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.