Expanding into Brazil

Transcription

1 Expanding into Brazil Support for your Business kpmg.ie Expanding into Brazil 1

2 Are you looking to expand your business into Brazil? Dynamic Irish businesses are looking to new markets to expand and grow. Inevitably, tax can be an important factor in deciding upon the best operating structure. KPMG s international team both in Ireland and Brazil can help you quickly identify the key decisions you will need to take to ensure that your business expands as smoothly and as profitably as possible. Our Irish tax teams can act as your point of contact and link you to our local Brazilian colleagues to provide the support and advice you may need. We also provide a range of useful information for your business through our portal ( Expanding into New Markets ) with materials dealing with specific Brazilian issues. We look forward to hearing from you 1 Expanding into Brazil

3 Some key considerations Expanding into a new market triggers a range of issues and we can help you manage these to the best advantage of your business. These include: How should I structure my business? How do I decide the tax residence of subsidiaries? Do I need a holding company? How should I finance my business? What is transfer pricing? What employment issues will I face? What taxes do I need to be aware of? What tax incentives are available? What local reporting issues should I be aware of? How should I structure my business in Brazil? Initial marketing and business development If you intend to send people to Brazil to carry out initial marketing research or business development, you will need to consider visa requirements. A business visa will allow you to enter Brazil to attend meetings and visit clients for a maximum of 90 days. If the extent of your activity will be greater than this, you may need a temporary visa or permanent visa both of which are likely to result in a taxable presence in Brazil. Irish employees may be entitled to claim the foreign earnings deduction in computing their employment income subject to Irish income tax by reference to the number of days carrying on their employment duties in Brazil on behalf of their Irish employer. In addition, business travel and related expenses incurred by the employee can be reimbursed tax free in Ireland. Remote servicing and direct sales of goods The provision of goods and services from your home country by using a distribution arrangement may form a starting point while assessing the local market opportunity - but this could result in a taxable presence in Brazil in addition to being taxable in Ireland. Contracts should be carefully drawn up as undefined terms will be determined by the Brazilian civil and commercial legislation, which can impose its own terms where contracts are silent. We can help inform your decision. What is the best way to structure a local presence? In many countries, if you do not have an office or people on the ground that have the authority to enter into binding contracts, there is no local taxable presence (permanent establishment). In Brazil, there is no law or clear guidance on this area which means that a taxable presence in Brazil can be created with limited local activity. As a result, there is a need to address, at an early stage, the appropriate operating structure in Brazil. Representative office Even though a sales representative s role is only to create interest and solicit orders and not to enter into any contracts, there is a risk that the representative could be viewed as an employee or that the relationship will constitute the existence of a taxable business presence in Brazil. There is a risk that any profits arising from Brazilian sales could be attributable to this taxable presence and taxable in both Brazil and Ireland. Credit relief should be available for corporate income taxes paid in Brazil against Irish corporation tax on the profits. As Brazilian tax rates are typically higher than Irish rates, this should mean the effective rate of tax will be the Brazilian tax rate. Branch The creation of a Brazilian branch of a foreign company can be time consuming since it requires prior authorisation from the Brazilian Federal Government in the form of a ministerial decree. The articles of governance of the branch need to be registered prior to set up. Any future changes of the articles of governance of the Brazilian branch also require Federal Government approval. Given the extent of approvals and time involved, investors usually conduct business through Brazilian subsidiaries rather than branches. In the event a branch is created, taxable profits will be subject to tax both in Ireland and Brazil. Acquiring a local company or business It is more common to acquire Brazilian business interests through shares instead of assets because even in the case of an asset purchase, there is a significant risk that the tax liabilities of the previous business will attach to assets acquired. A share acquisition generally results in lower levels of documentation and indirect taxation for the acquirer. One significant advantage of a share sale over an asset sale would be that, if a share sale is structured properly, the amount paid in excess of the net equity of the target may, under current rules, result for the purchaser in the generation of an amortisable premium or a step-up in the tax bases of otherwise depreciable or amortizable assets. From 1 January 2015, tax accounting rules will be required to generally align with IFRS accounting rules in Brazil. This will impact on the method of calculating the amortisable portion of any premium paid on a share sale. Under IFRS rules, the purchase paid must firstly be allocated to the fair value of asset/liabilities and then to intangibles, with the remaining portion being allocated to goodwill which can be amortised for tax purposes. However, the current rules for amortisation of goodwill for tax purposes will continue to apply for acquisitions carried out until 31 December 2014 and mergers carried out until 31 December Expanding into Brazil 2

4 Expanding into New Markets Support for your Business This opportunity is not available if shares in a Brazilian company are purchased directly by a non-resident and is not available to the same extent if assets are purchased. To take advantage of this opportunity, the acquisition of shares would need to be made through a Brazilian acquisition vehicle. The taxation issues arising on the acquisition of a company depend, to some extent, on the residency of the purchaser and the seller. In general terms, capital gains are taxed in Brazil even in the case of a transaction made fully abroad, when the assets (or shares) sold are located in Brazil. A detailed share or business purchase arrangement is usually executed following due diligence. If the company is a publicly held company or in certain sectors such as banking, insurance, energy and telecommunications, there will be additional Brazilian regulatory requirements. Incorporating a new company locally There are two main types of company in Brazil, a Sociedade Limitada which is similar to a private company or Sociedade Anonima (SA) Corporation which is similar to a PLC in Ireland. A Limitada is usually the preferred vehicle for a wholly owned subsidiary as it has more flexible provisions regarding limitations of liability and is easier to administer. An SA has more complex compliance obligations but can be used for public or private companies. Both types of company require at least two quota holders (shareholders), with a few exceptions. Non resident quota holders must grant a power of attorney to a representative in Brazil, who may be a lawyer or another quota holder, to receive service of notices and act on their behalf at the quota holders meetings. No minimum capital requirements are imposed, except for specific situations, such as obtaining a permanent visa for a non-resident to manage the company and applying for import/ export licenses or registrations. It can take up to 30 days to incorporate a company and some operating licences that may be required can take six months or more to obtain. Most companies engaged in business activities are classed as a Sociedade Empresarial and must be registered with the Board of Trade (Junta Comercial). In addition, such entities must be registered with the federal tax authorities, state tax authorities, municipal tax authorities and the social security system. How do I decide the tax residence of subsidiaries? The profits of a foreign subsidiary are taxable in Ireland if the subsidiary is centrally managed and controlled in Ireland. This can give rise to tax on the subsidiary s profits both in Ireland and in Brazil if the central management of the subsidiary is carried out in Ireland. Alternatively, if the foreign subsidiary is more autonomous and is managed and controlled in the local country, it may not be tax resident in Ireland. It will be necessary to consider the extent to which the parent oversees the activities of the Brazilian subsidiary, usually through the appointment of Irish based directors to the board of management of the company, and the actual exercise of the management and control in Brazil. Any employee with even a temporary visa would be considered a tax resident in Brazil. This could give rise to personal income tax liabilities for individual directors. Directors do not need to be employees. Do I need a holding company? If an Irish parent holds directly an investment in a Brazilian company, the Irish company should be entitled to offset Brazilian corporate income taxes on profits from which dividends are paid against Irish corporation tax on dividends. Brazil does not yet have a double tax treaty with Ireland. As a Brazilian company would not be resident in a tax treaty country, a gain on disposal of the Brazilian company would not qualify for the exemption from corporation tax on chargeable gains and is taxable at 33% in Ireland. A capital gain on sale of shares can also be taxed in Brazil at a rate of 15% (or 25% where the person making the disposal is resident in a country which Brazil considers a tax haven) without credit relief in Ireland for the double tax. Ireland is not considered a tax haven from a Brazilian tax perspective. If an Irish company provides services such as management services, licences or finance, it could bear Brazilian withholding tax on payments received without the benefit of reduced rates which could apply to the providers of services who are resident in countries with tax treaties with Brazil. We can advise on the tax and legal compliance requirements that can arise. How should I finance my business in Brazil? Whilst legally there are no rigid exchange controls, all foreign investments (equity or debt) must be registered with Brazilian Central Bank (BACEN) and must be conducted through an authorised agent. In practice, BACEN exercises close control over financial transactions which can result in barriers to the free movement of capital. It is important to ensure that capital flows are properly registered to enable the future repatriation of capital and remittance of dividends, interest on equity and gains. A Brazilian entity may be equity or debt financed. Brazil has the concept of Interest on Net Equity (INE) which is an expense that is tax deductible for companies taxable under the actual profit system. This has the potential to create a tax efficient funding structure as there may be a tax deduction in Brazil for the payment but the income may not be taxable in the hands of the parent. The INE payment triggers withholding tax generally at a rate of 15% but it can be up to 25% in the case of payments to countries which Brazil considers a tax haven. The Irish tax analysis of any such income receipt needs to be carefully considered. 3 Expanding into Brazil

5 Debt may be sourced locally or abroad from third parties or related entities. Locally high interest rates and reduced credit availability means that many groups provide intra group finance to Brazilian subsidiaries. This can give rise to foreign currency considerations in relation to Brazilian currency and foreign currency businesses. A withholding tax of 15% would apply on interest paid to Irish companies. If the group has a treasury or finance company located in a country where Brazil has a double tax treaty in place this entity may be entitled to lend to a Brazilian company with interest subject to reduced withholding tax. Interest on loans with related parties is tax deductible in Brazil provided the loan is necessary for the company s activities and the interest rate is lower than LIBOR plus a spread, assuming the loan is in Euros. From 1 January 2013, the spread margin to be added to the interest rate on a loan from a related party is 3.5% for the purposes of determining deductibility of interest expense. A company which is thinly capitalised will lose deductibility of some interest, which is only an issue for companies taxable under the actual profit system. Generally 2:1 is the acceptable level of debt:equity unless the lender is located in a tax haven or low tax jurisdiction (as defined under Brazilian law). Financial Operations Tax (IOF) applies at varying rates to most financing transactions. The Irish parent may need to consider whether it can obtain a tax deduction for borrowing to raise the money to invest in its Brazilian subsidiary, whether through equity or loans. Although complex provisions apply to meet the conditions for tax relief in Ireland, this should be possible to achieve. We can help you decide what funding structure fits your business. What is Transfer Pricing? Transfer pricing is concerned with the pricing of transactions between connected companies and is a key concern for foreign businesses engaged in activities in Brazil. Transfer pricing principles generally support the attributions of profits to the country where entrepreneurial risk and value added functions are located. Ireland follows OECD guidelines in respect of transfer pricing requirements but local rules in Brazil do not comply with OECD guidelines. They generally apply a fixed margin for import and export operations, which do not vary depending on the industry or service. This could lead to difficulties where the provider of the service has to comply with OECD transfer pricing requirements in setting an arm s length price as it would in Ireland. KPMG s network of teams providing advice on Transfer Pricing Services can assist you in managing the issues and complexities that can arise on the documentation and pricing requirements for group entities that deal with the Brazilian enterprise. What employment issues will my business face in Brazil? Brazilian employment law and conditions has unique features such as the 13th month payroll entitlement on which we can advise. There are opportunities to reward staff tax efficiently through meal payments, provision of transport, pension and insurance premiums. Two thirds of the employees of all companies must be Brazilian citizens, both in terms of numbers and overall payroll. Exceptions can be made for certain skills if not available locally. Mobile assignees You need to consider the legal and tax issues which may affect international employees such as whether moving will affect their entitlements and whether existing employment contracts deal with issues faced by mobile employees. This can include developing policies on assignments. All foreigners coming to work in Brazil must obtain a valid visa. Holding a visa can result in Brazilian tax obligations for employer and employee. A split payroll, where a proportion of salary relative to an executive s work locally is paid locally with the balance paid in the home country, is often used for international assignees. Brazilian legislation does not expressly provide guidance on the treatment to be applied to cases in which a split payroll structure is put in place; the Brazilian authorities may argue that Brazilian tax is due on the total remuneration received. KPMG s network of teams providing advice on International Expatriate Services can assist you in managing the issues and complexities that can arise on the deployment of mobile employees as well has helping you identify in a timely manner Brazilian employee related compliance obligations. Expanding into Brazil 4

6 Expanding into New Markets Support for your Business What taxes do I need to be aware of? The range of potential taxes in Brazil is summarised in the diagram below. Tax Types Employer Employer Social Contribution INSS 25 / 29% Employer Payroll Tax FGTS 8% Employee Social Contribution INSS 8 / 11% Indirect State VAT, ICMS 4-19% Municipal Services Tax, ISS 2-5% Federal Excise Tax, IPI (Various) Import Tax (Various) Withholding General Withholding Tax 15 / 25% Withholding Tax on Services 15 / 25% Contribution for intervention in the economy CIDE 10% Interest on Net Equity 15/25% Corporate Corporate Income Tax 25% Social Contribution Tax on Profits, CSLL 9% PIS & COFINS 3.65 / 9.25% Other Municipal Transfer Tax 2 / 6% Gift/Inheritance Tax, up to 8% Annual Real Estate Taxes (Various) Capital Gains for non residents 15% Taxation on Financial Operations (IOF) Varies Employment taxes There are three payroll taxes. Each month the employer must contribute 8% of total salary to the Retirement Fund (FGTS). These contributions do not apply to payments made to independent professionals and are not mandatory for statutory directors. Employers Social Security Contributions (INSS) must be paid at a rate of 20% of gross salaries. In some business sectors, the 20% INSS contribution has been replaced by a contribution levied on gross revenue, limited for a certain period of time. The INSS is further increased by a working accident insurance and other contributions to governmental institutions such as National Service, etc. This brings the total combination employer contributions to 25-29%. Employee contributions to Social Security range between 8-11% and must be operated by the employer. Income Tax on Brazilian source payments made to employees for services must be withheld on a monthly basis at the following rates 0, 7.5, 15, 22.5 and 27.5%. Withholding taxes Withholding tax (IRRF) applies to certain domestic transactions such as fee payments to service providers and financial income from investments. Withholding tax is also due on payment of Brazilian source income to most non-residents e.g. payment of Brazilian source royalties, services fees, capital gains, interest and others. The rate depends on the nature of the payment, the residence of the beneficiary and the existence of tax treaties. Most rates range from 15-25%. As there is no Irish double tax treaty with Brazil, an Irish provider of patents or finance, etc. would bear withholding tax at the highest local rates on royalties, interest, etc. A service provider which is located in a jurisdiction which has a tax treaty with Brazil may be entitled to lower withholding tax rates. In addition to general withholding tax, a Contribution for intervention in the Economy (CIDE) of 10% is levied on payments to non-residents including certain royalties, technical and administrative services, technical assistance and on the import and sale of oil and gas related products. CIDE is imposed on the payer of the fees and may not be reduced by tax treaties and may not generate a tax credit abroad. Source of Income/Gains Table subtitle Withholding Taxes Domestic WHT Rate Irish Co Investors Treaty Rate Royalties 15% 15% 10/15% Interest 15/25% 15% 12.5/15% Dividends 0% 0% 0% Interest on net equity 15/25% 15% 12.5/15% CIDE 10% 10% N/A Services 15/25% 15/25% 0/10/15% Capital gains on share sales 0*/15/25% 0*/15% 0/15% * Capital gains earned by non-residents on disposal of an investment in the financial or capital markets in Brazil may be eligible for a 0% rate of withholding tax in Brazil. Direct taxes There are two corporate income taxes in Brazil, and their collective rate is 34%. Corporate income tax (IRPJ) applies at a basic rate of 15%, plus a surtax of 10% on the annual taxable income that exceeds R$240,000. The second tax is a social contribution tax on profits (CSLL) of 9% and is not tax deductible for IRPJ. There are two methods used to calculate corporate income taxes. The actual profit system corresponds to taxing the company s net book profit arrived at under Brazilian GAAP, adjusted by some addbacks and deductions. This method would be preferred if there was significant costs and expenses (e.g. material debt financing) or the margins were significantly lower than the predetermined profits of the presumed profit system. 5 Expanding into Brazil

7 The presumed profit system is based on a presumed net profit which is calculated by applying a predetermined rate to turnover. This method of calculation can be more beneficial in certain circumstances but is not available in all instances. From 1 January 2015, a new set of rules will come into effect in Brazil to align tax accounting rules with IFRS accounting rules. This will mean that taxable income of a company will generally be based on the company s accounting profits calculated under IFRS rules, subject to a number of adjustments which will need to be made. Whilst the actual profit system and presumed profit system will continue to apply for calculating corporate income taxes, the adjustments required under IFRS will likely impact on the calculation of a company s taxable profits for the purposes of corporate income taxes in Brazil. PIS and COFINS are federal taxes charged on revenues, on a monthly basis, under two regimes, cumulative and non cumulative. Under the cumulative regime, the combined rate is 3.65% and no credit mechanism is applicable. Companies under the presumed profit system should calculate their PIS and COFINS under this cumulative mechanism. Some companies under the actual profit system could apply the non cumulative regime, under certain circumstances, which subjects taxpayers to PIS at a rate of 1.65% and COFINS at 7.6% but tax credits for PIS and COFINS levied on certain inputs are available. These tax credits are also available to offset future PIS and COFINS or other federal taxes in certain circumstances. Indirect taxes ICMS is a type of value added tax (VAT) levied by Brazilian state authorities on certain transactions involving goods, inter-municipal and interstate transportation services, communications services, as well as on imports of products. Rates vary from 4% to 19%. In general, ICMS taxpayers are entitled to a tax credit for the amount of the tax paid subject to certain conditions.if goods originate in Ireland it may also be necessary to consider Irish VAT issues in relation to the same supply. IPI is a federal tax levied on the import and manufacturing of domestic goods for sale. In many aspects it operates like a VAT where ultimately the tax is borne by the end user. As a rule, IPI on purchases can be offset against IPI on the subsequent sales. The rates vary depending on the product classification under the IPI tax rates table (TIPI). ISS is a municipal services tax levied on revenues derived from the provision of services. Although it is a municipal tax, the specific services subject to ISS are listed in federal law (Complementary Law 116/03). The tax base for ISS is the price or value of the service. The rates vary from 2% to 5%, in accordance with the municipality where the service provider is located, where the service is provided and the type of the service. Import Tax (II) applies to the cost, insurance and freight (CIF) value of imported products at variable rates and it is a final tax. There are no credits granted. Other custom fees include processing fees for import licences, freight duties, when necessary, as well as miscellaneous port charges. The obligation to register and comply with local sales taxes and customs requirements is often one of the first local country taxes encountered when conducting business with local customers. Severe penalties can apply in case of failure to comply. KPMG s team of indirect tax specialists can assist you in identifying the range of operational requirements that will need to be addressed to comply with Brazilian VAT and customs tax operation, reporting and invoicing requirements. Tax on Financial Operations (IOF) IOF is a federal tax levied on credit, foreign exchange, insurance and securities transactions executed through financial institutions and includes inter-company loans and gold transactions. The rates vary depending on the nature of the transaction and the maturity term. Since IOF rates have been constantly changing, we recommend careful and updated analysis of the applicable rates prior to implementing any transactions within the scope of these taxes. Other taxes There are a range of other taxes that need to be considered in Brazil (see table on page 5). It is important to seek advice regarding the taxes that apply in Brazil as it is not just the rate of tax which may vary but the tax base on which the tax is levied. It can even vary from state to state within Brazil. Are there tax incentives available? A wide range of government incentives are available for start up projects in Brazil. In general, the international investor has equal access to these incentives when compared to local investors. The use of government incentives is a significant feature of the Brazilian business environment. Usually, incentives take the form of subsidised loan financing and tax exemptions or reductions, rather than cash grants. The incentives can be federal, state, local, industry-related, etc. Expanding into Brazil 6

8 What local reporting issues should I be aware of? Listed companies and large companies must have an annual audit by law. Whilst other companies may not require an audit by law, banks and other financiers frequently require audited financial statements from borrowers. They are in principle not required for tax purposes. There are various tax registration and filing obligations for business in Brazil, including payroll, import tax and corporate income tax registration and filing requirements. Restrictions apply to foreign investors in certain industries and assets in Brazil. How can KPMG help? Brazil has its own complexities in relation to business operations, regulation and taxation and we can help identify the issues for you once you have identified where you wish to expand. We are committed to helping ambitious Irish businesses expand abroad. Our approach is focussed on helping you cut through the potential complexity of expanding into new markets so you can achieve your Brazilian business objectives as quickly and as simply as possible. Your local point of contact in KPMG Ireland can link you to the Brazilian teams that can help your business exceed in the local marketplace. To find out more on how we can help your business succeed please do get in touch. We look forward to hearing from you. Contact Johnny Hanna Partner, CIM Tax KPMG in Ireland T: E: johnny.hanna@kpmg.ie Marienne Coutinho Partner KPMG in Brazil T: E mmcoutinho@kpmg.com.br Niall Campbell Partner, VAT KPMG in Ireland T: E: niall.campbell@kpmg.ie kpmg.ie 2014 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Ireland. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name, logo and cutting through complexity are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. If you ve received this publication directly from KPMG, it is because we hold your name and company details for the purpose of keeping you informed on a range of business issues and the services we provide. If you would like us to delete this information from our records and would prefer not to receive any further updates from us please contact us at (01) or siobhan.mcdermott@kpmg.ie. Produced by: KPMG s Creative Services. Publication Date: August (101990)