpretations are subject to questioning by the tax authorities.
At any rate, this new interpretation by the tax authorities will be strongly fought by taxpayers, since the STF’s decision specifically analyzed legislation and tax-triggering events relating to the state ICMS and municipal ISS and has not yet analyzed the requirement to pay the federal PIS/COFINS-Importation on the contracting of services and digital goods coming from abroad.
Brazil Finally Approves Alignment of its Transfer Pricing Rules to the OECD
Law 14.596/2023, which provides for new Brazilian Transfer Pricing Rules, has finally been approved by Presidential sanction. The law is the result of the conversion of Provisory Measure 1.152/2022, enacted on the final working day of 2022, which was approved by the Nation’s Congress in May 2023.
Now, with the sanction by Brazil’s President and its enactment and publication, Brazil’s Transfer Pricing rules are in line with the directives of the Organization for Economic Cooperation & Development (OECD).
Application of the new rules by companies operating here will be optional for this fiscal year (2023), and mandatory as from fiscal year 2024.
Among the alterations, the most important are the end of fixed profit margins for calculation of the parameter price in the arm’s length approach and the adoption of transactional methods.
Now it remains for Brazil’s Federal Revenue Bureau (RFB) to regulate the manners for application and proof of compliance with the new rules, as well as fulfillment of accessory obligations.
Loss of effectiveness of MP 1.160/2023 – Casting Vote in the Administrative Tax Appeals Council (CARF)
Provisory Measure 1.160, which had determined the casting vote as the exclusive criterion for breaking ties at the Administrative Tax Appeals Council (CARF), lost its validity effective June 1, 2023. Now, the previous rule once again comes into effect, such that in case of a tie in the voting of a judgment, the issue will be resolved in the taxpayer’s favor.
The government has already proposed a new Law to re-establish the casting vote rule, aiming for the reflex of such a rule in taxation, since the tendency is to favor the government’s position in CARF decisions. Such initiative was presented as part of the new taxation framework here in Brazil, though it has not yet been approved by Congress.
Jurisdiction of Brazilian Central Bank to regulate Legal Framework for Cryptocurrencies
Federal Government recently introduced an important change in the regulation of the market for virtual assets, including cryptocurrencies, by means of Decree 11.563/23.
This decree is aimed at regulating certain aspects of the Legal Framework for Cryptocurrencies (Law 14.478/22), establishing principles and concepts to be involved in the so-called “operations with virtual assets”, which apply also to the exchanges located here in Brazil.
One relevant measure adopted by the Executive Branch is the power granted to the Brazilian Central Bank – BACEN to regulate, authorize and supervise the service providers related to virtual assets, as well as to deliberate on other issues covered by the Law.
Moreover, the Decree strengthens the jurisdiction of the Brazilian Securities Commission (CVM) to regulate the cryptocurrencies considered as securities and the Brazilian National Consumer Protection System, when applicable. Such measures represent a significant step forward in the definition of a regulatory framework for virtual assets in Brazil.
Brazilian Tax Reform – Chief aspects
The base text for the nation’s reform of taxes on consumption was introduced just over a month ago, on July 7, by the Chamber of Deputies when it approved the Bill for a Constitutional Amendment (PEC) 45/2019.
Along general lines, PEC 45 replaces five existing taxes and contributions, the federal Social Integration Program – PIS, Social Security Finance Contribution – COFINS, and excise tax – IPI, as well as the state tax on circulation of goods and services – ICMS and municipal service tax – ISS, with the Selective Tax – IS, Goods and Services Tax – IBS, and Goods and Services Contribution – CBS.
Selective Tax
The Selective Tax will be of the “extra-fiscal” type and is to be levied on the production, sale or importation of goods and services harmful to health or the environment, with there also being the possibility that it may be levied on operations involving electric power, telecom services, petroleum by-products, fuels, and minerals.
IBS and CBS
The CBS (federal) and IBS (state and municipal) taxes will adopt the value-added model, with a broad base of incidence and uniform rates aimed at complete non-cumulativeness.
The proposal is for these taxes to be levied on operations, including importation, involving material or immaterial goods, including rights and services. At this point in time, no rates have been set yet for these taxes, which will be defined by each entity of the Brazilian federation by means of specific laws.
There is further provision for the possibility of reduced and differentiated rates for specific goods and services, such as fuels and lubricants, financial services, operations with real estate assets, health-care coverage plans, among others.
In addition to these main issues, the proposal deals with punctual alterations in the rules for the Automotive Vehicle Property Tax – IPVA, Inheritance and Donations Tax – ITCMD, and Urban Property Tax – IPTU.
Transition to the new model is slated to take 8 years as from 2026, until the IS, CBS and IBS are fully effective.
After it passes the Chamber of Deputies, the project will go to the Senate, where it will need to be approved by a qualified majority, that is, by 49 senators (3/5 of the total), in two sessions. In case the text is substantially changed (not just changes in wording), it will have to go back to the Chamber of Deputies. In case such a situation should arise, it is possible that there will be enactment of part of the Tax Reform, including just the portion that passes both legislative bodies.
UK Treaty to Avoid Double Taxation with Brazil is approved by the Royal Council
On July 19, 2023, the Council of King Charles III solemnly approved the text of the Convention to Eliminate Double Taxation between Brazil and the United Kingdom, which was signed in November 2022. The text had already passed the House of Commons, such that the Treaty is now officially approved by the Government of the United Kingdom.
On the other hand, in Brazil the nation’s Congress has not even begun analyzing the Convention’s Draft and there is no forecast as to when this will occur.
US postpones rule establishing terms for offsetting foreign tax credits
On July 21, 2023, the Internal Revenue Service issued tax relief aimed at US companies that have foreign tax credits which can be offset in the US.
The norm established that, for 2022 and 2023, such taxpayers will be eligible for waiver from taxes paid abroad for US tax purposes, as provided by sections 901 and 903 of the Internal Revenue Code Notice.
The norm will prevail again as from January 1, 2024.
