BRAZILIAN TAX REVIEW – JULY/AUGUST 2018 11 de September de 2018

Brazil-Argentina Amendment Protocol to Double Taxation Convention

On August 28, Decree 9,482 was published in Brazil’s Federal Gazette, enacting the Brazil-Argentina Amendment Protocol to Double Taxation Convention, which is now in force in Brazil.

This Protocol introduces several modifications to the Brazil-Argentina DTC related to: (i) measures to prevent BEPS; (ii) incorporation of changes in the OECD and United Nations model conventions; and (iii) amendments that reflect the countries’ specific tax treaty policies.

Rota 2030: Brazil’s New Automotive Tax Benefit

On July 6, President Michel Temer signed a provisional measure that establishes Rota 2030, an automotive industry policy that replaces the previous one, which was known as Inovar Auto.

Rota 2030 establishes a discount on corporate income tax for automakers and auto parts suppliers, as well as the concession of ex-tariff to auto parts to reduce taxation on import transactions to zero, among other measures. These benefits will last five years.

This provisional measure is now being analyzed by the Brazilian Congress. If it is approved, the benefits will become effective on January 1, 2019.

Brazilian Government Reduces Reintegra tax benefits

On May 30, Decree 9,393 was published in Brazil’s Federal Gazette, reducing the rate for calculating Reintegra credits from 2% to 0.1%.

The Reintegra program aims to reduce the tax burden on goods exported by Brazilian manufacturers by granting PIS and Cofins tax credits. This measure therefore impacts the benefit exoneration of the export transaction.

The Decree is effective immediately, but the Brazilian Federal Constitution establishes several principles that protect individuals from government acts, such as retroactive taxes, and provides legal security. Therefore, the reduction should have become enforceable only 90 days from the date it was enacted.

Brazilian General Data Protection Law

On August 15, the Brazilian General Data Protection Law (“LGPD”) was published. It establishes a comprehensive data protection system in Brazil and imposes detailed rules for the collection, use, processing and storage of personal data, both digital and physical.

The LGPD was signed by President Michel Temer with some vetoes and will go into effect 18 months after its publication (February 2020).

Brazilian Government Attempts Again to Change the Taxation on Closed-End Funds and Private Equity Funds

In 2017, the Brazilian Government published Provisional Measure 806/2017, introducing significant changes to the tax treatment of Closed-End Funds (“Fundos de Investimento Fechados”) and Private Equity Funds (“FIP”). The main change was automatic investor withholding income taxation on a semi-annual basis, regardless the redemption or amortization of their fund shares.

However, the Brazilian Congress did not convert the Provisional Measure into law before the regulatory deadline. Therefore, in July 2018 the Senate presented Bill 338/2018, attempting again to implement the same changes to the tax treatment of those funds. The Bill is pending approval from the Brazilian Congress and subsequent Presidential ratification.

Brazilian Government Prohibits Taxpayers from Offsetting Any Tax Credit Against Corporate Income Tax Advance Payments

Law 13,670/2018, amongst other important provisions, forbids the offset of any tax credit against the IRPJ and CSLL tax monthly advanced payments, calculated by the annual actual profit method.

Considering the serious impact this will certainly have on a great many taxpayers, and given its clear violation of constitutional and other legal provisions, this new rule has been challenged in court, with favorable orders being granted so far. There have also been proposals for its revocation by some members of the Brazilian Congress.

Partial Restoration of Payroll Tax Affects Brazilian Companies

Since 2011, 56 industries have had the option of replacing the 20% payroll tax by a 1% to 4.5% tax on gross revenues (“CPRB”).

In the context of the economic crisis and aiming to increase its tax revenue, the Government restored the payroll tax for 39 of those industries (Law 13,670), generating widespread opposition from the affected companies and large-scale lawsuits regarding this matter.

Commissions Paid by Brazilian Exporters to Their Foreign Agents are not Subject to PIS/COFINS-Import tax

The Federal Revenue Office recently issued Private Letter Ruling 76/2018, stating that the commissions paid by Brazilian exporters to their foreign agents are not subject to PIS/COFINS-Import tax.

This is a change to the Federal Revenue Office’s interpretation. Previously, tax authorities had issued private letter rulings stating that services provided by foreign agents generate results in Brazil, triggering the PIS/COFINS-Import tax. Under the new interpretation, the result of the service (export of the goods) is deemed to be accomplished abroad, so the PIS/COFINS-Import tax is not due.

Taxpayers are Entitled to Refund of PIS/COFINS-Import Tax Non-Cumulative Credits Related to Exports

As provided under Brazilian law, taxpayers are entitled to maintain the PIS/COFINS tax non-cumulative credits related to exports (which are exempt from these taxes) and request a refund, which can be converted into an offset against any other federal tax debts.

Despite this, the Federal Revenue Office claims that this right applies only to credits derived from purchases on the domestic market and, therefore, has denied the refunds (and offsets) of PIS/COFINS-Import tax credits linked to subsequent exports.

This controversy may have reached a conclusion in the context of Private Letter Ruling 70/2018. This ruling recognizes the taxpayers’ eligibility for a refund (and offset against other federal taxes) of the PIS/COFINS-Import tax non-cumulative credits linked to exports.