Author: Anni Varanda

Brazilian Government extends Manaus Free Trade Zone

The Manaus Free Trade Zone was conceived as an import and export free trade area with special tax incentives (tax breaks, extra tax credits and deferrals) that was supposed to last until 2023. However, the Brazilian Congress enacted Constitutional Amendment 83/2014 on August 6, extending the life of the Manaus Free Trade Zone for an additional fifty years, from 2023 to 2073.

New rules to facilitate Drawback System

Drawback is a special customs method that allows tax and duty suspensions or exemptions on imported goods used to manufacture products for export. This tax break applies to the Import Duty, PIS/COFINS taxes, IPI (Excise Tax) and ICMS (State Value-Added Tax), as well as to the domestic acquisition of items used to manufacture products for export.

The Brazilian Federal Revenue Office and the Foreign Trade Secretariat recently published a joint ordinance that contains new regulations for the drawback method. The most significant change is the possibility of substituting products imported using the method for equivalent products acquired without the tax break in order to meet export commitments. This option eliminates the need to keep drawback inventory separate from products that do not take advantage of the tax break, which has been a major inventory control problem for exporters.

New regulations for “Ex Tarifarios”

Importers can apply for a temporary reduction in import duties when importing equipment or machinery (capital goods and IT goods) for which there is no equivalent produced in Brazil. This tax break reduces all the taxes levied on customs clearance (IPI, ICMS and PIS). This tax break is referred to as “ex tarifario” in Portuguese.

On August 15, the Chamber of Foreign Trade (CAMEX) published new requirements and procedures for the ex tarifario method. The new regulations fully describe all the procedures for applying the ex tarifario method and will help to eliminate subjective criteria and will make it easier to grant the tax break.

New decision on service exports holds that Services Tax (ISS) does not apply when the result of the service is received abroad

Under Brazilian law, the Services Tax (ISS) does not apply to the export of services. However, if the result of the services is manifest in Brazil, the ISS tax is due to the city where the entity that provided the service is located, even if the party purchasing the service has no establishment in Brazil. In this context, there is disagreement about the meaning of “result of the services” since the law does not define this expression.

A recent decision by the São Paulo Court of Justice held that the term “result” should be interpreted as the economic result of the services rendered. Therefore, under this definition, if the economic result takes place exclusively abroad, the ISS tax is not due.

This is contrary to a prior decision from the Superior Court of Justice. That case involved a company that performs repair and maintenance services for aircraft engines and turbines for foreign airlines. In that case, the Superior Court of Justice held that, since the service is begun and completed in Brazil, it should not be classified as exportation of services, despite the source of payment being abroad.

New rule on the withholding income tax triggering event on service transactions

On September 2, 2014, the Brazilian Federal Revenue Office issued Interpretative Declaratory Act 8/2014, which addresses the moment of the triggering event for the withholding income tax on service transactions.

The new rule formalizes the tax authorities’ position in a long-term conflict with taxpayers. The rule says that the withholding income tax is due on the date the party purchasing the service enters the amount for the service received in its books. According to the rule, whether payment was made for the service is irrelevant.

Although this interpretative declaratory act is related to services provided within Brazil, Brazilian Federal Revenue applies this rule to remittances abroad too.

Despite this rule, it should be noted that there are good arguments to defend the position that the withholding income tax is due only at the moment of actual payment or remittance abroad for the service received.

Revenue on dispositions of corporate shares

On July 9, 2014, Provisional Measure 651/2014 made significant changes to PIS and COFINS legislation. These are two social security taxes levied on gross revenue.

Under the rule, revenue from the sale of corporate shares is subject to the PIS and COFINS taxes using the cumulative tax method, which is levied at rates of 0.65% (PIS) and 4% (COFINS). The new rule allows taxpayers to deduct the acquisition cost of the investment from the revenue received when calculating the taxes due. This results in a capital gain tax on the investment.

This new rule applies only to operational investments since revenue from the sale of shares recorded as noncurrent assets and classified as not being operational is exempt of PIS/COFINS.

This legislative change may lead to future disputes about which equity investment sales transactions are subject to PIS and COFINS taxes, i.e., which ones should be considered operational assets and which should not.

The provisions regarding this matter become effective January 1, 2015.

Withholding Income Tax on Transactions between Residents and Nonresidents – New Rule on Capital Gains and Technical Services

On March 7, 2014, Brazilian Federal Tax Authorities issued a new Normative Ordinance (IN 1,455) regarding the withholding income tax on transactions between residents and nonresidents. Among the issues addressed by the Normative Ruling, two specific points must be highlighted: (i) taxation of capital gains earned by nonresidents; and (ii) the extension of the definition of technical services to determine the withholding income tax rate.

Capital gains
Under IN 1,455, capital gains earned by a nonresident on the sale of Brazilian assets are subject to the withholding income tax at a 15% rate, or at a 25% rate if the beneficiary of the income is located in a blacklisted country. The controversial point presented in IN 1,455 is the way the capital gains must be calculated, especially with respect to the currency that must be used to convert the cost of the investment sold.

Historically, the capital gains earned by a nonresident have been calculated in foreign currency, which means that the selling price and the cost of the investment made by the nonresidents were usually converted to Brazilian currency at the exchange rate on the transaction date.

However, IN 1,455 has introduced different criteria, requiring the capital gains to be calculated in Brazilian currency. This means IN 1,455 requires the cost of the investment sold by the nonresident to be calculated based on the historical value of the investment made in Brazilian currency, which could lead to higher taxation regardless of the absence of capital gains in the foreign currency (i.e., it taxes changes in the exchange rate). IN 1,455 is subject to broad challenges in this regard since it introduces a new calculation method without legal grounds.

Extension of the Definition of Technical Services
IN 1,455 confirms the understanding that technical services are subject to the withholding income tax at a 15% rate, or a 25% rate if the beneficiary of the income is in a blacklisted country. Additionally, it introduces a new definition of technical services, defining them as services in which “the performance relies on technical expertise or involves administrative assistance or providing advice, performed by an independent professional or through an employment relationship, or even through automated structures with clear technological content.”

It is important to point out that this new definition is wider than others usually adopted by the tax authorities in previous normative ordinances and rulings and also can affect the classification, under the double taxation treaties that Brazil has entered into with other countries, of the income derived from technical services in cross-border transactions.

New Interpretation of IPI taxation on Imports on behalf of Third Parties

Imports on behalf of a third party are subject to the Industrialized Products Tax, or IPI, on customs clearance as well as on the remittance of the imported product from the trading company to its acquirer (the third party). Since the third party is considered the actual importer in these transactions and the trading company a mere services provider, the latter issues a services invoice against the importer to be compensated for the services provided, as the goods are purchased directly from the exporter by the third party. Hence, the IPI is levied on the customs value (CIF) plus import duty, at the time of customs clearance, and on the total cost of the product on the further remittance.

However, the recent COSIT (General Coordination of Taxation) Ruling 30/2014 holds that the calculation basis of the IPI levied on the remittance of the imported product must include the price for the service charged by the trading company, which means that trading companies will be subject to higher taxation on the transaction, even though the difference may be credited by the third party (the IPI is a type of value added tax, in which earlier tax payments can be credited against later ones involving the same goods).

We highlight that COSIT Ruling 30/2014 is binding for all Federal Tax Authorities.

Normative Instruction 1,460/2014 – Changes to the Express Customs Clearance Procedure (Blue Line or“Linha Azul”)

Brazilian tax authorities issued Normative Instruction 1,460 to make changes to Normative Instruction 476/2004, which governs the Express Customs Clearance Procedure called “Linha Azul”. This procedure aims to provide express custom clearance for imports, exports and customs transit for companies that meet the requirements and conditions established by Brazilian Federal Revenue.

Under the new rule, some requirements and conditions are not mandatory for companies eligible for the Program for Support to Technology Development of the Semiconductor Industry (PADIS), which makes it easier for these companies to receive this benefit.

UN Convention on Contracts for the International Sale of Goods (CISG) comes into force in Brazil

The United Nations Convention on Contracts for the International Sale of Goods (CISG) came into force in Brazil on April 1, 2014. The Convention governs commercial contracts for the import and export of goods between Brazilian companies and most of their foreign trading partners.

Withholding Tax: New National Treasury Attorney’s Office report on remittances for services and technical assistance

The National Treasury Attorney’s Office recently issued a report on the withholding tax levied on remittances abroad. The report says no withholding tax is due on remittances for technical services and assistance without technology transfers if the transaction is , covered by a double taxation convention.

Historically, Brazilian tax authorities have always maintained that these remittances should be considered “Earnings not Expressly Mentioned” (article 21 of the OCDE Model Convention). Consequently, they should be taxable both in Brazil and in the country of residence.

The new report is a drastic change of position on this subject, since the National Treasury Attorney’s Office has reclassified the remittances as “Company’s Profit” (article 7º of the Model Convention), which makes them taxable only in the state of residence, with no withholding tax levied on the remittance in Brazil.

Brazilian Anti-Bribery Act in force

The Brazilian Anti-Bribery Act came into force in January., It has introduced a major change by providing for civil liability for the companies responsible for corruption or bribery, regardless the proof of fault or malice. With the new rules, federal, states and municipal authorities are authorized to open administrative proceedings to investigate suspect company’s acts of bribery or corruption of domestic or foreign government authorities, and even punish companies that try to obstruct investigations.

Among the penalties provided for, are fines that can range from 20% of the company’s gross revenue up to BRL 60 million, the registration of punished companies in public records and prohibition from participating in public bids.

New Ordinance widens Social Security Contribution on Gross Revenue taxation basis

Brazilian tax authorities recently issued Ordinance 1,435, new regulations on the Social Security Contribution on Gross Revenue (CPRB) created by Law 12,546/2011.

Under the new rule, the revenues resulting from direct exports are not to be included in the calculation basis. However, the ordinance says that revenues resulting from indirect exports (sales to trading companies) must be considered the calculation basis. This contradicts the Brazilian Constitution, which provides that revenue resulting from exports is excluded from Social Security taxation.

Changes in Temporary Admission for Economic Use

Temporary Admission for Economic Use is a special customs system in which goods intended for economic use in Brazil can be imported on a temporary admission basis. Taxes due on importation are paid proportionally to the time the good is supposed to stay in Brazil.

Decree 8,187/2014, published in January 2014, changes the Brazilian Customs Code (Decree 6,759/2009) concerning the renovation of the temporary admission for economic use concession period.

SECEX Ordinance 02/2014 – Legal Representation in Trade Defense Procedures
The Foreign Trade Secretariat (SECEX) enacted SECEX Ordinance 02/2014 in January 2014, in order to regulate legal representation of interested parties (national or foreign) in trade defense procedures regarding antidumping and compensatory measures.

Provisional Measure 627/2013 – Several Changes to Federal Taxes

Provisional Measure 627/2013 was published on November 12. It makes a number of changes to federal taxes, including the income tax, Social Tax on Net Profit (Contribuição Social sobre o Lucro Líquido), or CSLL, Social Integration Program Tax (Programa de Integração Social), or PIS, and the Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS. The purpose of these changes is to harmonize Brazilian tax law with the IFRS and end the Transitional Tax System.

The new rules become mandatory on January 1, 2015. However, taxpayers may choose to adopt them on January 1, 2014. Until then, the Transitional Tax System rules will remain effective.

The main changes are:

i) The adaptation of the corporate income tax and CSLL calculation basis to the IFRS. This includes several adjustments to net income to make the new accounting standards for the corporate income tax and CSLL neutral in regard to:
Fair value adjustments;
Payment of goodwill on share acquisition;
Goodwill valuation;
Gross income from real estate activity;
Initial public offering expenses;
Adjustments to present value (long-term assets or liabilities);
Preoperational expenses;
Long-term construction agreements;
Public subsidies for investments;
Premiums in the issuance of debentures;
Impairment test on assets;
Stock option plans;
Concession contracts for public services;
Depreciation and amortization of assets and intangibles; and
Financial leasing.

ii) PIS and COFINS calculation basis – new definition of “gross revenue” for PIS and COFINS calculation purposes.

iii) Dividends and interest on shareholder equity (IOE) payments between 2008 and 2013 – Dividends and IOE payments during the Transitional Tax System were required to be based on “tax financial statements” (old Brazilian GAAP), rather than on “business financial statements” (IFRS). However, the Provisional Measure states that the tax authorities will not challenge entities that paid dividends and IOE based on “business financial statements” between 2008 and 2013.

iv) Worldwide income taxation (CFC Legislation) – new guidelines on income taxation of Brazilian subsidiaries abroad.

New Interpretation on Cost-Sharing Agreements

Tax aspects of cost-sharing agreements have always been a controversial matter in Brazil because Brazilian law has never properly addressed them.

To end this problem, the General Tax Coordination Office of Brazilian Federal Revenue has issued a ruling stating its interpretation of these transactions.

Ruling 23/2013 says Brazilian legislation allows Brazilian companies from the same economic group to share administrative expenses by means of cost-sharing agreements, as long as certain requirements are met.

In summary, this ruling says that expenses shared through cost-sharing agreements are tax deductible for the participating companies as long as these companies meet certain requirements, including: (i) the expenses must be for goods or services actually provided or received; (ii) the shared services or costs must be expenses that are necessary to support the companies’ primary activities and their ability to generate profit; (iii) the cost-sharing agreements must establish reasonable and clear criteria for allocating expenses among the participating companies and the amounts reimbursed cannot include a profit margin; (iv) the centralizing company can only record its share of the expenses as an expense on its income statement.

As long as these requirements are met, the amounts the centralizing company receives are not subject to PIS and COFINS taxes. Additionally, each participating company can calculate the PIS and COFINS non-cumulative credits on its share of the expenses, where these credits apply.

Brazilian Federal Revenue has issued a similar ruling on cross-border arrangements. In this regard, Ruling 8/2012 changed the previous Brazilian Federal Revenue opinion to allow corporate income tax and CSLL tax deductibility. In addition to having the same requirements as Ruling 23/2013, in this case the extent to which the shared expenses can be deducted for tax purposes is limited to the arm’s-length price, calculated using transfer pricing methods.

Superior Court of Justice decides Excise Tax (IPI) is levied on sales of imported goods

After a favorable decision issued by its First Panel, the Second Panel of the Superior Court of Justice recently held that sales of imported goods are subject to the Excise Tax (Imposto sobre Produtos Industrializados), or IPI. The earlier case, which was decided by the First Panel, held that only the IPI tax levied at the time of customs clearance of imported goods would be valid under Brazilian rules and the National Tax Code. This holding stated that taxing imported goods on customs clearance and on their later sale would result in double taxation for the same product.

Because of the divergence between the holdings, this issue will probably be decided by the First Section of the Superior Court of Justice. The First Section includes justices from both the First and Second Panels.

Supreme Court holds ICMS is due on imports by non-taxpayers after 2002

The Supreme Court has recently decided that the Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, is due on imports by non-taxpayers after Constitutional Amendment 33/2001 and Complementary Law 114/2002.

Since the ICMS is a state VAT that is levied only on transactions by manufacturers and traders/sellers, those who are not ICMS taxpayers (natural persons and services providers) have always attempted to not pay this tax on imports, even though it is provided for in the law of each Brazilian state.

However, since this taxation was introduced in the Federal Constitution through Constitutional Amendment 33/2001, the Supreme Court considered it constitutional, regardless of the category of the taxpayer. Nonetheless, the Supreme Court held that this tax is valid only if the state included its tax triggering event in its internal rules after the passage of Complementary Law 114/2002.

New export clearance procedures

Brazilian tax authorities issued Normative Instruction 1,407/2013 in November 2013. This Normative Instruction changes export clearance procedures. Most of these changes are intended to reduce the time and costs involved in exporting.

The main changes include a new procedure for inspecting the exporter’s documentation that avoids appearing in person. In most cases exporters will no longer need to submit all documentation to customs authorities and, even if they do, the documents can now generally be delivered over the Internet. This reduces bureaucracy in export transactions.