Anni Varanda, Autor em GSGA

BRAZILIAN TAX REVIEW – OCTOBER 2022

Posted on 11 de October de 202211 de October de 2022 by Anni Varanda

Brazilian Network of Conventions to Avoid Double Taxation Expands

As from the beginning of next year (January 1, 2023) Decree 11.109/2022, which was enacted in June of this year, takes effect to avoid double taxation between Brazil and the major Southeast Asian market hub, the country of Singapore.

Moreover, in August of this year, Brazil signed a Protocol to update its agreement with the world’s second most populous nation, India, and signed a new agreement to avoid double taxation with South America’s second most populous nation, Colombia.

This year, the Commission of the Brazilian Representation in the Mercosur Parliament (Parlasur) also approved the agreement to avoid double taxation between Brazil and its small southern neighbor, Uruguay, that had been signed in 2019.

For the latter three cases above (India, Colombia and Uruguay), the documents signed still need to be approved by Brazil`s National Congress and signed by either President Lula or Bolsonaro (depending on which one of them wins the second round of voting set for October 30, 2022).

Brazilian Government Prepares to Alter the Nation`s Transfer Pricing Rules

Brazil`s Federal Revenue Bureau (RFB) has made a series of presentations to several major players in the nation`s economy regarding the future project intended to bring the country`s legislation more into line with the norms of the Organization for Economic & Commercial Development (OECD) regarding international transfer pricing transactions.

The idea is for the RFB to prepare a legislative bill or provisory measure after sounding out market suggestions and criticisms, though the precise form in which the project will be presented has not yet been defined.

This is currently a major concern of the Brazilian Government, as alignment of local transfer pricing rules to those of the OECD is one of the requisites for Brazil to join this major international organization.

Payment for Technical Services Rendered by Residents of Japan are Exempt from Brazil`s WIT

Brazil`s Federal Revenue Bureau (RFB) recently resolved Inquiry 20/2022 and issued its interpretation that the nation`s Withholding Income Tax (called IRRF) is not to be levied on payments for some services performed in Brazil by companies set up in Japan. The list of services includes technical and administrative assistance without technology transfer and sales commissions for such services.

This interpretation results from application of the Convention to Avoid Double Taxation signed between Brazil and Japan. The Convention calls for the profits of companies only to be taxed in the country where the party performing the services resides. Furthermore, such agreement does not equate remuneration for technical assistance services to royalties, which would permit IRRF taxation in Brazil.

The agreement with Japan is one of just five treaties signed (and the only one with a non-European nation), out of a total of 35 currently in effect, that does not equate technical assistance services with royalties. The other four are those with Austria, Finland, France, and Sweden.

Highest Brazilian Administrative Tax Chamber turns down taxation of profits earned by foreign subsidiaries

Earlier this year (on May 11, 2022), the 1st Panel of the Superior Tax Appeals Chamber (CSRF – the highest administrative judgment level) decided that Article 7 of the OECD Model Convention (followed by the treaties signed by Brazil with other nations to avoid double taxation) prevents profits accrued by non-Brazilian subsidiary companies from being taxed here (Decision 9101-006.097).

In the specific case analyzed by the CSRF, the corporate taxpayer had not included in its taxable income for Corporate Income Tax (IRPJ) and Social Contribution (CSLL) the profits accrued by its subsidiary companies in Spain and Luxemburg, owing to the provisions in this sense in the agreements with those nations signed by Brazil to avoid double taxation.

Brazilian legislation requires that profits accrued by foreign subsidiaries be included in the calculation of corporate taxes of Brazilian companies. The controversy arose regarding the classification of such earnings: whether the profits of the Brazilian company would be taxed (which would remove application of the treaties), or whether there would be indirect taxation of the earnings of companies headquartered abroad (which would be contrary to Article 7 of the OECD`s Model Convention).

The decision, ruling against taxation in Brazil, was handed down according to the tie-breaking criterion in the taxpayer`s favor, instituted by Law 13.988/2020, which overturns the CSRF`s previous interpretation. The new interpretation is in line with Brazilian Courts, and guarantees greater juridical security to Brazilian companies with overseas subsidiaries headquartered in nations that have double taxation avoidance treaties signed with Brazil.

Taxation Transaction – Negotiation of federal tax debts

Towards the middle of this year (June 2022) Law 14.375/22 expanded the transaction benefits and hypotheses regarding federal back taxes owed. The measure was adopted to permit renegotiation of tax debts, with the payment period expanded and the possibility of obtaining debt reductions included.

Among the main changes, highlights include the rise from 50% to 65% of the maximum discount that may be granted for such a transaction and expansion of the maximum installment period from 84 to 120 months. The new law also established the possibility of payment with IRPJ tax loss credits and negative results for CSLL purposes, precatory credits and the possibility of transacting debts that are being contested in the administrative sphere with respect to the RFB that have not been classified yet as federal active debts.

In August of 2022, the administrative rulings were published to regulate these matters by the Brazilian Federal Treasury Attorney General`s Office (PGFN) and the RFB.

At the level of the PGFN, the action had the positive aspect of expanding the access to individual transactions, reducing the minimum amount for this mode, and instituting the so-called “Simplified Individual Transaction“. On the other hand, the Ruling severely restricted the use of IRPJ tax losses and negative CSLL results, clearly extrapolating legislative provisions in their strict sense, paving the way for interested taxpayers to file suits to protect their rights.

In the case of the RFB, the positive aspects of the recent regulations decreed by the PGFN were upheld – such as greater access to “individual” and “simplified individual” transactions that may cover debts of higher than one million reais (R$ 1M). Also now allowed are broader use of IRPJ tax losses and negative CSLL result. On the other hand, the new regulations do not expressly deal with the possibility of using credits recognized by court decisions and qualified with respect to the RFB, which was one of the taxpayers` expectations.

Reduction of Brazilian Excise Tax Rates

Ever since April of 2022, Brazil`s Federal Government has been trying to reduce excise tax (IPI) rates on several products through Decrees that have been the target of constant questioning in the courts.

The object of the discussions involving the attempts to reduce the tax rates is the negative impact that the reductions would supposedly have on the operations of companies located in the Manaus Duty-Free Zone (ZFM) since its competitiveness could be affected by such reductions.

Considering that the zone`s differentiated economic model is protected by Brazilian Constitution, the reduction attempts carried out by the Federal Government have been suspended by decisions of the Supreme Federal Court – STF (direct constitutional appeal number ADI 7153), until the IPI rates for all ZFM products are kept at the original percentage.

The most recent adaptation, by the Executive Branch of the Federal Government, to the demands discussed by the Supreme Court, was the publication of Decree 11.182 on August 24, which has already been forwarded for analysis by the STF as direct constitutional suit number ADI 7153, though it has not yet been decided upon.

This is an issue that direct influences the competitiveness of companies operating in Brazil and is bringing juridical insecurity to taxpayers, since they are in a very difficult position regarding how to correctly apply excise taxation here.

Application of International Treaties for Avoidance of Double Taxation – Dividends received by Spanish individual taxpayer

In July of 2022, the Superior Court of Justice of Catalonia (Tribunal Superior de Justicia) analyzed a case involving the tax exemption of dividend received by an individual party from a Brazilian company.

In brief, the decision confirmed that dividends received by a Spanish Citizen are tax exempt in Spain on account of the “Convention between Brazil and Spain to avoid double taxation”, plus the prevalence of the international treaty over the national provisions of Spain.

Even though the case deals with an individual, it is an important precedent that should be appraised from a corporate standpoint. It could even be used to plead for tax exemptions in similar cases, including those involving other countries and corporate tax beneficiaries.

BRAZILIAN TAX REVIEW – JULY 2022

Posted on 19 de July de 2022 by Anni Varanda

Brazil’s Federal Supreme Court (STF) Suspends Reduction of Excise Tax (IPI) Granted by Federal Government

In February of 2022, the Brazilian Federal Government issued a Decree reducing the federal Excise Tax (IPI) by as much as 25% for most products sold in Brazil. In April, it issued a new decree upping the IPI reduction to 35%, except for products produced in the Manaus Duty-Free Zone (ZFM), which were to maintain the 25% reduction.

Even so, through a provisional remedy, the STF suspended the effectiveness of the decrees and blocked the IPI reduction for products produced in the ZFM. The decision was handed down to preserve the competitiveness of the ZFM, which could be prejudiced by the IPI reduction in the nation’s other regions.

The STF’s decision has triggered doubts among taxpayers, especially regarding the beginning of its effectiveness and exactly which products are covered. Thus, companies operating in Brazil are awaiting new pronouncements by the tax authorities regarding the definition of such issues.

Brazilian Federal Government Bars PIS/COFINS Credits on Fuel Purchases

In March of 2022, the Brazilian National Congress passed Complementary Law 192/22, which called for “single phase” state value-added tax on goods and services (ICMS) with respect to fuels, including imported ones, based on a fixed rate per volume sold.

The Law also introduced an exemption from the federal contributions PIS/COFINS on fuels in 2022, guaranteeing the maintenance of the credits for the purchaser of the exonerated product.

However, in May 2022, the Federal Government issued a Provisory Measure 1.118/2022, withdrawing the possibility of companies taking PIS/COFINS credits on their purchases of fuels, even if used as raw materials.

This measure was poorly received by the market, as its effect will be to increase freight costs, increasing the so-called “Brazil cost”.

New ancillary obligation for the municipal Service Tax (ISS) in the municipality where the service is performed has now been regulated

Ever since 2016, Brazilian tax legislation has called for Service Tax to be levied in the place where the contractor party is registered for some services, such as health-care coverage plans, commercial leasing and agency services, franchising, and factoring, as well as mutual fund, consortia, credit or debit card and commercial leasing management.

However, only now has the Standardized Declaration for the Municipal Tax been instituted. This form, called the “DEPISS”, is to be filed by the performers of services whose ISS is owed to the municipality where the party for whom the services are provided is domiciled.

For the services in question, the taxpayer will have up to August 13, 2022, to develop the unified standard electronic system (DEPISS), either individually or in conjunction with other forms and systems, and to make it available for government ratification.

Therefore, the taxpayers themselves will be responsible for doing this.

It should be mentioned that there is a preliminary injunction granted by the Supreme Court, the STF, that suspended the obligation to pay over the ISS to the municipality where the party for whom the services are performed is registered. Accordingly, it will be important to observe the position taken by the municipal tax authorities, considering the possibility of charges in case of non-compliance with this obligation.

Relativity of final unappealable decision – STF begins judgment that deals with loss of right with new court decision

At the beginning of May 2022, the STF started judging two extraordinary appeals, i.e., regarding constitutionality, that deal with limits of a final unappealable decision (rem judicatam) in tax matters.

The reporting ministers of the two cases voted to define that a taxpayer that obtained a final unappealable decision favorable to their interests would automatically lose their rights (without any need for the government to file an action for revision) in case of a new STF decision on the same matter contrary to the interpretation of the decision in the taxpayer’s individual case.

The judgment is currently suspended due to a request for review by one of the STF Justice, though prior to the suspension the score was 4×0 against taxpayers.

The thesis that is presently prevailing has been subject to criticisms in the legal milieu since it is contrary to the principle of legal security and the institution of a final unappealable decision.

No date has yet been set for the two cases to be judged again.

Global Mobility – Remote work overseas

Recently, with the expansion of the possibilities for remote work, the displacement of human-power between countries has become increasingly a fact of daily life, which has brought on significant challenges for companies.

In carrying out movements in this sense, either at the initiative of companies or even by the employees themselves, the legal issues — chiefly involving labor, social security, and tax aspects — should be carefully examined.

In the tax sphere, companies need to pay attention to compliance with the obligations imposed by fiscal entities, given the norms that vary from one country to another (territory income x worldwide income systems). By the same token, employees need to adapt themselves to the norms of the nations where they fiscally and physically reside, avoiding potential material impacts derived from double taxation by the nations involved.

From a labor standpoint, the recently published Provisory Measure 1.108, established, among other issues, the application of Brazilian legislation to the work contracts of employees hired in Brazil that elect to carry out work over the Internet when located abroad.

Despite this being just the beginning of specific regulation on this issue, we note that the authorities are trying to track the evolution of the procedures adopted by companies, for which reason the preventive adoption of good practices has become necessary to mitigate undesirable risks.

Exchange Legal Framework – Rules for remitting royalties abroad

The alterations proposed by Law 14.286/21 for the Brazilian exchange market have introduced important modifications in relation to remittances of royalties for benefits overseas.

The first deals with the new non-requirement to register contracts with the Brazilian Central Bank (BACEN) as a requisite for tax deductibility for expenses on royalties. Now, all that’s needed is to register such contracts with the nation’s patent office (INPI). This is an important step for cutting red tape on remittances.

Moreover, the new law eliminates the prohibition against remittances of royalties between Brazilian subsidiaries/branches and their overseas head offices in amounts exceeding their tax deductibility in Brazil. Now, Brazilian companies can pay royalties to the foreign holding company irrespective of the amount that legislation considers deductible for calculation of their Corporate Income Tax (IRPJ).

The new provisions of the Exchange Legal Framework are scheduled to take effect on December 30, 2022, so until this date taxpayers should be on the lookout for possible changes to be made in tax legislation.

OECD – New Transfer Pricing Rules

In April of 2022, the Brazilian Federal Revenue Bureau (RFB), in conjunction with the Organization for Economic Cooperation and Development (OECD), announced that it is working on a Bill to change Brazil’s transfer pricing rules.

According to the Minister of the Economy, Paulo Guedes, this is an important step for the nation to join the OECD and favors approximating Brazil to international markets and attracting foreign investors, as well as preventing tax evasion and double taxation.

Currently, corporate taxpayers need to choose from among the methods called for under Brazilian legislation that involve arbitrated and fixed profit margins. In this new scenario, the transfer price to be adopted in an operation between related parties would be obtained by means of comparison with other similar operations carried out by independent parties, in line with the principles established by the OECD.

The Federal Government’s intention is to introduce the draft bill to the National Congress this year.

STF – Unconstitutionality of CIDE levy on remittances abroad

Brazilian Supreme Court is examining the constitutionality of the Contribution for Intervention in the Economic Domain (CIDE) being levied on remittances abroad for payments under agreements covering licenses for use and transfer of technology, technical, administrative assistance, and similar services, even if without transfer of technology, as well as royalties.

The general repercussion of this issue was recognized by the STF in 2016 (Issue 914), and the debate mainly deals with the mandatory requirement for there to be transfer of technology for the CIDE to be levied.

At the time of the publication of Law 10.168/2000, the contribution was due only on remittances abroad relating to service agreements and royalties when there was transfer of technology. Nonetheless, after the changes introduced by Law 10.332/2001, the range for levying the CIDE was expanded to even cover cost-sharing and administrative agreements.

The judgment had been set for just over a month ago (May 18, 2022) but was excluded by one of the Minister for an indefinite length of time. With this, corporate taxpayers are now anxiously awaiting the Supreme Court’s decision, since there is now the possibility that CIDE amounts unduly paid may be recovered if its unconstitutionality in several cases is recognized.

Limitation of the U.S. Tax Credit

On December 28, 2021, the U.S. Treasury Department enacted TD 9959 to restrict the offset of withholding income tax (WIT) amounts paid in the case of countries whose tax systems are not compatible with the U.S.’s – and Brazil is one of such cases.

There are substantial differences between the Brazilian and U.S. tax systems, especially (i) regarding the criteria adopted for withholding income taxation, and (ii) with respect to the transfer pricing methods presently applied in Brazil, which are not yet in harmony with international practices (established by the OECD).

Such changes have caused great fears regarding double taxation in the Brazilian market, as the amounts of remittances from Brazil to U.S. taxpayers would be subject to both the Brazilian Withholding Income Tax – IRRF (15%) and the U.S. income tax (21%).

Consequently, specialists are forecasting increases in the prices of products and services imported into Brazil, as a means of passing the burdens of companies on to local consumers.

BRAZILIAN TAX REVIEW – OCTOBER 2021

Posted on 27 de October de 202127 de October de 2021 by Anni Varanda

Superior Court of Justice – STJ overturns late payment fine on federal taxation of imports supported by Drawback-Suspension

The STJ recently analyzed an appeal filed by a corporate taxpayer that claimed there was a discrepancy in the case law development regarding application of a late payment fine in cases of non-compliance with re-exportation obligation in operations supported by the Drawback customs system (Suspension modus operandi).

The Court ruled that the Drawback-Suspension is a system whereby the customs duties and other federal taxes on imports (Customs Duties – II, Social Contribution Program – PIS on importation, Social Security Finance – COFINS contribution on importation, and Excise Tax – IPI on importation) are suspended under the resolutive condition of the effective export of the finished products; in case of failure to re-export, interest and monetary restatement are due from the moment of registration of the Import Declaration.

On the other hand, the penalty for late payment would only be due after the 30-day period established in the Customs Regulations for timely extinction of the Drawback.

Thus, according to the STJ’s interpretation, there is no delay in the obligation to re-export until the 30^th day of the deadline set therefor, which is why the late payment fine should not be applied in these cases.

ITCMD on inheritances and donations from abroad

In the first half of 2021, the highest court in our land, the Brazilian Supreme Court (STF), ruled that state laws establishing the Gift and Inheritance Tax (ITCMD) on inheritances and donations from abroad were unconstitutional, due the lack of complementary federal law on the subject. The decision’s effects are prospective, which means that they are valid from the judgment date onwards, except for the ongoing lawsuit.

Whereas the binding effect of the decision is restricted to the ongoing lawsuits, and not to the public administration, in May of 2021 the Attorney General’s Office of the Brazilian National Treasury (PGR) filed 24 (twenty-four) Direct Unconstitutionality Lawsuits (ADI 6.817 to 6.840) against state laws that regulate the issue.

STF endorses the suspension of rules that regulate the ITCMD abroad.

IOF – Loan Daily Rates Have Been Temporarily Increased

The Brazilian government temporarily increased the daily rate of the Financial Operations Tax (IOF) on loans involving transactions carried out in the 4^th Quarter of this year (i.e. between September 30 and December 31, 2021). Such rate was increased from 0.0041% to 0.00559% for companies and from 0.0082% to 0.01118% for individuals.

It is important to mention that taxpayers can challenge this tax increase in court, because the IOF is a tax for the purpose of economic induction, rather than collection, as established by the federal government.

Finally, the IOF-Exchange (financial operations tax on foreign exchange) rates were not increased, but only the IOF-Credit rates.

Tax Recovery Program – Extension of deadline for renegotiation of debts

The Brazilian National Treasury Attorney’s Office (PGFN) extended, through Ordinance PGFN/ME n. 11,496/2021, the deadline for joining the Tax Recovery Program established in September 2020, to encourage companies to straighten out their tax debts regularization and help economic recovery from impacts caused by the Covid-19 pandemic.

Taxpayers registered with the Federal Government who have debts in terms of taxes and contributions, as well as with the Guarantee Fund for Length of Service (FGTS – a kind of severance pay accrual) up until November 30^th, 2021 will be able to join the program by the last working day of December (the 29^th this year). Among the kinds of modus operandis for such transactions, the highlights are the “Exceptional Transactions” and “Extraordinary Transactions”.

Exceptional transactions are available to taxpayers who can prove the economic and financial damage caused by the pandemic on their operations; the program calls for a down payment of four per cent (4%) of the amount of their debts, payable in monthly installment payments over a period of 12 (twelve) months. The remaining amount can be split up to into further installment payments over a period of 72 (seventy-two) months. Furthermore, in this transaction model, the taxpayer can obtain up to 100% discount on interest and penalties, with a limit of up to 50% of the total debt amount.

Extraordinary transactions are available to all taxpayers and requires a down payment of 1% (one per cent) of the debt amount in installments within 3 (three) months. The remaining amount can be paid within 81 (eighty-one) months.

As for Social Security (INSS) debts, for both modalities, they have a payment limit of up to 60 (sixty) installments.

This is an opportunity for companies that have federal tax debts due, and the opportunities must be evaluated according to the specific situation of each taxpayer.

Federal PIS and Cofins contributions on state value-added tax on circulation of goods and services (ICMS) – Alleged effects of the Supreme Court decision on credit bases

In July/21, the Brazilian Federal Revenue Bureau (RFB) issued Cosit Opinion n. 10/2021, which concluded by excluding the ICMS value highlighted in a company’s invoice from the calculation basis of the contribution credits for the PIS/Pasep and for the Cofins, as it believes that the aforementioned amount is not part of the price of the goods/services. It was an attempt to apply by analogy in light of the decision of the so-called “thesis of the century” of the Federal Supreme Court (STF), which established the interpretation that the state ICMS does not encompass the taxpayer’s gross revenue for purposes of calculation of the federal PIS and Cofins.

However, in September/2021, the National Treasury Attorney’s Office (PGFN) issued SEI Opinion n. 14483/2021/ME, whereby the understanding previously expressed by the RFB was overcome, ensuring the inclusion of the ICMS portion in the breakdown of the PIS and Cofins, in addition to stating that the prohibition of the right to the respective credits should be changed through the legislature. As a result, greater legal certainty was provided to taxpayers.

The PGFN’s statement shed light on the issue and allayed the fear of the business community after the RFB’s statement.

Interest of Tax Credits Must Not Be Subject to the Corporate Income Taxes (IRPJ and CSLL)

In September/2021, Brazil’s Supreme Court (STF) declared that it was unconstitutional for Corporate Income Taxes (IRPJ and CSLL) to be levied on interest based on the SELIC rate added to unduly paid federal taxes.

This topic is extremely important for taxpayers, because many companies are recovering large amounts of tax credits, monetarily updated, after the conclusion of the thesis of the century (exclusion of ICMS from the PIS and COFINS base).

There Are Still Uncertainties on the Approval of Income Tax Reform

The bill for Income Tax Reform was approved by the Chamber of Deputies and now will be discussed in the Senate, where it will face more resistance.

According to some Senate representatives, Consumption Tax Reform may be granted priority over Income Tax Reform. In view of this, there are still doubts regarding the approval of the tax reform in 2021.

Changes under discussion in Congress

Possible extension of the Social Contribution on Gross Revenue (CPRB)

The Finance and Taxation Committee of the Chamber of Deputies approved Bill n. 2,541/21, which extends from December 2021 to December 2026 the term of the social security contribution on gross revenue (CPRB) for 17 sectors of the economy.

The sectors are: footwear, call centers, communications, confection/clothing, civil construction, construction companies and infrastructure works, leather goods, vehicle and bodywork manufacturing, machinery and equipment, animal protein, textile, IT (information technology), ICT (communication technology), integrated circuit design, subway-railway passenger transport, collective road transport and road freight transport.

The bill is currently in the Constitution and Justice and Citizenship Committee of the Chamber of Deputies.

Bills for new debt installment payment programs

Given the current economic scenario, there is a great deal of news and discussion circulating in Congress about the possibility of instituting federal debt installment payment programs.

Among the main projects, there is the possibility of reopening the Special Program for Tax Regularization (PERT), referred to in Law n. 13,496/17, which was sent to the Chamber of Deputies after approval by the Senate.

Aiming at relief for companies affected by the Covid-19 pandemic, the objective would be to institute a new debt installment payment program, providing the possibility of paying tax debts in up to 144 installments, allowing a discount of up to 90% on interest and fines, in addition to the possibility of offsetting tax losses. The bill also provides for changes in the tax transaction institute, to ensure more installments and discounts to taxpayers.

Chamber commission created to discuss technology taxation

The Chamber of Deputies’ Committee on Science and Technology, Communication & Information Technology is analyzing Bill n. 2,358/20, which institutes the Contribution for Intervention in the Economic Domain (Cide-Digital), levied on gross revenue from digital services provided by big tech companies.

On September 20, 2021, a public hearing was held to debate the institution of Cide-Digital.

Main issues on the brazilian income tax reform bill as approved by the Chamber of Deputies

Posted on 19 de October de 2021 by Anni Varanda

The Brazilian Federal Government sent to Congress, on June 25^th 2021, a tax reform proposal focusing on income tax. The proposed bill (PL 2.337/2021) brings relevant changes related to Corporate Income Tax. Afterwards, on September 2^nd 2021, the bill was approved, with amendments, by the Chamber of Deputies, and is still subject to approval by the Senate and to presidential sanction.

The proposed tax reform will progressively reduce the rates of the Corporate Income Tax, from 15% to 8%. Moreover, companies are also currently subject to a 10% surcharge on yearly profits that exceed BRL 240,000, which would not be reduced. On the other hand, the 9% social contribution tax (CSLL) would be reduced to 8%, if certain tax benefits are repealed. While decreasing the corporate tax burden from 34% to 26%, dividends paid to most shareholders (legal entities and individuals, either residents or non-residents) will no longer be tax-exempt.

Hence, according to the current wording of the bill, dividends would be subject to the withholding income tax at a flat 15% rate, which would increase the Corporate Income Tax effective burden, for companies who distribute dividends, from current 34% to 41% (roughly speaking), inducing companies to run on a new tax planning race to neutralize this tax increase.

Furthermore, the Brazilian version of an allowance for corporate equity (“Juros sobre Capital Próprio”) will no longer be tax deductible for Corporate Income Tax purposes, what will certainly increase the cost of repatriation of profits to investors, specially to those located abroad.

However, on the bright side, another matter affected by the new bill is related to the Corporate Income Tax calculation, since the annual option will no longer exist and all companies will be subject to the quarterly calculation. As a result, net operating losses will be fully compensated, without the 30% limitation, in the three immediately subsequent quarters.

Regarding the Individual Income Tax, the bill updates the current Income Tax Table in a way that income up to BRL 2,500 will be exempt from taxation (currently the limit is BRL 1,900). Income above the limit will be taxed according to the monthly progressive table. Additionally, standard deduction of 20% of the taxable income will be maintained for simplified returns, but deduction limitation drops from BRL 16,745.34 to BRL 10,563.60.

It is important to mention that the proposed tax bill displeased various industries and also the Brazilian States and Municipalities, which is why its passing in Senate is still uncertain, even with some likelihood for the bill to be withdrawn. However, sooner or later Brazilian income tax will be reformed, once it is a no return path, reason why we can expect some important news on this matter on the upcoming months.

*Article originally posted on Mondaq.

Brazilian National Congress approves income tax reform preliminary text

Posted on 14 de September de 202115 de September de 2021 by Anni Varanda

The Brazilian National Congress approved on September 2 the preliminary text of the income tax reform (bill 2,337), which includes important changes from the original draft presented June 25.

According to the approved text, the corporate income tax (IRPJ) rate will be reduced from 15% to 8%, after the implementation of an additional “financial compensation for mineral exploration” (CFEM) 1.5% tax levied on the extraction of iron, copper, bauxite, gold, manganese, kaolin, nickel, niobium, and lithium.

There was no change to the additional 10% rate of IRPJ (if the net income exceeds BRL 20,000 per month).

The social contribution on net income (CSLL) rate will also be reduced by up to 1%, conditioned on the revocation of some tax incentives, such as the zero-rate applicable to piped natural gas, mineral coal, chemical, pharmaceutical and hospital products and the presumed credit to pharmaceutical products. If this scenario is maintained, banks, financial institutions, and companies, in general, will be subject to rates of 19%, 14% and 8%, respectively.

In addition to corporate income tax rate changes, another tax reform topic subjected to extensive discussion was the taxation of profits and dividends, which are currently exempt from tax.

The initial text established the levy of a 20% withholding income tax rate on profits and dividends paid to residents in the country and abroad and was severely criticized, but the approved text maintained the new levy to offset the reduction in other taxes. However, the applicable rate was reduced to 15%. Likewise, the bill also maintained the elimination of the possibility of deducting interest on equity (JCP) in the calculation of IRPJ and CSLL.

Additionally, the new tax levy will not include investment funds, amounts distributed by small and micro companies and companies taxed on the presumed profit regime with income up to BRL 4,800,000 (approximately USD 920,000), if they do not meet the corporate restrictions for qualifying for the simplified taxation system (Simples Nacional).

Provisions regarding individual taxation were also altered.

Initially, the bill imposed a limit to the use of the simplified method, which would only apply to taxpayers with taxable income of up to BRL 40,000 (approximately USD 7,670) in the calendar year. Such limit was altered in the new text, and taxpayers who opt for the simplified method will be able to deduct 20% of income tax on the sum of taxable income, up to the limit of BRL 10,563.60 (approximately USD 2,025). The current limit is BRL 16,754 (approximately USD 3,212).

In this sense, although the new text established a higher limit in comparison with the initial text, the income limitation for the simplified method was maintained and the total deduction limitation will be decreased.

It is important to note that the approved text also includes other provisions on corporate and individual taxation, tax treatment of investment funds and tax incentives, but the most relevant changes from the initial proposal are the ones relating to the applicable IRPJ and CSLL rates and taxation of profits and dividends.

The bill will proceed to the Senate and can still be modified. If any changes are proposed by the Senate, the bill will return to the National Congress for analysis and a new voting round will occur. However, if the Senate approves the presented text, the bill will be sent to the President for sanction or veto.

Despite the effort to revise the bill to meet taxpayers’ expectations and complaints, the approved modifications were not sufficient to fully balance the new taxation of profits and dividends.

Therefore, it is safe to say that new changes to the current wording of the bill are probably going to occur and that income tax reform still has a long way to go before Presidential sanction.

*Article originally posted on MNE Tax.

Brazilian tax reform’s second phase includes corporate, investment proposals

Posted on 21 de July de 2021 by Anni Varanda

The Brazilian government presented on June 25 the second phase of its proposed tax reform, which aims to change the income tax legislation for individuals and legal entities, as well as establish new rules for the taxation of profits, dividends, and financial investments.

Almost a year after the first phase was presented, the new bill will now proceed to the National Congress and may be modified before the final version is approved – if not totally rejected, considering that the proposal increases the corporate tax burden for most Brazilian companies.

The main measures proposed include various individual, corporate, and investment provisions.

Corporate provisions

With respect to corporations, the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL) would be calculated on a quarterly basis and there would be a standardization of the calculation bases of these two taxes. In this model, corporations would be allowed to offset 100% of a loss incurred in one quarter in the following three.

The initial version of the bill submitted to the National Congress suggests reducing the general income tax rate from 15% to 12.5% in 2022 and to 10% in 2023. There was no proposed change in the incidence of the 9% CSLL rate and the additional 10% rate of IRPJ (if the net income exceeds BRL 20,000 per month).

In the context of acquisition of investments, the bill would introduce rules to limit tax planning and corporate reorganizations. These rules would affect the taxation of capital gains generated by offshore companies in indirect disposals of assets located in the country and would prohibit the deductibility of goodwill in operations of acquisition from 2022. They would also require tax amortization of intangible assets over a minimum of twenty years, except when there is a determined legal or contractual term. In addition, they would change the methodology for calculating the capital gain earned on capital returns and capital payment with assets and rights to require that operations be carried out at market value.

Other relevant points are the inclusion of new situations that would result in disguised profit distribution (for example, the cost of personal expenses of partners or related persons) and the prohibition of the deductibility of bonus payments and profit sharing to partners and directors made with shares of the company.

However, the measures that would most impact investors and are being widely discussed in Brazil are the provisions ending the possibility of deducting interest on equity in the calculation of IRPJ and CSLL – in Portuguese, Juros sobre o Capital Próprio, or JCP – and imposing withholding income tax on the distribution of profits and dividends (they are exempt under current law).

In this respect, the bill proposes a withholding income tax at the rate of 20% on profits and dividends paid to residents in the country and abroad, and 30% when the beneficiary of the resources is resident in a tax haven or subject to a privileged tax regime.

However, profits or dividends that are capitalized (reinvested) will not be subject to tax, except if capital is reduced in the five years prior to payment or in the five years following payment. Profits and dividends distributed to micro and small businesses up to the amount of BRL 20,000 per month (approximately USD 3,900) would also be exempt.

Investment fund provisions

Currently, income earned from fixed-income investments, such as direct treasury and CDB, for example, are subject to income tax according to a regressive table that varies in accordance with the investment time – the longer the redemption time, the lower the applicable rate. In this sense, the applicable rates range from 22.5% to 15%.

The new bill would end the rate regression depending on the duration of the investment and provide that income earned from fixed income investments would be taxed at a single rate of 15% as of January 1, 2022.

Open-ended and closed-ended funds would also be taxed at a single rate of 15%, rather than under the regressive tables.

Furthermore, changes were proposed to the method of tax payment known as “come-cotas” for investment funds. In this modality, there is a mandatory anticipation of income tax on the investment’s profit, with a reduction in the number of investor shares equivalent to the minimum percentage of tax due on the investment’s income, even if there have been no redemptions.

The presented text proposes the extinction of the “come-cotas” for open funds in the month of May, with only the portion corresponding to the month of November being maintained, at a single rate of 15%. As for closed-ended funds, the come-cotas is now applied, observing the same rules provided for open-ended funds, that is, occurring only in November, at a rate of 15%.

Moreover, the bill would eliminate the withholding income tax exemption for distributions received by individuals from real estate investment funds with shares traded on the stock exchange, which would be subject to a 15% withholding tax.

Measures for the taxation of stock, commodity and futures exchanges are also proposed. Under current law, operations carried out on the spot, forward, options and futures markets are subject to a 15% rate and day trade operations to a 20% rate. The proposed text would apply a 15% rate for all markets and would allow the offsetting of losses between all operations, including day trades.

There is no proposed change on the income tax exemption on net gains earned by individuals on sales made with shares, in the spot market on stock exchanges or over-the-counter markets that do not exceed the amount of BRL 60,000 (approximately USD 11,730) in the quarter.

Exemptions related to investments in savings accounts of individuals and those specifically granted to income earned by residents and domiciled abroad were also maintained.

The Brazilian government contends that the proposed amendments to the taxation of financial investments would simplify and harmonize the tax treatment for all funds and asset classes, so that taxation no longer defines the investment choice.

Individual provisions

The bill proposes to increase the amount of income exempt from income taxes from BRL 1,903.98 to BRL 2,500 (approximately USD 372 to USD 488), including retirement and pension income and the wage reserve of taxpayers over 65 years old.

Additionally, the government suggested a limit to the use of the simplified method, which allows taxpayers to deduct a presumed percentage of 20% expenses from their taxable income. In accordance with the bill presented, this option would only apply to taxpayers with taxable income of up to BRL 40,000 (approximately USD 7,820) in the calendar year.

The bill would also allow updating the value of properties acquired before December 31, 2020, in the annual individual income tax return, at a 4% rate on the difference between the updated value and the acquisition cost. According to the Ministry of Economy, this measure aims to reduce the tax impact at the time of the good’s sale (capital gain taxation).

The bill would also institute an automatic taxation regime on profits earned by individuals through a company resident in a tax haven or subject to a privileged tax regime (a sort of Brazilian controlled foreign corporation rule for individuals). This rule is intended to prevent individuals from preventing their offshore income from being taxed in Brazil.

Next steps

If approved this year, the income tax reform would be effective as of January 1, 2022.

It is worth remembering that the first phase of the tax reform, presented in July 2020, aims to create a new indirect tax, the Contribution on Goods and Services (CBS), which would replace PIS and COFINS and is still pending approval in the National Congress.

Likewise, the second phase also still needs to be discussed and approved in the Chamber of Deputies and the Senate, and possible changes to the current wording of the bill may be made.

The proposed changes represent a clear effort by the federal government to adapt Brazil to OECD standards with an aim to joining the organization as a member.

However, the tax burden of Brazilian companies is still very high, and the corporate tax reduction measures proposed in the bill would not be sufficient to balance the incidence of income tax on dividends. According to experts, the current proposal raises the corporate tax burden from 34% to 37%.

Furthermore, the simple announcement of the proposal to extinguish the exemption for income from real estate investment funds was enough to cause the fall of the IFIX – the main index of funds in this category in Brazil. In this scenario, other “side effects” can occur, such as investors leaving Brazil and corporations undertaking reorganizations with the sole purpose of reducing their tax burden.

The Ministry of Economy and the bill’s rapporteur in the Chamber of Deputies have already announced that the original text is going to be altered to further reduce the corporate income tax rate. The expansion of the range of individuals who will be able to use the simplified method is also being evaluated, as well as other measures that were severely criticized.

It is safe to say that the second phase of the tax reform proposal will continue to evolve (or be completely changed) and that new measures are likely to be introduced. This is especially true given that some important issues were not addressed at this stage, such as transfer pricing rules and thin capitalization rules.

*Article originally posted on MNE Tax

BRAZILIAN TAX REVIEW – JUNE 2021

Posted on 18 de June de 2021 by Anni Varanda

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.

Brazilian Tax Review – April 2021

Posted on 14 de April de 2021 by Anni Varanda

Supreme Court Schedules the Trial of the so-called “Tax Case of the Century”

The Supreme Court has scheduled the hearing of a motion for clarification of a decision that deals with the exclusion of the ICMS tax from the PIS and COFINS tax calculation bases for April 29, 2021.

In 2017, the Supreme Court ruled that the ICMS tax must be excluded from the PIS and COFINS tax bases. Now, the Court will decide a motion for clarification presented by the Federal Attorney General’s Office, which, among other matters, discusses what ICMS tax amount is to be excluded (the amount stated on the tax invoice or the ICMS amount actually paid by the taxpayer, i.e., after credits and debts). Additionally, the Federal Attorney General’s Office has requested a so-called “modulation” of the effects of the decision, in order for the decision to be applicable only to taxable events subsequent to the judgement.

As this case involves a very significant amount of money for taxpayers and the Brazilian government, it is being closely watched.

Supreme Court Concludes Tax Dispute on Software

The Supreme Court held that ICMS (state indirect tax on goods) does not apply to licensing or any assignment related to software, since these transactions are subject to the ISS (municipal tax on services).

The majority of the judges held that the supply of software, whether customized or off-the-shelf, is a service that results from human effort. Therefore, these transactions must be subject to ISS tax and not the ICMS tax.

The Supreme Court also modulated the effects of the decision, covering several situations involving taxpayers, states and municipalities, in order to establish an equal treatment amongst defaulters, liquidators and those with lawsuits pending in court.

For example, taxpayers that paid only the ICMS tax for the periods prior to the judgement are not entitled to a refund, and the municipalities cannot charge the ISS tax for the same period; whereas taxpayers that paid only the ISS tax had their payments validated and the states cannot charge the ICMS tax for past periods.

In this context, it is very important for companies to verify which tax was applied to their transactions so they can determine whether they need to take any action.

Supreme Court holds that gifts and inheritances abroad are not subject to the state Gift and Inheritance Tax

In February 2021, the Brazilian Supreme Court ruled, as a binding precedent, on the application of the Gift and Estate Tax (ITCMD) to gifts and inheritances that occur abroad. The Court held that states and the Federal District do not have the power to pass laws that govern the collection of these taxes when the taxable events occur abroad.

The decision was based on the fact that 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, in order to determine which state has the power to tax such transactions.

This decision will apply only to taxable events that occur after the decision is published (it has not been published yet), but also safeguard the rights of taxpayers who have already filed lawsuits at the time of the trial.

Technical Services taxation controversy – Tax Treaty to Avoid Double Taxation between Brazil and Spain

The Superior Court of Justice (STJ) recently analyzed the taxation of cross-border remuneration for technical engineering services, provided by a Spanish company, to determine whether the amounts were subject to taxation abroad (country of residence) or subject to the Brazilian withholding tax (source country), under the Brazil-Spain DTC.

The Court ordered the return of the case to the Federal Regional Court (TRF3) to review the prior interpretation that the income should be classified under article 7 as “business profits,” and ordered the lower court to review whether the funds are considered profits and, therefore, should be subject to exclusive taxation in Spain; classified as royalties (article 12) and subject to a 15% WHT in Brazil and a 25% tax sparing credit in Spain; or as an independent personal service (article 14) and subject to a regular WHT in Brazil and deductible from the income tax basis in Spain.

The order for verification by the TRF3 aims to preserve the correct tax incidence on the transaction and to confirm whether the company is using a hybrid arrangement to avoid taxation in both countries, since the objective of the Treaty, in addition to avoiding double taxation, is also to prevent tax evasion.

Central Bank – Census of Foreign Capital in Brazil

April 4 was the deadline for submitting the Declaration of Brazilian Capital abroad. Now companies should turn their attention to the five-year Census of Foreign Capital in Brazil.

The purpose of this declaration is to provide the Central Bank with information for decision-making on economic policy, in addition to assisting the activities of economic researchers and international organizations.

The following situations are subject to the obligation to provide the declaration, on the basis date of December 31, 2020:

Legal entities headquartered in Brazil, with direct ownership by non-residents in their share capital, in any amount;
Investment funds with non-resident shareholders, through their managers; and
Legal entities headquartered in Brazil, with a total debit balance of short-term commercial credits granted by non-residents, in an amount equal to or greater than the equivalent of US$ 1 million.

The period for submitting the declaration starts on July 1, 2021, and ends on August 16, 2021.

Supreme Court maintains secrecy of information on the repatriation of assets

In 2016, the law on the repatriation of assets abroad offered special conditions for regularization of assets with legal origin held by Brazilian taxpayers abroad. The regularization took place with the payment of 15% income tax on the regularized amount, plus a 100% fine on the tax amount.

In contrast to the taxpayers’ obligations, the legislation established the impossibility of using it as the only evidence or element for the purposes of criminal investigations and ensured the confidentiality of the information provided.

However, the guarantee of secrecy has begun to be challenged in the Supreme Court, under arguments of violation of constitutional principles.

In a decision in March 2021, the Supreme Court held that the prohibition on sharing information provided by taxpayers is constitutional and equated the disclosure of information with breach of fiscal secrecy.

That is an important decision to maintain legal security and the integrity of the repatriation program, mainly for taxpayers who trusted the law and chose to repatriate their assets abroad, based on the obligations and rights that were provided.

Recent decision on taxation of income from trusts

Trusts are a widely used tool internationally, but are not yet regulated by the Brazilian legislation.

In short, the settlor of the trust transfers the ownership of the assets to a third person (trustee), who is responsible for the administration of resources in favor of the beneficiaries of the trust.

Upon receiving amounts by the beneficiaries, there are discussions regarding the taxation in the Brazilian scenario as to whether there should be an income tax, if the revenue constitutes income from abroad, or from the Gift and Estate Tax (“ITCMD”), as these are perceived gifts. It is important do mention that the taxation by the ITCMD is more advantageous from an economic point of view.

Regarding this matter, in March 2021, the Brazilian IRS analyzed the taxation on the amounts received from trusts abroad and took the position that they are taxable income. It is important to mention that this position is binding on federal tax authorities.

At the judicial level, a recent trial court decision in São Paulo (Writ of Mandamus #5017217-81.2020.4.03.6100) held that it is not possible to classify the amounts received as gifts from the trustee to the beneficiaries and the income should be taxed by the income tax.

Despite the unfavorable precedents, it is a matter that has not yet been widely discussed by the judiciary, so that the situations of each specific case can influence in defining the legal nature of the amounts received and their tax consequences.

Superior Court of Justice Held that 1% Additional Amount of Cofins-Import does not apply to Exempt Products

The Superior Court of Justice (“STJ”) granted the special appeal of two pharmaceutical companies to remove the obligation to pay the additional Cofins-Imports, calculated at 1% on the imports of medicines exempted from this contribution.

For the court, the benefit granted to these products in 2008, which reduced the Cofins-Import rate to zero, was not changed in 2013, when the additional 1% in Cofins-Import was created.

One must note that, although the decision analyzed specific products, the conclusion could also apply to other products that are in a similar situation. Therefore, it is important that companies pay special attention to the taxation of products subject to additional Cofins-Import.

Brazilian Tax Review – October 2020

Posted on 21 de October de 2020 by Anni Varanda

Dutch Government Changes the Classification of Brazilian Interest on Shareholder Equity (“JCP”)

According to new directives from the Dutch Government, Interest on Shareholder Equity received by Dutch beneficiaries from Brazilian sources must now be classified as dividends instead of interest.

As a consequence, Dutch taxpayers who receive Interest on Shareholder Equity are no longer eligible to take advantage of a 25% tax sparing for the Brazilian withholding tax, but only a 20% credit. This may result in the tax position of the Dutch holding company changing from a tax-free position to having a net payable tax.

There is no grandfathering clause for the previous rule, which classified Interest on Shareholder Equity as dividends. Hence, payments made by a Brazilian subsidiary to a Dutch controlling company will – if all the required conditions are met – only qualify for a 20% tax sparing credit.

New Private Letter Ruling on the Brazil-Finland Double Tax Treaty –Payments for Technical Services are not Subject to WHT

Most of the Double Tax Treaties signed by Brazil, with a few exceptions, classified payments for technical services as “royalties” instead of “business profits,” meaning they are taxed in the source country.

The recent Private Letter Ruling 99,011/2020 states that the Brazil-Finland Double Tax Treaty is one of those rare exceptions, which does not classify payments for technical services as “royalties,” but as “business profits.” This means the withholding income tax does not apply when a Brazilian resident pays service fees to a Finnish resident.

Dividends Distributed by a Brazilian Company to its Swedish Controller Are Not Be Taxed by WHT

A Brazilian subsidiary of the Swedish group Volvo prevailed over the Brazilian government in a legal dispute concerning the application of the Brazil-Sweden Double Tax Treaty. The hearing, held as a Virtual Plenary Session of the Federal Supreme Court (“STF”), held that the Brazilian company was not required to pay Withholding Income Tax on dividends distributed to its controller in Sweden (base year of 1993).

The court accepted the taxpayer’s arguments that Brazilian tax authorities cannot impose income taxation on dividends paid to Swedish residents due to a reciprocity clause in the Brazil-Sweden Double Tax Treaty. In this regard, if dividends are not taxed for Brazilians residents, they cannot be taxed for Swedish residents either.

Brazilian IRS and OECD Invite Companies to Suggest Improvements to Brazilian Transfer Pricing Legislation

The Brazilian IRS and the OECD launched a joint study group called “Transfer Pricing in Brazil” in order to review and analyze the differences between Brazilian and OECD rules on transfer pricing. As a result, the group released a document called “Transfer Pricing in Brazil: Towards Convergence with the OECD Standard.”

As a milestone of this convergence, the IRS and OECD released a survey in which companies are encouraged to respond to a questionnaire. The answers they provide should help the authorities identify specific taxpayer needs.

This questionnaire contains 17 questions on subjects that include: (i) safe harbor regime development (releasing taxpayers from some tax obligations that would otherwise be due under the regular tax regime); (ii) Advance Pricing Agreements – (“APAs”), which reduce certain risks in more complex transactions; (iii) use of available comparative data; and (iv) other forms of simplification regarding Transfer Pricing operations. In the end, these measures are meant to contribute to increased legal certainty in the Brazilian tax system.

The questionnaire can be found at the OECD website and interested parties are invited to send their contribution via email by October 30, 2020, to [email protected], with copy to [email protected].

STF Issues Very Important New Decisions on the Constitutionality of Social Security Contributions

The Federal Supreme Court (“STF”) has recently issued three important decisions on social security contributions. The court ruled against the INSS levy on wages during maternity leave, but maintained the tax on the constitutionally required one-third extra vacation pay and the 10% social contribution on FGTS fines for termination without cause.

Regarding maternity leave, the Supreme Court pointed out that the social security contribution should be levied on amounts paid as consideration for the work or services provided to the employer, which is not the case during maternity leave, during which the worker stops providing services. Therefore, the benefit is not part of the calculation basis of the social contribution on payroll.

On the other hand, the Court held that the constitutionally required one-third extra vacation pay is a periodic supplement to remuneration for the work provided by the employee. Therefore, the Court reasoned, these amounts are subject to the social security contributions.

Finally, regarding the additional payment of 10% on the FGTS fine, the Supreme Court held that this contribution was created to preserve the social rights of workers, which is a genuine purpose under the Federal Constitution.

STF Issues Important Decisions on Several Tax Matters

Since the beginning of 2020, the Supreme Court has issued several important decisions involving tax matters.

Some of these decisions have clarified the STF’s position on the following matters:

The Services Tax (ISS) tax list is exhaustive, but it allows for extensive interpretation for the activities inherent in the services listed. This interpretation is possible when the legislator, for example, includes terms such as “of any nature,” “of any kind” and “among others” when defining the services subject to taxation.

STF guaranteed the possibility of refunding the amounts of overpaid PIS and COFINS taxes, in the tax substitution system, when the sale of goods occurs at a price lower than estimated.

The IPVA (state vehicle ownership tax) must be paid to the state where the vehicle owner is domiciled, e., where the property must be licensed and registered, according to legislation on the subject.

The value of real properties superior to the subscribed capital to be paid-in is not exempt from the ITBI (Municipal tax on transfer of real estate).

ICMS is levied on transactions or installments prior to the export of goods. Thus, ICMS immunity does not apply to the manufacture of packaging for products to be shipped abroad.

The taxpayer is entitled to offset ICMS credits only when supplementary legislation authorizes it. Therefore, the postponement of the right to offset ICMS credits on goods acquired for use and consumption does not violate the non-cumulative principle.

A state decree requiring the advance payment of the ICMS tax, without tax substitution, on the entry of goods acquired from another state is unconstitutional.

Retention of imported goods at customs for payment of tax differences does not violate the Constitution. According to the decision, it is not an indirect coercion aimed at tax settlement, but a rule that conditions the admission of the goods into the country to on the collection of differences.

The contributions to SEBRAE, APEX and ABDI, calculated on the payroll, have the legal nature of Intervention Contributions in the Economic Domain (“CIDE”) and, therefore, are constitutional.

The fees paid to credit and debit card administrators by the selling companies must be included in the PIS and COFINS calculation bases. According to the Court, administrative fees that will later be passed onto credit card companies must be taxed by PIS and COFINS at the source because they constitute an operating cost to be included in the revenue of companies that received payment by credit card.

STF Held that the Disallowance of Presumed ICMS Credits Granted without CONFAZ’s Authorization Is Constitutional

The Supreme Court held that state legislation that disallows the ICMS credit recorded by taxpayers due to acquisitions from other states is constitutional. The decision deals with credits that, even though fully stated in the tax document, exceeded the value of the ICMS effectively paid in the state of origin, reduced as a result of tax breaks granted without the approval of the National Council for Fiscal Policy (“CONFAZ”).

In this context, the STF also allowed the proportional reversal of ICMS credits due to the presumed tax credit granted by another state. In a hearing in a virtual plenary session of Extraordinary Appeal 628075, the STF justices, by majority, established this rule: “The proportional reversal of ICMS credit made by the state of destination, due to the presumed tax credit granted by the state of origin without authorization of CONFAZ, does not violate the constitutional principle of non-cumulativity.”

Brazilian Government Withdraws Urgency Status from Tax Reform Bill Sent to Congress

The executive branch canceled the urgency status request for the tax reform bill before the Brazilian Congress. This was evidently done because the administrative reform bill, which concerns the government apparatus and civil servants, is now the administration’s priority for the time being.

The tax reform bill was divided into parts to facilitate approval by Congress. The first part, which aims to replace the current PIS and Cofins taxes with the Goods and Services Contribution (“CBS”), already faces resistance for the services sector, indicating that the administration might have a difficult time getting it approved.

Brazil Sanitation: Stay home and wash hands – OK, but how?

Posted on 6 de August de 2020 by Anni Varanda

In the midst of the Covid-19 pandemic, Brazilian federal government enacted Law No. 14.026/20, establishing a new regulatory framework for basic sanitation in Brazil. It is true that some 35 million Brazilians (more than 16% of the population) simply cannot stay at home and wash their hands to decrease their contamination’s risk, as they do not have piped water supply… More than that, approximately 100 million Brazilians (47%) do not have access to a treated sewage system and dispose their domestic liquid effluents in the nature. The Brazilian underdeveloped sanitation system affects the quality of life, hygiene, public expenses, health, environmental protection, but the Brazilian government has not been able to satisfy the needs of the country’s growing population.

Under the recently-enacted Law No. 14.026/20, by 2033, the residencies of 90% of the Brazilian population shall have treated water supply and sewage.

To achieve this rather ambitious goal despite the current lack of public resources, the federal government’s priority is to enhance its ongoing privatization’s trend (ie, there are already a number of privatization projects). It is true that 94% of the providers of piped water and sewage are entities controlled by state or municipal governments that have been facing financial difficulties for years. Probably for this reason, close to 20% of the current investments in sanitation come from the private entities who operate only 6% of the network.

The provisions of Law No. 14.025/20 eliminate the almost monopolistic dominance of state owned service providers who may face a real competition in any bid concession and may even be more subject to privatization. By increasing the competitiveness of the market and consolidating the legal scenario with more stable regulations, the Brazilian government wants to increase the number of PPPs – Public Private Partnerships – and to attract large multinational players, as well as private equity funds.

To complete its required infrastructure plan, Brazil will need investments exceeding R$700 billion until 2033. It will not be an easy task! To attract new investments, Law No. 14.025/20 strengthened drastically the ruling powers of ANA – Agência Nacional de Aguas, the Brazilian national water agency. To mitigate the instability of the legal system, with a myriad of confusing and unstable rules from different state, municipal and regional authorities, ANA was granted with powers to provide a single and uniform guidance to the sanitation system’s development in the whole country.

To avoid new investments to focus only on profitable projects, Law No. 14.025/20 determined that the targets for investments should be a combination of areas where providing sanitation service is likely to be profitable, and others where circumstances raise difficulties for financial benefits.

A number of additional rules should be shortly enacted by ANA and by regional governments following the guidelines of the new sanitation legal framework introduced by Law No. 14.025/20. In this sense, there is no doubt that these new rules will aim at improving the attractiveness of Brazil’s sanitation area for private investors from Brazil and specially from abroad.