Author: Gabriela Barreiro

Subsidies for investment – Issue 1.182.

On April 26, 2023, Brazil’s high tax court, the Superior Court of Justice (‘STJ’), defined the possibility of excluding tax benefits related to the State Value-Added Tax on the Circulation of Goods and Services (ICMS), such as reduction of the basis for calculation, rate reduction, exemption, deferral, among others, from the calculation basis of the Federal Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL).

A similar question was analyzed by the same Court in 2017, when it specifically judged the possibility of ICMS presumed credits – denominated “positive incentives or benefits – being excluded from the bases for the IRPJ and CSLL, without the need to adhere to the formal requirements of Law 12.973/14 and Complementary Law (LC) 160/17, thus becoming an important paradigm in relation to federal taxation of ICMS tax benefits.

Nonetheless, the same understanding was not settled in terms of being applied to the remaining ICMS benefits – denominated “negative incentives or benefits”– and was submitted to the STJ’s judgment through a series of repetitive appeals.

In this year’s case, the STJ set out the following interpretations: (i) ICMS benefits are only eligible for exclusion from the calculation basis of the IRPJ and CSLL if the company heeds the provision of Article 10 of Complementary Law 160 and Article 30 of Law 12.973/14 and the subsidy can be recorded in the equity of the company’s books; (ii) Proof of concession as stimulation for implementation or expansion of a project will not be required when the requisites of Article 30 of Law 12.973/14 are fulfilled; and (iii) The Brazilian Federal Revenue Bureau (RFB) may assess the company for IRPJ and CSLL if it is ascertained that the amounts arising from the tax benefits have been used for purposes foreign to the guarantee of the economic project’s viability, that is, if the gains arising from the benefit were distribute to the company’s shareholders.

The decision, despite being definitive, has generated numerous controversies of interpretation, both conceptual and accounting, which should be clarified by the Federal Government.

 

Brazilian Federal Government publishes Provisory Measure aimed at altering taxation of overseas investments

The federal government aims to change the taxation of assets maintained by Brazilian individuals abroad, as well as to expand the range of tax exemption from the Individual Income Tax (IRPF) in Brazil.  These two matters are covered by Provisory Measure (MP) 1.171/2023, which was enacted on April 30, 2023.

The main innovation of the MP is applicable to the taxation of individuals shareholders which control entities abroad.  Under the new rules, in case the subsidiary entity earn more than 20% of passive income (royalties, dividends, interests, rental property, or other among of passive income), or if it is set up in a tax haven, Brazilian taxation of the profits obtained abroad will take place at the end of each fiscal year (December 31), even if such earnings are not distributed to the shareholders.

Annual earnings of more than R$ 6,000 will be subject to a progressive rate, varying between 15%, if the earnings are below R$ 50,000, and 22.5%, if they are above this amount.

Moreover, the MP revoked provisions that called for exemption of capital gains accrued by the sale of goods acquired based on non-resident status, as well as the legal provision that exempted from taxation the gains resulting from exchange variation upon the sale of assets originally acquired in foreign currency.

The deadline for consideration of the MP ends on August 27, 2024, and, even if it becomes converted into a law, the original text should undergo changes, in that so far over one hundred amendments to the original text have already been presented.

 

Brazilian Senate approves Treaty to Eliminate Double Taxation between Brazil and Uruguay

Brazil’s Federal Senate approved on June 15, 2023, the text of the Brazil-Uruguay Convention for the Elimination of Double Taxation in Relation to Taxes on Income and Capital and to Prevent Tax Evasion.

This new Treaty introduces certain novelties.  Among them is Article 13 – Technical Services, which authorizes taxation of this type of payment overseas, both by the nation of Residence and the nation of the Source.  In the latter case, taxation is limited to 10%, in line with the new treaties signed by Brazil with the Arab Emirates and Singapore.

By and large, the treaties that follow the standard set by the Organization for Economic Cooperation & Development (OECD) determine that taxation of service earnings should be imposed only by the nation of Residence, based on the article dealing with Profits of companies (Article 7).  Accordingly, Brazil is going against the grain of such interpretation, even given the country’s declared interest in following OECD policy and becoming part of the Organization.

Now, the text of the treaty should be approved by President Luis Inácio da Silva, for subsequent publication of the respective Legislative Decree, at which time the treaty will begin to produce effects.

 

RFB Alters Interpretation on Assessment of PIS/COFINS-Importation on Licensing of Overseas Software

Through the recent Resolution of COSIT Inquiry 107/23, the Brazilian Federal Revenue Bureau (RFB) changed its interpretation regarding the levying of the Social Integration Program and Social Security Finance Contribution (PIS/COFINS) on Importation of software licensing sourced from abroad.

Previously, the tax authorities believed that PIS/COFINS-Importation should not be levied on remittance of amounts abroad resulting from non-personalized software licensing, as they involved payment of royalties for the availability of an intangible asset, rather than consideration for a service provided.

However, based on the recent interpretation by the Federal Supreme Court (STF) on the levying of the municipal Service Tax (ISS) on software licensing, the tax authorities changed their orientation and now consider the licensing of computer software programs as importation of services subject to the PIS/COFINS-Importation.

It is important to stress that Resolutions of Inquiries are binding on the RFB, such that taxpayers who do not adopt their interpretations are subject to questioning by the tax authorities.

At any rate, this new interpretation by the tax authorities will be strongly fought by taxpayers, since the STF’s decision specifically analyzed legislation and tax-triggering events relating to the state ICMS and municipal ISS and has not yet analyzed the requirement to pay the federal PIS/COFINS-Importation on the contracting of services and digital goods coming from abroad.

 

Brazil Finally Approves Alignment of its Transfer Pricing Rules to the OECD

Law 14.596/2023, which provides for new Brazilian Transfer Pricing Rules, has finally been approved by Presidential sanction.  The law is the result of the conversion of Provisory Measure 1.152/2022, enacted on the final working day of 2022, which was approved by the Nation’s Congress in May 2023.

Now, with the sanction by Brazil’s President and its enactment and publication, Brazil’s Transfer Pricing rules are in line with the directives of the Organization for Economic Cooperation & Development (OECD).

Application of the new rules by companies operating here will be optional for this fiscal year (2023), and mandatory as from fiscal year 2024.

Among the alterations, the most important are the end of fixed profit margins for calculation of the parameter price in the arm’s length approach and the adoption of transactional methods.

Now it remains for Brazil’s Federal Revenue Bureau (RFB) to regulate the manners for application and proof of compliance with the new rules, as well as fulfillment of accessory obligations.

 

Loss of effectiveness of MP 1.160/2023 – Casting Vote in the Administrative Tax Appeals Council (CARF)

Provisory Measure 1.160, which had determined the casting vote as the exclusive criterion for breaking ties at the Administrative Tax Appeals Council (CARF), lost its validity effective June 1, 2023.  Now, the previous rule once again comes into effect, such that in case of a tie in the voting of a judgment, the issue will be resolved in the taxpayer’s favor.

The government has already proposed a new Law to re-establish the casting vote rule, aiming for the reflex of such a rule in taxation, since the tendency is to favor the government’s position in CARF decisions.  Such initiative was presented as part of the new taxation framework here in Brazil, though it has not yet been approved by Congress.

 

Jurisdiction of Brazilian Central Bank to regulate Legal Framework for Cryptocurrencies

Federal Government recently introduced an important change in the regulation of the market for virtual assets, including cryptocurrencies, by means of Decree 11.563/23.

This decree is aimed at regulating certain aspects of the Legal Framework for Cryptocurrencies (Law 14.478/22), establishing principles and concepts to be involved in the so-called “operations with virtual assets”, which apply also to the exchanges located here in Brazil.

One relevant measure adopted by the Executive Branch is the power granted to the Brazilian Central Bank – BACEN to regulate, authorize and supervise the service providers related to virtual assets, as well as to deliberate on other issues covered by the Law.

Moreover, the Decree strengthens the jurisdiction of the Brazilian Securities Commission (CVM) to regulate the cryptocurrencies considered as securities and the Brazilian National Consumer Protection System, when applicable.  Such measures represent a significant step forward in the definition of a regulatory framework for virtual assets in Brazil.

 

Brazilian Tax Reform – Chief aspects

The base text for the nation’s reform of taxes on consumption was introduced just over a month ago, on July 7, by the Chamber of Deputies when it approved the Bill for a Constitutional Amendment (PEC) 45/2019.

Along general lines, PEC 45 replaces five existing taxes and contributions, the federal Social Integration Program – PIS, Social Security Finance Contribution – COFINS, and excise tax – IPI, as well as the state tax on circulation of goods and services – ICMS and municipal service tax – ISS, with the Selective Tax – IS, Goods and Services Tax – IBS, and Goods and Services Contribution – CBS.

 

Selective Tax

The Selective Tax will be of the “extra-fiscal” type and is to be levied on the production, sale or importation of goods and services harmful to health or the environment, with there also being the possibility that it may be levied on operations involving electric power, telecom services, petroleum by-products, fuels, and minerals.

 

IBS and CBS

The CBS (federal) and IBS (state and municipal) taxes will adopt the value-added model, with a broad base of incidence and uniform rates aimed at complete non-cumulativeness.

The proposal is for these taxes to be levied on operations, including importation, involving material or immaterial goods, including rights and services.  At this point in time, no rates have been set yet for these taxes, which will be defined by each entity of the Brazilian federation by means of specific laws.

There is further provision for the possibility of reduced and differentiated rates for specific goods and services, such as fuels and lubricants, financial services, operations with real estate assets, health-care coverage plans, among others.

In addition to these main issues, the proposal deals with punctual alterations in the rules for the Automotive Vehicle Property Tax – IPVA, Inheritance and Donations Tax – ITCMD, and Urban Property Tax – IPTU.

Transition to the new model is slated to take 8 years as from 2026, until the IS, CBS and IBS are fully effective.

After it passes the Chamber of Deputies, the project will go to the Senate, where it will need to be approved by a qualified majority, that is, by 49 senators (3/5 of the total), in two sessions.  In case the text is substantially changed (not just changes in wording), it will have to go back to the Chamber of Deputies.  In case such a situation should arise, it is possible that there will be enactment of part of the Tax Reform, including just the portion that passes both legislative bodies.

 

UK Treaty to Avoid Double Taxation with Brazil is approved by the Royal Council

On July 19, 2023, the Council of King Charles III solemnly approved the text of the Convention to Eliminate Double Taxation between Brazil and the United Kingdom, which was signed in November 2022.  The text had already passed the House of Commons, such that the Treaty is now officially approved by the Government of the United Kingdom.

On the other hand, in Brazil the nation’s Congress has not even begun analyzing the Convention’s Draft and there is no forecast as to when this will occur.

 

US postpones rule establishing terms for offsetting foreign tax credits

On July 21, 2023, the Internal Revenue Service issued tax relief aimed at US companies that have foreign tax credits which can be offset in the US.

The norm established that, for 2022 and 2023, such taxpayers will be eligible for waiver from taxes paid abroad for US tax purposes, as provided by sections 901 and 903 of the Internal Revenue Code Notice.

The norm will prevail again as from January 1, 2024.

New Brazilian transfer pricing rules can already be used by companies as from fiscal year 2023

At the end of 2022, the Brazilian Federal Revenue Bureau (RFB) published Provisory Measure (MP) 1152/2022, which altered the nation’s transfer pricing rules, bringing them more into line with the rules applicable under the Organization for Economic Cooperation & Development – OECD.

The alterations brought about in Brazil’s transfer pricing rules may already be applied this year for such controlled transactions in fiscal year 2023, although they are only mandatorily required as from the start of 2024.

Accordingly, on February 24, 2023, the RFB published Normative Instruction IN RFB 2132/2023, which regulated the manner, period, and terms for early application of the MP in question.

Taxpayers interested in taking advantage of this early adoption of the new transfer pricing rules in relation to their 2023 operations are to formally express such intention through a digital process.  This involves filling out an affidavit made available on the Internet by the RFB between September 1^st and 30^th of this year.

 

Brazilian Federal Supreme Court (STF) makes a “final unappealable decision” a relative matter, in a controversial ruling

On February 8, 2023, Brazil’s highest court, the STF, ruled that decisions favorable to taxpayers on a “final unappealable basis” (in rem judicatam) will be automatically annulled if, in a subsequent ruling, the same court upheld the constitutionality of the tax or contribution under discussion.

In the appeal to the STF, the concrete case involved the declaration of unconstitutionality of the federal Social Contribution on Net Income (CSLL), obtained by a taxpayer in the 1990’s, during which period the decision involved a final unappealable one.  Subsequently, in 2007, the STF ruled that the CSLL requirement was in fact constitutional.  Thereupon, there ensued a discussion about what precisely would be the effect of the declaration of CSLL constitutionality in individual cases involving concentrated control (direct appeal to the STF – ADI 15 – hence, affecting all taxpayers) that were decided on a final unappealable basis in favor of taxpayers.

Hence, without there being any need to file an action to overrule a final judgment, the STF declared that there will be automatic annulment of the effects of any such final judgments that are contrary to a subsequent ruling regarding the constitutionality of government tax claims.  This controversial ruling would affect all taxes and contributions, not being restricted to the CSLL specifically discussed in such case.

In this context, such decision could impact taxpayers who have “final unappealable decisions” in other cases involving any taxes and contributions, such as, for example, the levying of the federal Excise Tax (IPI) on the resale of imported products.

Moreover, there are several doubts among taxpayers as regards application of this decision that probably will be covered by appeals requesting clarification thereof, at which time hopefully the market will have better clarifications with respect to this wide-ranging and controversial matter.

 

Senate approves treaty for exchange of tax information between Brazil and Guernsey

The Brazilian Senate has passed the Treaty between Brazil and Guernsey for the Exchange of Information Related to Tax Matters.

Guernsey is an island and bailiwick (county) in the English Channel that is not a formal part of the United Kingdom.  Together with the bailiwick of Jersey, which is larger and closer to the French Coast, it forms the Channel Islands.

The treaty aims to combat fraud and tax evasion, as well as curb the room for practices that are considered tax avoidance schemes and abusive tax planning transactions.  It also seeks to strive for greater transparency and enhanced cooperation between the tax administrations of both Brazil and Guernsey.

The Treaty will take effect after issuance of a Presidential Decree by Brazil’s President Lula.

 

STF suspends decisions that cut in half rates for federal PIS and COFINS contributions on financial revenues

Brazil’s highest court, the STF, suspended the effectiveness of court decisions that either expressly or tacitly did away with application of a Presidential Decree that re-established the rates of the federal contributions known as PIS and COFINS Social Security Contributions, levied on the financial revenues of companies subject to the non-cumulative system.

On the final working day of last year (December 30, 2022), the nation’s former Vice-President, Hamilton Mourão, who was then serving as the acting President, issued an executive fiat (Decree) that cut the PIS and COFINS rates in half on taxation of companies´ financial revenues.  The PIS was reduced from 0.65% to 0.33% and the COFINS from 4% to 2%.  The new rates were to have taken effect immediately, which means they were applicable as from January 1^st, 2023.

Nevertheless, as soon as he took office on January 1^st, 2023, incoming President Lula published a new, immediately effective decree that revoked the previous one and maintained the same rates paid by such corporate taxpayers ever since 2015 (0.65% and 4%).

Lula’s decree was upheld by the STF based on a restraining order (preliminary injunction) granted in the case of Declaratory Constitutionality Suit 84, which is still subject to a vote by the Supreme Court’s plenary sitting.

 

Alteration of taxation on fuels and institution of Export Duty

Brazil’s tax rules have changed substantially this year, particularly as regards fuels.  For instance, at the beginning of last month (March 1^st, 2023), the federal government laid down Provisory Measure (MP)1163/23, which established the following tax exemptions: (i) suspension until June 30^th, 2023, of payment of the contributions known as the PIS/COFINS-importation on operations involving jet fuel (kerosene) and natural gas for vehicles (known in Brazil as GNV), and (ii) suspension of payment until December 30^th, 2023, of the PIS/COFINS contributions on petroleum imports by the nation’s refineries.

Furthermore, this new MP kept the rate of the federal tax on fuels (CIDE, formally known as the Contribution for Intervention in the Economic Domain) on gasoline and its by-products, except jet fuel, initially set for February 28^th, 2023, which was extended until June 30^th, 2023.

In addition to the exemption measures, the new norm called – with immediate effect and through June 30^th, 2023 – for the levying of an Export Duty on operations involving the exportation of crude oil at the hefty rate of almost ten per cent (9.2%).  Brazil’s O&G market was taken aback by the sudden institution of such a steep export duty rate, given that export operations carried out by companies operating here have traditionally been exempt and the agreements already signed with overseas counterparts have no clauses covering the financial impact of this surprising tax measure.

Given this startling turn of events, many of the nation’s political parties joined forces with the Brazilian Association of O&G E&P Companies (ABEP) and filed direct unconstitutionality appeals to the STF against MP 1163/23.  They alleged in their suit that the Export Duty is merely an “extra-fiscal” tax aimed at maintaining the government’s economic equilibrium and that institution thereof on oil is solely intended to offset the government’s losses given the exemptions granted with respect to fuels.  None of the appeal actions have been considered yet by the Supreme Court.

 

Reduction of AFRMM rates

At the close of the Bolsonaro administration, on December 30^th, 2022, yet another severe federal tax rate cut was attempted by the outgoing government in the form of Decree 11.321/2022.  This drastic measure would have reduced by half the rates of the Freight Surcharge for Merchant Marine Renewal (AFRMM).  The latter contribution is levied on maritime navigation transport operations at rates ranging from 8% to 40% of the amount thereof, depending on the modus operandi contracted.

The reduction would be significant, though the new administration of President Lula swiftly enacted Decree 11.374/2023 to revoke this and other norms on as from the first day of this year 2023.

Nevertheless, the AFRMM is a contribution that must obey the Annuality Tax Principle, which determines that taxes can only be collected in the year after their creation or increase, or at least, 90 days thereafter.  Thus, the re-establishment of the rates brought on by Decree 11.374/2023 may only be required in the next fiscal year, that is as from January 1^st, 2024.

Therefore, there are good legal arguments for pleading in court to uphold the AFRMM discounts until the end of this fiscal year (December 31^st, 2023), in case it represents a material opportunity for companies subject to this contribution.

 

Norway and Brazil sign new Treaty to avoid Double Taxation

On November 4th, 2022, Brazil signed an international agreement with Norway that, among other things, would eliminate double taxation on income, as well as prevent tax evasion.

The purpose of the new agreement is to update and modernize – based on best international practices – the rules of the tax treaty in force that was signed between the two nations over three decades ago (Decree 86.710/1981).

The new treaty determines specific provision regarding offshore activities and brought about several changes, including a separate article to deal with the taxation of remuneration for technical services.

The novelty brought by the treaty is in article 23 which established that, if an enterprise carries on exploration or exploitation of the seabed or subsoil or their natural resources in a state for a period of more than 30 days within a 12-month period, the activity shall be deemed to be carried on through a permanent establishment, resulting in taxation.

Validity of the new international agreement still depends on the text being ratified by the Brazilian Congress and signed into law by the country’s President.

 

Brazil signs another Treaty to avoid Double Taxation, now with the UK

On November 29, 2022, Brazil signed another international treaty, this time with the United Kingdom, to eliminate double taxation on income and prevent tax evasion.  Until now, the two countries did not have such a treaty signed and the new measure will contribute to greater legal security between them, potential increase in the flow of investments and reduced tax burden.

This agreement is in line with the Convention Model of the Organization for Economic Cooperation & Development (OECD) guidance and with the OECD’s project for Erosion of the Domestic Tax Base and Shifting of Profits (BEPS), and has been developed by this international institution in a clear movement in the process of Brazil signing on to the OECD.

The Treaty with the UK has introduced certain novelties in relation to those already signed by Brazil with other nations so far, notably: (i) tax rate of 10% levied on the payment of royalties (rather than 15% as in most of the agreements signed by Brazil with other countries); (ii) a specific article to regulate taxation of payments for technical services, including reduction of rates applicable in the first years of effect; and (iii) mutual agreement procedure for granting adjustments on operations subject to transfer pricing operations.

The final text further depends on certain procedures in Brazil and the UK and will require the text to be ratified by Brazil’s Congress and signed into law by the President of the Republic.

 

Waiver of financial statements for Brazilian subsidiaries overseas

On December 13, 2022, Brazil’s highest administrative tax appeals panel, the Administrative Tax Appeals Council (CARF), did away with arbitration of profit for Brazilian income tax purposes (Corporate Income Tax – IRPJ and Social Contribution on Net Income – CSLL) for subsidiaries of Brazilian companies set up in the US State of Delaware and in Panama.

Under a strict interpretation of Brazilian legislation, in case of non-submission of tax documents and record books, the Brazilian Federal Revenue Bureau (RFB) is to arbitrate a company’s profit and, based on this amount, set IRPJ and CSLL taxation.  With respect to cases where Brazilian companies have subsidiaries overseas, our legislation calls for financial statements to be drawn up according to the norms of the commercial legislation in effect in the country of domicile.

Nonetheless, in determined locations and under specific circumstances – as in the case of Delaware and Panama – there is no local requirement for preparation and publication of financial statements.

Despite this waiver regarding preparation of financial statements, the RFB recently assessed a company with registered offices here and arbitrated the profit accrued by its overseas subsidiaries, alleging that it had not submitted the latter’s financial statements.

However, the prevailing interpretation is that such profit cannot be arbitrated, since the Brazilian company is not subject to such arbitration in relation to that part of its overall accrual that comes from subsidiary companies headquartered in places that waive the preparation of financial statements.

 

New transfer pricing rules

Towards the end of last year, December 29, 2022, Brazil’s transfer pricing rules changed substantially with Provisory Measure (MP) 1.152/2022 as regards determination of transfer prices on controlled transactions carried out between Brazilian companies and their related parties abroad.

The new set of regulations, which was one of the requirements for Brazil to join the Organization for Economic Cooperation & Development (OECD), establishes new methods for determination of transfer prices, including on operations involving services and intangible items, always based on the international arm’s length principle:

• Independent Comparable Price (abbreviated here as PIC);

• Resale Price less Profit (PRL in Brazil);

• Cost less Profit (MCL here);

• Net Transaction Margin (MLT in Brazil);

• Division of Profit (MDL); and

• Other alternative methods that can be justified by the taxpayer.

Owing to adoption of the arm’s length principle, criteria based on arbitration of margins and/or interest rates have been replaced by comparative transactional methods, for purposes of IRPJ and CSLL deductibility.

Among other relevant aspects that can be noted, the following also deserve being highlighted:

• The amount of the adjustment relating to transfer prices is to be reimbursed by the overseas related party to the Brazilian company, subject to updating at the rate of 12% p.a., for as long as it remains unsettled; and

• The interest related to operations for supply of financial resources which, according to the criteria established by the Provisory Measure, may be considered as a capital operation, are to be considered non-deductible for IRPJ/CSLL purposes.

Besides the new transfer pricing rules, MP 1.152/2022 restricts deductibility of royalties and technical, scientific, administrative or similar assistance in cases of payments to: a)  beneficiaries domiciled in states with favorable or privileged taxation rules (the so-called “tax havens”); b) related parties, in cases in which deduction of the expense results in double non-taxation; and c) when the amounts are intended to finance related parties resulting in the cases highlighted above.

Provisory Measure (MP) 1.152/2022 only takes effect as from January 1, 2024, though the new rules may be adopted already in 2023 at the taxpayer’s option.

 

Travel Agencies – Reduction of Brazilian Federal Withholding Income Tax

To enhance the competitiveness of Brazilian travel agencies on international operations where they serve as intermediaries, the Federal Government has enacted Provisory Measure (MP) 1.138/2022 to reduce the Withholding Income Tax (IRRF) on such operations for a total five-year period.

At present, the IRRF rate on remittances made from Brazil to overseas firms intended to cover the expenditures of Brazilians on international trips is 25%.  Considering that the tourism industry was one of the ones most affected by the COVID-19 pandemic, the IRRF rate will be reduced to 6%, with progressive increases of 1% every year and ceasing in 2027 at a 9% rate.

Considering that this Provisory Measure was published on September 22, 2022, its 60-day effective period was to have terminated on November 20, 2022.  Even so, since it has not yet been debated by the nation’s Congress, its effective period has been tacitly extended for an equal period, hence closing on March 3, 2023 (final deadline considering the annual Congressional recess).

Accordingly, it is necessary for travel agencies to pay attention in relation to the deadline for this MP’s effective period.  This is because if it does not become converted into a law, travel agencies operating here will still be subject to the 25% IRRF rate on remittances made overseas to cover the expenditures of Brazilians on international trips.

 

Superior Court of Justice – Interest on Capital Invested in Prior Years

In recent judgments, the Superior Court of Justice (STJ) handed down two decisions favorable to taxpayers, authorizing the deductibility of expenses incurred by companies on payment of expenses for Interest on Capital Invested (JCP) from prior years.

The decisions that define the legal basis for the JCP do not impose any time limit for deductions of payments made on this basis.  They merely reiterate the condition that the company must have profits for the year or retained earnings and earnings reserve in an amount equal to or greater than twice the JCP that will be paid.  As regards the accrual basis of accounting, the rulings determined that the obligation to pay the JCP arises when decided by the shareholders and at this time the expense is to be recognized accounting-wise, as is the respective tax ramification.

Although the two judgments highlighted here have not been affected as repetitive appeals, this positioning on the part of the STJ merely reinforces its interpretation favorable to the deduction of prior years’ JCP, an issue that has been debated for more than a decade now.

These precedents reinforce the importance of such interest, besides providing greater legal security to companies availing themselves of this option as a means of remunerating the capital invested by their shareholder.

 

New Administration intends to take up tax reform again

With the new government of President Luis Inácio da Silva (Lula), the Ministry of the Treasury will now have seven secretariats, as follows: Executive Secretariat; Special Federal Revenue Secretariat; National Treasury Secretariat; International Affairs Secretariat; Economic Policy Secretariat; Economic Reforms Secretariat; and Extraordinary Secretariat for Tax Reform.

The new Treasury Minister, Fernando Haddad, who took over his position on January 1, 2023, has appointed economist Bernard Appy as Secretary for Tax Reform.

Bernard Appy is the author of the bill for Constitutional Amendment 45/2019, which calls for the unification of all the taxes presently levied on consumption at present with just a single Tax on Goods and Services (“IBS”).

In interviews, Bernard Appy has stated that he is confident that approval of the new system of taxing consumption will be granted next year, which has aroused considerable expectations on the part of the market.

 

Government Extends Benefits on Taxation of Brazilian Multinational Profits

The Brazilian federal government has enacted a provisory measure (MP) that renews for two years certain provisions that deal with worldwide taxation set to expire as from 2023.

The first extension refers to the possibility of consolidating the P&L of all Brazilian company’s overseas subsidiaries and the second extension refers to the possibility of a presumed 9% credit on the foreign tax calculation basis, which can be used to offset the difference between the tax paid abroad (usually 25%) and that paid in Brazil (34%).  This applies to overseas investees involved in manufacturing beverages and food products, construction of buildings and infrastructure projects, besides industries in general.

The Brazilian market received such extensions with tremendous relief.  This is because, without renewal, both benefits would cease being effective as from 2023, making taxation of our nation’s multinationals more complex and possibly making them lose their competitiveness.

 

Income Tax Exemption for Certain Investments Made by Foreigners

A Provisory Measure (MP) issued by the Brazilian government reduced to zero the income tax owed by foreigners who have certain investments here.

Under the new rule, the exemption applies to the earnings of parties resident or domiciled abroad that are shareholders of Funds for Investment in Infrastructure Equity Interests (FIP-IE) and Investment in Equity Interest in Intensive Economic Production in Research, Development and Innovation (FIP-PD&I) that are received between January 1, 2023, and December 31, 2027.

Moreover, also exempted from income tax are a series of earnings received by overseas residents generated by bonds or securities that are publicly distributed, issued by private companies not classified as financial institution or mutual funds investing in credit rights regulated by the Brazilian Securities Commission (CVM), the originating party of assignor of which is not a financial institution.

The exemptions mentioned above are also valid for investments made by sovereign funds even if they are headquartered in tax havens.

Brazil expects that, with these tax benefits, it will be able to obtain funding from foreign resources for investment in the nation’s financial market.

Brazilian Federal Supreme Court (STF) rules on state value-added tax (ICMS) on electric power and telecom services

The Brazilian Federal Constitution established that States may assign different ICMS rates depending on the product or service sold.  Nevertheless, it is necessary to observe the selectiveness of such goods and services since higher rates should be applied to goods and services that are less essential or goods considered superfluous, and lower rates should be applied to goods and services considered essential.

However, Brazilian states set rates for ICMS on operations involving sale of electric power and telecom services that are higher than the ordinary rates levied on sales of common goods and services, violating constitutional rules.

In this sense, this month (December of 2021) the STF decided that, since electric power and telecom services are essential to the population and to overall economic activities, their ICMS tax rate should be the regular rate (around 17%), and the setting of higher rates by the States is unconstitutional.

The decision has general repercussion, as it will apply to all taxpayers that purchase electric power and telecom services.

The STF determined that the effect of the decision will only be applied as from financial year 2024, except for those lawsuits filed up to the date of the commencement of the judgment, on February 5, 2021.

Modulation of the effects of the decision surprised taxpayers since they were expecting that the STF would determine that the ruling would be valid for suits filed up to the day before the notice of the final decision.

Taxpayers that filed suits before February 5, 2021, will be able to recover ICMS taxes overpaid in the last five years, as from the date their suits were filed.

 

Federal Administrative Tax Appeals Council (CARF) alters interpretation regarding taxation of income of companies abroad

Federal legislation establishes that Brazilian taxation of results accrued by foreign subsidiaries, affiliates and branches will occur under the worldwide tax system.

On the other hand, Article 7 of the Tax Treaty to avoid double taxation and prevent tax evasion signed by Brazil, establish that business profits of a foreign enterprise may not be taxed by Brazil.

Nonetheless, the Brazilian Federal Revenue Bureau (RFB) applies worldwide taxation, even in cases where the foreign company is located in a State that has a treaty signed with Brazil, alleging that there is no incompatibility between Brazilian law and such agreements/treaties.

Given this impasse, the Supreme Federal Administrative Tax Appeals Council (CSRF – the highest court in the administrative sphere) concluded that domestic law is contrary to the Treaties, and decided that the provisions of the international agreements should prevail, thus preventing taxation by Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL).

The decision in question resulted from a tie among the council members and only occurred due to the so-called “pro-taxpayer tie-breaking vote” pursuant to Article 19-E of Law 10.522/2002, which establishes that, in case of a tie, the decision has to be resolved in the taxpayer’s favor.

Nevertheless, it is important to point out that the constitutionality of the “tie-breaking vote” is under discussion by the STF, through Direct Appeals for Unconstitutionality, and if the”pro-taxpayer tie-breaking vote” is extinguished, it is possible that there will be a new alteration in the interpretation reached by administrative councils/courts.

 

CARF – No Individual Income Tax (IRPF) on gains resulting from stock option plans

In analyzing a debate involving the taxation of gains accrued through stock option plans, the Federal Administrative Tax Appeals Council (CARF) decided, in a pro-taxpayer tie-breaking vote, that such agreements were mercantile in nature, rather than some form of remuneration.

As far as the tax authorities are concerned, gains obtained under stock option plans should be interpreted as yields resulting from work.  In the concrete case judged, the taxpayer was assessed for omission of earnings in his/her income tax return.

In his/her defense, the taxpayer alleged that the stock option plan was not linked to performance and the productivity targets of the professionals involved, for which reason it could not be considered remuneration.

After conducting a meticulous analysis of the stock option plan agreement, the CARF decided that it was not to be classified remuneration, as they believed that the key elements of a mercantile agreement were present (voluntary, onerous, and risk-taking nature).

In this sense, the only taxation that would apply would be the imposition of Income Tax over any capital gain, when the shares acquired are sold.

 

CARF – Revenues derived from licensing or assignment of use rights for software developed abroad are subject to the non-cumulative PIS and COFINS contributions

By majority vote, the CARF decided that agreements for licensing or assigning use rights for computer software programs developed overseas should be considered as importation.  Thus, they would be subject to the non-cumulative system for payment of the federal Social Contributions known here as the PIS and COFINS.

Under applicable Brazilian legislation (Law 10.833/04, Article 10, XXV), there is a rule that data processing companies which accrue revenues from the licensing or assignment of use rights for software are subject to the cumulative PIS/Cofins.  However, paragraph 2 of such article contains a specific norm hindering such rule in the case of imported software.

For the council members, the manner of importing the software is not relevant for purposes of applying the legal provisions, and the licensing or assignment of the right to use imported software suffices for application of the non-cumulative system for such contributions.

 

RFB Clarifies Levying of WIT on Capital Gains Accrued in Brazil by Portuguese Company

Brazil’s Federal Revenue Bureau (RFB) has published a Resolution of Inquiry providing that the IRRF (withholding income tax) is to be levied at the rate of 15% on capital gains accrued in Brazil by a Portuguese Holding Company resulting from sale of the latter’s equity interest in a Brazilian company.

Item 6 of the Brazil-Portugal Protocol of Tax Treaty provides the Most Favored Nation Principle, so, given the subsequent signing of the Tax Treaty between Brazil and Israel, which sets a maximum capital gains tax of 15%, such determination should be applied to the tax relationship involving Brazil and Portugal.

Accordingly, for a company resident in Portugal that accrues a capital gain on sale of its equity interest in a Brazilian company, the gain will be taxed at the rate of 15%, rather than according to the progressive table, where rates vary from 15% to 22.5%.

 

Federal Government Imposes Restrictions on Use of Worker Food Program (PAT) Tax Benefit

A Recent Federal Government Decree, entitled “Infra-legal Labor Regulatory Framework”, among other alterations of labor norms, introduced new rules to limit the tax deductibility of expenses incurred by Brazilian companies on covering their worker food costs.

The limitations are as follows: (i) the deduction will be applicable only in relation to the amounts disbursed on workers who receive up to 5 (five) minimum monthly salaries, encompassing all workers of a beneficiary company that provides its own meals or subcontracts entities for food supply; and (ii) the deduction is only to encompass that portion of the benefit which corresponds to the amount of no more than 1 (one) minimum monthly salary per employee.

The issue has been questioned in court by corporate taxpayers, in that the limitations introduced by the Decree are not covered by a law, which is contrary to Brazilian taxation rules.