Global Tax Alert (News from Americas Tax Center) | 18 November 2013
Brazil revokes Transitional Tax Regime and introduces significant changes to tax system
On 12 November 2013, Brazil's Federal Government published Provisional Measure No. 627 (PM 627), containing a long expected set of rules that not only revoked the Transitional Tax Regime (TTR) but also added new rules aimed at permanently aligning the Brazilian tax system to the accounting model set forth by Law 11,638/2007.
Specifically, PM 627 established new tax rules on the treatment of foreign profits accrued abroad by legal entities and individuals resident or domiciled in Brazil, as an attempt to reduce litigation on the matter and add increased legal security for Brazilian investors doing business abroad.
The new rules are subject to election for 2014 but are mandatory for 2015. One important point to consider when deciding whether or not to make the election for 2014 is that PM 627 grandfathered dividends and interest on net equity payments made based on accounting books1 only for companies that formally elect to apply PM 627 effects as of 1 January 2014. In other words, companies that choose to maintain the TTR until 2015 will be subject to taxation, plus penalty and interest on distributions made in excess of the tax books since 2008.
To the extent that said changes are broad and deeply affect relevant topics in the Brazilian tax environment, more detailed Tax Alerts will be issued in the near future in order to cover all topics with greater accuracy. The main changes brought by PM 627 are summarized below.
As long expected, by revoking the TTR, the Federal Government issued the new rules contained in PM 627 in order to discipline the adjustments arising from the adoption of new accounting methods and criteria due to the convergence of Brazilian GAAP to IFRS. One of these relevant rules deals with the effects treatment caused by the considerable change in the leasing booking methodology, establishing that leased goods should be comprised in the permanent asset of the legal entity starting from the agreement formalization.
For investments evaluation through the equity method of accounting, PM 627 also established segregated registries for the figures arising from the invested company net assets fair market valuation and its difference related to the expected future profitability (goodwill).
Furthermore, it also brought a new measurement and treatment of the goodwill based on expected future profitability, establishing timeline and conditions for its tax amortization in the hypothesis of the legal entity bearing the investment being absorbed by other, due to incorporation, merger or spin-off. It also clarified that the goodwill deductibility shall be admitted only in cases when occurred between independent entities.
Thus, PM 627 also issued new rules on the tax treatment related to advantageous purchases in the hypothesis of incorporation, merger or spin-off of the ownership interest that generated said advantageous purchase.
PM 627 set forth that the legal entity domiciled in Brazil, in some specific cases, can elect to pay the Corporate Income Tax (CIT) and Social Contribution on Net Profit (CSLL) over the profits earned abroad by its controlled entities proportionally when the results are distributed. The payment shall be made until the fifth year following the accrual period. In the first year, it shall be considered as distributed at least 25% of the accrued profits.
It has also given permission to consolidate (for an experimental period of four years) profits and losses provided that the invested legal entity is located in a country that has an in force tax information exchange agreement with Brazil, and it is not a tax haven or low tax jurisdiction.
Moreover, the new rules allowed losses offsetting within a five years period carryforward in a same legal entity domiciled abroad, as well as the compensation of CIT/CSLL due in Brazil with taxes effectively paid abroad, including withholding tax paid on dividends remittances.
It also has established a differentiation between active and passive income for tax consolidation purposes, and had promoted changes in the moment at which controlling individuals in Brazil shall have its foreign profits taxed.
PM 627 also made changes to the recently issued Law 12,865.
a) Pis/Cofins debts of financial institutions and insurance companies:
For upfront payments, it was granted 100% reduction for late payment fines, 80% for isolated fines, 45% default interest and 100% over legal charges;
For upfront payment, it shall be granted full exemption of fines, default interest and legal charges.
To enjoy the above benefits, it was necessary to renounce all lawsuits related to Pis/Cofins
To enjoy the above benefits, it is necessary to renounce only the lawsuits related to Pis/Cofins paid debts or subject to installments.
Law has not established tax treatment on gains arising from fines, default interest and legal charges exemption/reduction.
Gains arising from fines, default interest and legal charges exemption shall not be computed in the CIT, CSLL and Pis/Cofins taxable basis.
b) CIT and CSLL installment related to foreign earned profits
Allowed to pay (fully or partially) debts due up to December 31, 2012
Allows to pay (upfront or parcel) debts whose triggering events occurred up to December 31, 2012
Allowed possibility to divide debts into 120 installments, reducing fines by 80%, default interest by 40% and legal charges by 100%
Allows debts to be divided up to 180 installments, reducing fines by 80%, default interest by 50% and legal charges by 100%
Allowed possibility to use CIT and CSLL tax losses to liquidate fines and default interest amounts
Allows possibility to use CIT and CSLL tax losses to liquidate fines and default interest amounts as well as up to 30% of due taxes (main value)
Allowed possibility to use CIT and CSLL tax losses generated by controlled entities up to December 31, 2011
Allows possibility to use CIT and CSLL tax losses generated by controlling and controlled entities up to December 31, 2012
Topic not previously covered
Allows possibility to use CIT and CSLL tax losses between controlling and controlled that share common direct bond or through other controlled entities
No rule on treatment of gains related to fines, default interest and legal charges gain.
Gains arising from fines, default interest and legal charges shall not be computed in the CIT, CSLL and Pis/Cofins taxable basis.
1. In contrast to the objective of NI 1,397 – see EY Global Tax Alert, Brazilian Normative Instruction 1,397 may affect taxes due to IFRS conversion, dated 30 September 2013.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Serviços Tributários S.S., Business Tax Services, São Paulo
- • Eliezer Serafini
+55 11 2573 3704
- • Eneas Moreira
+55 11 2573 3117
Ernst & Young Serviços Tributários S.S., Global Compliance and Reporting, São Paulo
- • Ricardo Gomes
+55 11 2573 3348
- • Claudio Yano
+55 11 2573 3310
Ernst & Young Serviços Tributários S.S., International Tax Services, São Paulo
- • Luiz Sergio F. Vieira
+55 11 2573 3571
Ernst & Young Serviços Tributários S.S., International Tax Services, Rio de Janeiro
- • Sergio Andre
+55 21 3263 7236
Ernst & Young LLP, Brazilian Tax Desk, New York
- • Ingrid Berner
+1 212 773 2539
Ernst & Young LLP (United Kingdom), Brazilian Tax Desk, London
- • Felipe Fortes
+44 755 228 2520
EYG no. CM3968