Dealing with tax complexities in Brazil

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1 Dealing with tax complexities in Brazil By: Dudley Juana Anderson Dutra

2 AGENDA Tax complexities in Brazil 1. Overview of main taxes in Brazil IRPJ and CSLL Gross Revenue Taxes: PIS and COFINS Indirect taxes: IPI ICMS ISS Other taxes and comments Withholding tax 2. Structuring investments in Brazil via the Netherlands 2

3 Corporate income tax: IRPJ and CSLL (1) Combined tax rate: 34% Tax losses may be carried forward indefinitely. The offset is limited to a maximum 30% of annual taxable income. Legal entities are subject to taxation on their worldwide income. CFC Rules Thin capitalization rules Non-OECD based transfer pricing rules 3

4 Corporate income tax: IRPJ and CSLL (2) CFC rules Profits generated by foreign controlled or affiliated entities must be taxed by the Brazilian Investor (legal entity) at the year-end regardless of an effective dividend or profit distribution. Taxes paid abroad should be creditable in BR, regardless the existence of a tax treaty signed with BR (however, some limitation shall be applicable). Thin capitalization Brazilian thin capitalization rules are recent applicable for related party loans from abroad (the general rule is a debt-equity ratio of 2 to 1) and for loans from companies located in tax haven jurisdictions or considered as privileged tax regimes (a debtequity ratio of 0.3 to 1). The limitation still applies if the loan is taken from a non resident bank and the guarantor is related to the Brazilian debtor. Beneficiaries located in tax havens or considered as privileged tax regimes: Interest payments made to beneficiaries in such circumstances are deductible only if the Brazilian debtor is able to demonstrate some sort of substance evidences of the foreign lender 4

5 Corporate income tax: IRPJ and CSLL (3) Transfer pricing Non-OECD based transfer pricing rules, Brazilian methods are generally incompatible with OECD. Other The Brazilian Revenue Services has listed (in Normative Instruction IN 1,022/2010) holding companies in NL as PTR. Furthermore, Normative Instruction 1,045/2010 determines that holding companies situated in NL would only be a PTR if they do not perform substantial economic activity. The Netherlands appealed to the tax authorities requesting removal of their holding company from the list. The tax authorities granted a suspension of the inclusion of the entity from the list. A final decision is still to be ruled on this matter KPMG Meijburg & Co, The Netherlands. All rights reserved 5

6 Gross Revenue Taxes: PIS and COFINS The PIS and COFINS tax event is the monthly invoicing the totality of revenues received by legal entity independent of the denomination or accounting classification Revenues arising from financial transactions and exchange rate variation are subject to PIS and COFINS tax at the rate of zero percent. Export transactions are not subject to PIS tax and COFINS tax Non-cumulative system - combined tax rate: 9,25% / allowance to recognize tax credits on the purchase of goods and service according to the applicable legislation. Cumulative system - combined tax rate: 3,65% / remains applicable for certain entities and revenues. 6

7 Indirect taxes (1) IPI: This federal tax is levied on industrialization of a product when sold by industrializing establishment even though the industrialization may be incomplete, partial or intermediate. It is also levied on imports at the same rates as on Brazilian made products. Exceptions include: export and most food products. Tax rate depends on the product classification on the tax rates table. Credit is available for raw materials or components parts used in the finished products or consumed in production. 7

8 Indirect taxes (2) ICMS: This sales tax is levied on sales or physical movement of goods, on freight, transportation, and communication services. Tax rates varies from 7% to 12% for interstate transactions and from 17 to 30% for intrastate transactions. The rates applicable are dependent on the local legislation. Tax is calculated on monthly operations and payment is due according to the company s activity code. Payments are made during the subsequent month. Credit are allowed on the purchase of raw materials and some other items utilized in production. Export is not subject to ICMS ICMS Fiscal War in Brazil - Background - Illustrative example - Impact 8

9 ICMS Fiscal War in Brazil Background (1) A common practice in Brazil has been the existence of different states fiscal policies to attract new investments. States concede fiscal benefits individually (the so-called fiscal war ) Scenario: Brazilian R$ overvalued = import of goods High interest + high taxation = less investment Tax charge reduction to attract investments (production plant) to their region GOOD! Tax charge reduction to attract goods/products increasing their port s activities NOT HEALTH! Tax benefit for ICMS (Value-Added Tax on Sales and Services) 9

10 ICMS Fiscal War in Brazil Illustrative example (2) ICMS computed on a wool t-shit Computed on (1) production line + (2) confection + (3) retail Produced in São Paulo by R$ ICMS 12% = R$ 112 Produced in China by R$ ICMS 3% * = R$ 103 * Imported by Santa Catarina through fiscal benefit Sale to retail market over Brazil São Paulo t-shirt R$ % (ICMS on sale 18% - ICMS on production 12%) China t-shirt R$ % (ICMS on sale 18% - ICMS on production 12%**) ** The fiscal benefit assumes the product was charged on 12% instead of 3% 10

11 ICMS Fiscal War in Brazil Impact (3) Government action The Brazilian Supreme Federal Court (STF) declared laws and decrees conceding benefits pertaining to the ICMS (Value-Added Tax on Sales and Services) as being unconstitutional The understanding formed by the STF is that the States cannot concede fiscal benefits individually. These incentives can only be conceded through unanimous signed conventions by the National Council of Treasury Policy CONFAZ, which brings together the Secretaries of Finance of all the States The federal government is negotiating a reduction of the interstate ICMS rate Companies challenges Review of cash-flows projection (and return on investment!) Establish a contingency planning 11

12 Indirect taxes (3) ISS: This service tax is a municipal tax on services rendered except in the case of inter municipal freight (subject to ICMS). Tax rates varies from 2% to 5% and is dependent on the municipality. The calculation basis is the value of the services 12

13 Other taxes and comments CIDE: Tax levied on payments to non-residents in the form of royalties, technical and administrative services. Tax rate is 10%. IOF: Federal tax levied at varying rates on loans and credit operations, certain foreign exchange transactions, insurance and securities transactions. CPMF Tax: Banking tax is levied on the movement of funds out of bank accounts at 0.38% per transaction. For example payments to suppliers, payments of taxes, employees compensation and other expenses would generate CPMF Tax charge when withdrawn from a Brazilian bank account to make payment. 13

14 Withholding tax The following are the main withholding tax rates applicable to payments to non-residents: The following are currently not subject to withholding tax (some requirements may apply): Interest 15% / 25%* Interest on equity 15% / 25%* Royalties** 15% / 25%* Technical service fees ** 15% / 25%* Non-technical service fees 25% Dividends (if related to post-1995 profits) 0% Interest and commission on export financing 0% Interest and commission on export notes 0% Export commissions 0% International hedging 0% Lease and rental fees 15% / 25%* Capital Gains 15% / 25%* * recipient is resident in a tax haven ** plus CIDE at 10% rate. Dutch tax considerations BR and NDL Transactions (Double Tax Treaty): Tax Sparing Credit at 20% on interests KPMG Meijburg & Co, The Netherlands. All rights reserved 14

15 2. Structuring investments in Brazil via the Netherlands Brazil Foreign Parent -CIT: 34% - No tax deduction and tax neutral (no FX gains or losses derived from investment) Netherlands Dutch Parent - Dividends payments only when the BR company generate profits. Brazil - No dividends WHT on income generated as from Equity Brazil Co Dividends NL - Dividend income received by a Dutch corporate shareholder is tax-exempt if the participation exemption applies. BR taxes on transactions Income 100 CIT % 34 Amount to be paid abroad % Total

16 2. Structuring investments in Brazil via the Netherlands Interest on Equity Foreign Parent Brazil - CIT: 34% - WHT: 15% -Tax deductible interest expense at 34%. - It is limited to the higher between 50% of the payer s retained earnings or 50% of the payer s current profits. - Another advantage of interest on net equity is that the tax deduction for the payer is not conditioned to the effective payment or remittance. NL - To the extent the BR shareholding qualifies as shareholding for the Dutch participation exemption, the interest on equity should fall under the participation exemption. Netherlands Brazil Equity BR taxes on transactions Income 100 Interest on Equity CIT % 34 Income Tax Deduction Amount to be paid abroad 50 34% (17) 50 Dutch Parent Brazil Co 15% % 0.19 Total ETR Effective group benefit on the transaction in comparison with dividend payment :

17 2. Structuring investments in Brazil via the Netherlands Goodwill Amortization Foreign Shareholder Benefit of strategy One significant advantage of a share acquisition versus an acquisition of is that, if structured properly, the amount paid in excess of the target s net equity may result in the generation of an amortizable premium. Foreign Country Brazil 1 Equity / Loan Acquisition of shares Holding / Buyer 2 3 Merger Target 17

18 Contact information Dudley Juana Senior tax manager Member of the Ibero America-desk of KPMG Meijburg & Co and has as his main focus the Brazilian region Provides day to day tax advise for a wide range of national and international companies in the area of trade, tax planning, structured finance and mergers & acquisitions. : Phone: Cell phone: Anderson Dutra Senior manager, audit Seconded from KPMG in Brazil and member of the Brazilian-desk of KPMG in the Netherlands Professional experience in auditing and advising multinational corporations. Focused on Energy and Natural Resources, mainly Oil and Gas industry. Broad experience working on international and US environment, including IFRS-EU and SEC registrants. : Phone: Cell phone:

19 All activities performed and all services rendered by KPMG Meijburg & Co are subject to its general terms and conditions, filed with the Amsterdam Chamber of Commerce. KPMG Meijburg & Co, Tax Lawyers, is an association of limited liability companies under Dutch law and is a member of KPMG International Cooperative ("KPMG International"), a Swiss entity. The general terms and conditions are available on the KPMG Meijburg & Co website ( and will be supplied upon request.

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