Tag: TAX

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.

 

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.

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 TP.Brazil@oecd.org, with copy to Cotin.df.cosit@rfb.gov.br.

 

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.

Brazilian Government Grants New Tax Breaks to Mitigate the COVID-19 Crisis

Due to the continued state of public emergency in Brazil, the Federal Government has granted several tax breaks to mitigate the economic effects of the COVID-19 pandemic, including:

• Postponement of Social contribution tax (“PIS, Cofins, INSS, CPRB and Funrural”) payments for May 2020, normally due in June 2020, to November 2020.

 

• Import Duty (“II”) exemption for some goods, such as medicines, medical gloves and surgical masks, among others, until September 2020.

 

• Social contribution tax (“PIS and Cofins”) exemption for medicines with HS Codes 3003.90.99 and 3004.90.99 until October 2020.

 

• Federal-VAT (“IPI”) exemption for clinical thermometers with HS Code 9025.19.90 until October 2020.

 

• Tax on Financial Transactions (“IOF-Crédito”) exemption for loans (i) made through the Funding Authority for Studies and Projects (FINEP), or by its financial agents with FINEP funds; (ii) to finance logistics infrastructure projects for roads and railroads through a federal government concession; and (iii) contracted for by the Electric Energy Trading Chamber (“CCEE”), intended to cover, in whole or in part, deficits and the anticipation of revenue, incurred by the concessionaires and permit holders for public utility electricity distribution. This exemption is applicable to taxable events occurring up to December 31, 2020.

 

• Extraordinary installment plan for tax debits, in order to mitigate the economic effects of the COVID-19 pandemic. This special plan gives taxpayers the right to pay federal tax debts with benefits, such as reduced entry, discounts and special terms

 

Supreme Court Held that ISS Tax Applies to Franchising Agreements and Betting Services

The Federal Supreme Court in Brazil (“STF”) recently issued two important decisions dealing with municipal Services Tax (ISS) taxable events.

The first one deals with the incidence of this tax on franchising agreements, which, in Brazil, usually include the right to distribute products and services, technical assistance, raw material acquisition, employees training and assignment of the brand’s use, among other obligations. In this case, the court held that franchising agreements are hybrid in nature and are subject to the ISS tax.

Another important decision by the STF refers to levying the ISS tax on betting activities.  According to the Supreme Court, the incidence of the ISS tax on distribution services is constitutional and covers the sale of tickets and other lottery products, bingo cards, bets or coupons, sweepstakes and prizes, since gaming activity is classified as a service for ISS purposes.

Based on the decisions above, the Brazilian Supreme Court has been adopting a broader definition of service for tax purposes, which could affect other, similar cases in the future.

 

The Supreme Court Begins Analyzing the IPI Tax on the Resale of Imported Products

In a tax dispute worth billions, the Supreme Court began analyzing the incidence of the Federal-VAT (“IPI”) on the resale of imported products in June 2020.

So far, Justice Marco Aurélio has held that the tax should not be levied on the resale of imported products. However, the hearing was suspended, due to a request for analysis by Justice Alexandre de Moraes, and there is so far no determination of when the hearing will be resumed.

 

STJ Applies GATT Provisions to Embed Service’s Costs in the Import Duty Calculation Basis

The Superior Court of Justice held that services related to the handling of goods in ports (such as loading and unloading) must be included in the Import Duty (“II”) calculation basis.

According to the Court, the General Agreement on Tariffs and Trade (“GATT”) provides for the inclusion of expenses related to loading, unloading and handling, and the associated transportation of imported goods to the port or place of import, in the customs value.

The Court’s holding means that the services are included in the calculation of the customs value and are part of the Import Duty calculation basis since these activities are done inside the port or at a customs border crossing.

 

Draft Bills Propose Digital Services Taxes for Big Tech Companies

In May 2020, a draft bill was presented in Congress to create a Contribution for Intervention in the Economic Domain applicable to big tech companies (so-called “Cide-Digital”). The new tax would be similar to the digital services taxes (“DST”) introduced by other countries, especially in Europe.

Cide-Digital is proposed to be levied progressively, at a 1% rate on amounts up to BRL 150 million; 3% on amounts exceeding BRL 150 million and under BRL 300 million; and 5% on amounts exceeding BRL 300 million.

Additionally, the Senate proposed another bill to establish a differentiated system for the Social Contribution to Social Security (“Cofins”) tax levied on the companies that earn high revenues by means of digital platforms.

Both bills still must be discussed and approved by Congress, in different voting rounds, and be sanctioned by the president.

 

Extinction of the “Casting Vote” Grants Taxpayers the Right of a New Trial in the Federal Administrative Tax Tribunal

A recent law eliminated the so-called “casting vote” in the Federal Administrative Tax Tribunal, which was a tiebreaking vote by a representative of the tax authorities, in case of a tie vote between tax authorities and taxpayer’s representatives.

Because of this, the Federal Court of Rio de Janeiro granted a Brazilian company the right to a new trial at the Federal Administrative Tax Tribunal level after it lost a dispute with the IRS due to the so-called “casting vote”.

Brazilian taxpayers expect more decisions like this to be issued by the courts and many tax assessments could be reviewed if the courts apply the new law retroactively.

 

STF Allows the Issuance of Court Orders to Settle Undisputed Parts of a Lawsuit Before the Final Decision

In the specific case of a citizen who legally claimed compensation from the government due to a traffic accident, the Supreme Court held that it is constitutional to issue court orders for the payment of undisputed and autonomous parts of the judicial debt before the final and unappealable decision.

The decision was issued in a judgment of an appeal with general repercussion, meaning that this holding must be adopted in the decisions of all other courts. Additionally, this holding will apply to tax disputes.

 

STJ Defines its Position on Monetary Correction by Selic on PIS and COFINS Tax Refund

The Superior Court of Justice (“STJ”) held that the PIS and COFINS tax refunds must be adjusted by the Selic interest rate, after a 360-day period from the filing of the refund form, if the authorities do not take a position regarding the refund during that period.

This decision was issued in a trial under the repetitive appeal system, meaning that this holding must be followed in other court decisions.

 

Supreme Court Ends a Long Dispute Regarding which State Should Charge the ICMS Due on Imports

The Supreme Court held that the ICMS tax on imports should be paid to the state where the legal recipient is established, even if customs clearance occurred in a different state.

The decision analyzed three of the most common import structures: (i) direct import – in which the legal recipient is also the importer; (ii) import on behalf of third parties – the importer (trading company) is responsible for importing the goods on behalf of the legal recipient; and (iii) import on demand – the importer (trading company) buys the imported goods with its own funds, and, by doing so, acts as legal recipient to later sell the goods to a predetermined buyer.

In situations (i) and (ii), the Import-ICMS is owed to the states where the final recipient is established. In situation (iii), however, the tax is due to the state where the importer is established.

Brazilian Government Gives Several Tax Breaks to Mitigate the Covid-19 Crisis 

Due to the health crisis arising from the COVID-19 pandemic, the Federal Government decreed a state of public calamity in Brazil and most governors and mayors ordered “non-essential activities” to be shut down.

In an effort to mitigate the economic effects of these measures, the Federal Government given several tax breaks:

• Decree 10,285/2020: exempts medical and hospital products from the Federal-VAT (“IPI”) until October of 2020. 

• Decree 10,302/2020: exempts laboratory and pharmacy articles, gloves and clinical thermometers products from the Federal-VAT (“IPI”) until September of 2020. 

• CAMEX Normative Ruling 17/2020: exempts goods such as alcohol, disinfectant, medical gloves and surgery masks, among others, from the Import Duty (“II”) until September of 2020. 

• RFB Normative Ruling 1,927/2020 and CAMEX Normative Ruling 17/2020: simplifies the importation of some goods related to mitigating the health crisis. 

• Decree 10,305/2020: exempts loans taken out between April 3 and July 3, 2020, from the Tax on Financial Transactions (“IOF-Crédito”). 

• Provisional Measure 932/2020: reduces third sector contribution taxes (“S System”) by 50% until July 2020.

• Provisional Measure 927/2020: postpones the FGTS payments related to the months of March, April and May 2020, normally due in April, May and June 2020, respectively, to July 2020.

• Ministry of Economy Normative Ruling 139/2020: postpones the payment of Social Contributions (“PIS, Cofins, INSS, CPRB and FUNRURAL”) related to March and April 2020, normally due in April and May 2020, respectively, to August and October of 2020.

• Normative Ruling RFB 1,930/2020: extends the annual tax return submission deadline to June 30, 2020, instead of April 30, 2020, when it would normally be due.

• Normative Ruling RFB 1,932/2020: extends the deadline to submit the DCTF federal return and the EFD-Contribuições to July 2020, instead of the normal deadline of April, May and June 2020.

All these tax breaks are temporary and are expected to be phased out at the end of the pandemic.

Federal and States Governments Extend the Deadlines to Enforce Overdue Liabilities Certificates

Based on Ministry of Economy Normative Ruling 103/2020, National Treasury Attorney’s Office (“PGFN”) Normative Ruling 7,821/2020 and Regulation 543/2020, the deadlines to enforce federal tax debts included in Overdue Liabilities Certificates are extended for 90 days, from March 18, 2020, onwards.

In addition, from March 21, 2020, São Paulo State authorities cannot protest Overdue Liabilities Certificates for 90 days. Rio de Janeiro State authorities are prevented from protesting these instruments for 60 days, starting on March 24, 2020.

Once the suspension periods have run, the federal and state authorities will be allowed to enforce the Overdue Liabilities Certificates normally if the deadlines are not amended due to the continuation of the crisis.

Lawful Taxpayer Program’s Adhesion Deadline is Postponed 

The Brazilian Government has launched the “Lawful Taxpayer” Program with Provisional Measure 899/2019, providing regulations for taxpayers and tax authorities to negotiate terms for the settlement of outstanding federal tax debts.

The application deadline for this program was originally March 25, 2020, but has now been extended to June 30, 2020. 

Debt Clearance Certificates’ Expiration Dates are Extended

The National Treasury Attorney General’s Office and the IRS have extended the validity of debt clearance certificates related to Federal Taxes for an additional 90 days. This measure applies to debt clearance certificates that were valid on March 24, 2020.

E-Digital Project Moves Forward 

The Federal Government issued Decree 10,278/2020, which regulates the so-called Brazilian Digital Transformation Strategy (E-Digital), launched by the “Economic Freedom Act,” which establishes the right to use, transmit and file any microfilmed or digitalized document with the same standing and legal validity as the physical document.

The decree standardizes the technical and legal requirements for digitizing analog material and submitting private and public documents signed and certified under Brazilian public-key infrastructure standards.