2 nd Edition law Manage Corporate taxes in Brazil Sponsor:
American Chamber of Commerce for Brazil - AMCHAM International Affairs Department Brazil, 2013/2014
ACK ACKNOWLEDGEMENTS The American Chamber of Commerce for Brazil, being the largest Amcham outside the United States is constantly serving its members by building bridges for Brazilian businesses worldwide. Our foreign investment attraction efforts have also been a key leading point for Amcham. The How to Series is part of this initiative. With the support of some of our corporate members we are putting together strategic information on the most various aspects of doing business in Brazil. As part of BRICS (Brazil, Russia, India, China and South Africa) and representing the 6 th largest economy of the world, Brazil has clearly demonstrated its importance in the global market. The country s business environment as well as foreign investment numbers, despite international crisis, continues very positive. Medium and high classes are increasing, which creates a solid internal market and contributes to maintain good results in the economy. The 2014 FIFA World Cup has been estimated in US$ 56.8 billions and the 2016 Olympics in US$ 19.3 billions in investments. These events have had an impact on direct investments in Brazil and in infrastructure projects needed to hold them in the country. It is now more than ever a strategic time for businesses opportunities in Brazil. We welcome welcome you you and hope and hope that the that information the you are about to read serves you best. Gabriel Gabriel Rico Rico - CEO, - CEO, Amcham Amcham Brasil Br Brazil is experiencing an unprecedented moment. The economic and political stability has provided a major leap in almost all industries and has given the country visibility. Today, the projections are an ever increasing growth, also encouraged by the major world sports events to come and robust infrastructure investments. In this context, the gear of tax is a relevant factor to be considered for the proper positioning of companies and investors. It is known that the Brazilian tax system is complex and full of nuances, at different levels. Therefore, it is essential to know the tax structure in order to achieve the dynamism expected, to reduce costs, speed the deadlines and have a real competitive advantage. This title in partnership with AmCham is so a welcome opportunity, since it offers a practical guide to understand the Brazilian tax procedures, with clear guidelines for all areas of business. Raquel Novais - Partner, Machado, Meyer, Sendacz e Opice Advogados
LAW
CONTENT 01 INTRODUCTION 06 02 FEDERAL TAXES 08 03 STATE TAXES 22 04 MUNICIPAL TAXES 25 05 TAX BENEFITS 27 06 INTERNATIONAL TAX MATTERS 32 07 FOREIGN TRADE 45 08 ABOUT OUR SPONSOR 48
01. INTRODUCTION 6 LAW As in most Latin countries, the Brazilian legal system is based on civil law. Accordingly, the rules are established by the legislation in force and precedents do not frequently have a significant global role regarding the tax system in Brazil, since they are, as a general rule, applicable only to the litigants themselves. However, it is important to note a recent global trend both in civil and common law jurisdictions to single out relevant elements from the other model and combine them with the elements of the original legal system. Brazil is also following this trend and has been adapting its civil law system in order to insert some features of common law jurisdictions, such as the binding precedent institute, the repetitive appeal, according to which all matters regarding the same subject are suspended until the higher courts issue a decision to be applied to all cases dealing with the same matter. Specifically for the Brazilian tax system, it has its general rules outlined by the Federal Constitution, which determines precisely which taxes can be imposed, by which member of the federation, and what is the taxable event. Also, the Federal Constitution determines the immunities and the main tax principles. The Brazilian tax system is based on several principles, among which the most important is the strict legality, whereby, except for some specific constitutional authorizations, no tax can be imposed unless there is a valid legislation defining its main aspects (understood by scholars and precedents as the taxable event, the taxable basis and the applicable rate). Taxes may be levied by federal, state and municipal governments and also by the Federal District, which accumulates state and municipal jurisdictions. As a rule, the same tax may not be imposed by two different federation spheres. Regarding state and municipal taxes, there is usually a nationwide Law contemplating the guidelines to be followed by the States/Municipalities. Notwithstanding, States and Municipalities are still allowed to rule many aspects concerning the imposition of the tax under their jurisdictions that will apply within their territory, as well as may have their own interpretation of the nationwide guidelines, almost creating an independent system, which results in the existence of a highly complex tax system in Brazil. The judgment of tax-related controversies takes place in the administrative sphere and/or the judicial sphere. As a rule, the discussion is initiated at the administrative level, in which there are judgment instances, sometimes with a collegiate with the participation of taxpayers representatives in the second instance. The controversy may be taken to the judiciary either after, before or alternatively to the administrative level. The controversy may also initiate in the judiciary if it refers
to a claim by the taxpayer regarding the interpretation or application of certain legal provisions. Additionally, at the administrative level, most jurisdictions provide a procedure for a taxpayer to formally consult tax authorities on the most adequate tax treatment that shall apply to its transactions. The federal taxes are managed by the Brazilian Revenue Service (Secretaria da Receita Federal do Brasil RFB ), subordinated to the Economics and Finance Ministry (Ministério da Fazenda). The states, municipalities and the Federal District have similar agencies that manage the taxes attributed to them by the Federal Constitution. 7 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
02. FEDERAL TAXES IRPJ AND CSLL CORPORATE INCOME TAXES The Corporate Income Tax ( IRPJ ) and the Social Contribution on Net Profits ( CSLL ) (jointly referred as Corporate Income Taxes CIT ) are imposed on the taxable profit of a corporate taxpayer. For that purpose, the taxable profit shall include the income only when it becomes economically or legally available to the recipient. The CIT are imposed on income derived by all legal entities located in or operating within Brazil. Resident legal entities are those incorporated under Brazilian applicable laws. The branches, agencies and representative offices of non-resident legal entities are also treated as Brazilian entities for CIT purposes. According to the Brazilian tax law, there are basically four calculation regimes for CIT, namely: The Real Profits Regime; The Presumed Profits Regime; The profit as determined by the tax authorities; and The Simplified Regime for the collection of federal taxes. REAL PROFITS REGIME The applicable legislation prescribes the real profit as being the accounting profit accrued by the company, adjusted by additions and exclusions provided in law. 1 Over the accrued result, the CIT will be imposed as follows: IRPJ, levied at a 15% rate plus a surtax of 10% over the profits (taxable basis) that exceed the value of R$ 240,000.00 yearly; and CSLL, levied at a 9% rate. Financial institutions are subject to CSLL at a 15% rate. The accrual period by the real profit can be annual or quarterly. In the annual accrual there is an obligation to monthly anticipate the CIT. It should also be mentioned that the tax losses may be carried forward indefinitely. Non-operational losses may 8 LAW 1.Pursuant to the applicable tax legislation, as a general rule, deductibility of expenses incurred by Brazilian corporate taxpayers for CIT purposes is conditioned to the characterization of such expense as usual, ordinary and necessary for the development of the operational activities of the company. Therefore, only the expenses effectively incurred by the corporate taxpayer that are directly related to the development of business activities may be treated as deductible expenses for the assessment of the taxable basis of the CIT. Expenses that do not comply with the general principles or specific rules are not deductible. In general, accounting provisions are not deductible. Further, an additional requirement for an expense to be qualified as a deductible expense for tax purposes is the need of such expense being supported by reliable documents that evidence its incurrence and payment.
be carried forward, but they may be solely offset with nonoperational profits, such as capital gains. On its turn, tax losses carry back is not authorized under Brazilian tax law. In addition, the tax losses are lost in the following scenarios: The company generating the losses is merged into another entity; or If there is a change in the control and business activity performed by the loss-generating company. The tax losses may be offset against the taxable profits only up to the limit of 30% of the real profit of the period. PRESUMED PROFITS REGIME The Presumed Profits Regime is a simplified regime to determine the taxable basis of the taxes levied over the profit, which takes into account a pre-defined percentage of the operating gross revenue, to determine the profit of the taxable activity, and add to this value other types of income not directly related to the taxpayers activity (e.g.: capital gains, financial revenue, etc.). The option to the Presumed Profits Regime is a faculty available to the taxpayer. In other words, the taxpayer not obliged to assess the IRPJ and the CSLL under the Real Profits Regime can adopt the Presumed Profits Regime. The option for the referred method is made annually and may be renewed every year. Under the Presumed Profits Regime the profits are calculated and collected on quarterly basis. According to the applicable tax legislation, the legal entity whose gross revenue, in the previous calendar year, has been equal or lower than R$ 48,000,000.00 or R$ 4,000,000.00 multiplied by the number of months of its activity during the previous calendar year, when lower than twelve months, could opt to the tax regime on the presumed profit basis. Pursuant to a recently enacted law, as of January 1 st, 2014, said limits will be increased to R$ 78,000,000.00 and R$ 6,500,000.00, respectively. In any case, the option to the Presumed Profits Regime could only be done by the legal entity that does not encompass the restrictions provided in Section 14 of Law nº. 9,718/98. 2 The CIT taxable basis of the entities subject to the presumed profit is quarterly calculated through a pre-defined percentage of the operating gross revenues. Such percentage may differ according to the company s activity, being, for IRPJ calculation purposes, 1.6% for the commercialization of fuel, 8% for the commercialization of goods in general and 32% for the rendering of services. On its turn, the applicable 2. Section 14 (wording currently in force) The accrual by the real profit is mandatory to: I Legal entities that derived, in the previous calendar year, total revenues higher than the limit of R$ 48,000,000.00 (forty eight million reais), or proportional to the number of months of the period, when lower than 12 (twelve) months; II Legal entities whose business activities are the ones of commercial banks, investments banks, development banks, savings banks, credit companies, finance and investment, real estate credit companies, securities brokerage firms, securities and exchange, distribution of securities and securities, commercial rental companies, credit cooperatives, insurance companies and private entities funded and private schemes open; III Companies with capital gains earned offshore; IV Companies, authorized by the tax legislation, to enjoy tax benefits related to exemption, or tax reduction; V Companies which, during the calendar year, have done monthly payments by the estimative regime, as provided in Section 2 of Law nº. 9,430/96; and VI Companies that explore the cumulatively and continuously rendering of credit counsel services, credit management, management of payable and receivable accounts, purchase of credit rights originated by installment sales or rendering of services (factoring). 9 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
10 LAW percentages for these same activities for CSLL calculation purposes are 12%, 12% and 32%, respectively. The tax rates applicable to the Presumed Profits Regime are the same of the Real Profits Regime. Therefore, the IRPJ rate is 15%, plus the surtax of 10% over the taxable basis value that quarterly exceeds R$60,000.00, considering that, once adopted the Presumed Profits Regime, the taxes will be definitive quarterly calculated. On its turn, the rate of CSLL is 9%. Therefore, in practice, the effective IRPJ and CSLL rates for legal entities engaged in commercial activities or service rendering correspond to 3.08% and 10.88%, respectively, over the gross sales or services revenues, without deduction of expenses or costs. In order to assess the taxable basis of the Presumed Profits Regime, the total amount of capital gains and other types of income not directly related to the taxpayers activity shall be added to the presumed profit basis to assess the CIT taxable basis under this method. Finally, tax losses cannot be used to offset profits under the Presumed Profit Regime. SIMPLIFIED PROFITS REGIME (SIMPLES) The Brazilian legal entities whose annual gross income do not exceed R$ 3,600,000.00, may opt for a simplified regime for CIT assessment, in addition to the Tax on Manufactured Products ( IPI ), the Contribution to the Employees Profit Participation Program ( PIS ), the Contribution to the Financing of the Social Security ( COFINS ) and the social security contributions. Beyond the limit of R$ 3,600,000.00 for annual gross revenues derived from domestic transactions, the entities have an additional limit of R$ 3,600,000.00 for export transactions. The taxable basis of the Simplified Profits Regime is determined by applying percentages established by the applicable tax law, which may vary from 4% to 16.85%, depending on the gross income of the legal entity. DETERMINED PROFITS REGIME The Determined Profits Regime is applicable in the hypothesis in which: The taxpayer fails to maintain commercial and tax records in accordance with the applicable tax laws; The taxpayer s bookkeeping evidences fraud, defects or errors which make it impossible to verify the actual transactions undertaken or to determine the CIT due and payable by the taxpayer based on the actual profit; or The taxpayer inappropriately opts to calculate and pay CIT under the Presumed Profits Regime. Under the Determined Profits Regime, the taxable basis is calculated by applying the following percentages increased with a 20% rate: 8% for commercial activities and for products and hospital services; 1.6% for resale of fuel, ethyl alcohol and natural gas, which are destined to consumption; 16% for rendering of transport services, except freight services, case in which the applicable percentage is 8%; or 32% for the rendering of other services.
For certain activities the percentages differ from the listed above, ranging from 1.92% (applicable to the resale of fuel) to 45% (applicable to banks, financial institutions and similar entities). On its turn, the applicable tax rates are the same of Real Profits Regime and Presumed Profits Regime. PROVISIONAL TAX REGIME - RTT On December 3rd, 2008, the President of Brazil sanctioned Provisional Measure ( MP ) 449/08, which was converted into Law 11,941, dated May 27, 2009, to neutralize the impact of the new accounting methods and criteria introduced under Law 11,638/07 that affects the basis for calculating federal taxes. The referred law introduced relevant changes in the Brazilian corporate law, which, in essence, led to the adoption of new Brazilian generally accepted accounting principles that are closer to the international accounting standards (IFRS). to some companies, in 2003, the federal government decided to create the non-cumulative regime of PIS and COFINS. The PIS and COFINS non-cumulative regime was established by Laws 10,637/02 and 10,833/03, which determined the imposition of those contributions at the 1.65% and 7.6% rates respectively. The innovation brought by such Laws refers to the credit mechanism, by means of which the taxpayers under the non-cumulative regime may deduct PIS and COFINS credits, at the same rates above, calculated on the amount of certain payments made by the taxpayer, such as on the acquisition of inputs and goods for resale. Said credits may be used to offset the PIS and COFINS due by the same taxpayer on future transactions. Regarding the credit mechanism, Laws 10,637/02 and 10,833/03 establish the list of payments that entitle taxpayers to recognize PIS and COFINS credits. Law 11,941/09 created RTT, which attempts to uphold the principle of tax neutrality. RTT could be applied voluntarily in 2008 and 2009 for the purposes of assessing the taxable basis of the CIT and the PIS and COFINS contributions, but has become mandatory in 2010, unless other regulations addressing the tax effects of the new accounting methods are enacted. PIS AND COFINS GROSS REVENUE AND IMPORT TAXES The PIS and the COFINS are federal taxes imposed on legal entities gross revenues. Initially, the PIS and COFINS were charged exclusively on a cumulative basis, at a 0.65% and a 3% rate, respectively, and were not recoverable. Due to the harmful cascading impact it had The cumulative regime is still applicable to the companies that assess the CIT under the Presumed Profits Regime and to other companies listed by the law, such as those engaged in insurance and health insurance activities, for instance. Financial institutions are also subject to PIS and COFINS under the cumulative regime, but the COFINS is imposed at a 4% rate and some deductions are authorized from the taxable basis. The cumulative regime is also applicable to revenues resulting from some activities specified by the legislation, such as telecommunication, news-related services and radio and television broadcasting, for instance. In this sense, the same company could have, in the same accrual period, part of its revenues taxed by PIS and COFINS under the cumulative and part taxed under the noncumulative regime. 11 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
12 LAW As a rule, PIS and COFINS are neither imposed on revenues related to the export of products or services nor on the sale of fixed assets. PIS and COFINS may also be imposed under the monophasic regime (regime monofásico), applicable to certain products, such as cosmetics, beverages, and other products expressly determined by the legislation in force. This system works like a tax substitution regime, in which the importer or manufacturer is liable for the collection of the PIS and COFINS imposed on the whole commercialization chain at a higher rate. Additionally, since May 1 st, 2004, the import of services and products is also subject to PIS and COFINS, which are imposed on the total value of the imported services or products (in accordance with the formulas established by RFB) at the rates of 1.65% and 7.6%, respectively, as a general rule. Recently the legislation has been modified in order to impose a 1% additional COFINS rate to some products. If the importer is under the non-cumulative regime, it may recognize PIS and COFINS credits on the import of products for resale and of products and services that will serve as input, among others. In some situations, the amount of credits assessed may surpass the amount of debts. It may happen for example in export transactions. In such case (of export transactions), the taxpayer may either maintain the credits in its records and use them to offset future PIS and COFINS debts or request the government to reimburse or authorize the offsetting of such amounts against other federal taxes managed by RFB, such as IRPJ, CSLL or IPI, according to the conditions established by the specific legislation. II IMPORT TAX The Import Tax ( II ) is imposed on the import of foreign products, i.e., products manufactured or extracted abroad and brought into Brazil. The taxable basis is the customs value, whose definition follows the Customs Valuation Agreement, which is part of the General Agreement on Trade and Tariffs ( GATT ). Based on said Agreement, the customs value corresponds, in general, to the Cost, Insurance and Freight ( CIF ) value of the imported products, plus additional expenses with wharfage. The II rates vary in accordance with the tax classification code of the imported product in the Mercosur Common Nomenclature ( NCM ), which follows the Commodity Description and Coding System (Harmonized System). Based on these codes, Mercosur established a common table of import tax rates (Mercosur Common External Tariff table TEC ), with possibility of limited variations on the rates applied by each jurisdiction. The II cannot be recovered by the importer. IPI TAX ON MANUFACTURED PRODUCTS The IPI is imposed on transactions with manufactured products, including imports or domestic sales. Regarding domestic sales, the taxpayer may be the importer, the manufacturer or a company treated as an industrial establishment by the IPI legislation, such as companies that sell imported products or manufactured products by other company under a tolling agreement, among many others.
On the import, IPI is imposed on the customs clearance of the products, over the customs value added by the amount of II due on the import. On domestic sales, the taxable basis is, as a rule, the value of the transaction. The legislation also establishes a minimum taxable amount, which corresponds to the minimum taxable basis to be adopted on transactions carried out between related companies, characterized as such by the IPI legislation. The applicable IPI rates vary in accordance with the tax classification code of the product under the NCM, used as a basis for the IPI table of rates TIPI. Also, according to the Federal Constitution, the IPI rates must obey the essentiality and selectivity principles, which means that essential products should be subject to a lower rate in order to reduce their final cost to the end consumer. Nonessential products, on their turn, should be subject to a higher IPI burden, meaning that the applicable rates are higher. The IPI legislation defines manufactured product as any product subject to industrialization process, i.e., any product that has undergone a process that modifies its nature, its functioning, its finishing, its presentation, etc. Moreover, the IPI is a non-cumulative tax, which means that the IPI due in prior transactions (including the import of products), can be offset against the IPI assessed by the taxpayer regarding its subsequent taxed transactions. The IPI is not imposed on the export of manufactured products. In some situations, the amount of credits assessed by the company may surpass the amount of debts. In such cases, the taxpayer may maintain the credits in its IPI records and use them to offset future IPI debts or request the government to reimburse or authorize the offsetting of such amounts against other federal taxes managed by the RFB, such as IRPJ, CSLL, PIS and COFINS, according to the conditions established by the specific rules. IOF TAX ON FINANCIAL TRANSACTIONS The Tax on Financial Transactions ( IOF ) is imposed on several financial transactions. The IOF can be imposed on credit transactions ( IOF/Credit ); on the execution of currency exchange agreements ( IOF/Exchange ); on the acquisition of securities (e.g., shares, quotas of investment funds, bonds and notes traded in organized markets, etc.) ( IOF/Securities ); on insurance transactions ( IOF/ Insurance ); and on the acquisition of gold ( IOF/Gold ). Next we present a chart containing the taxpayer and the party liable for the IOF collection, as well as the applicable rates for each taxable event: 13 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
Tax Taxpayer and Party Liable for the Collection of the IOF Current Tax Rate IOF/Credit The taxpayer of the IOF/Credit is the borrower and the party liable to collect the tax is the legal entity that grants the credit. The IOF/Credit taxable basis and applicable rates vary according to the characteristics of the credit transaction, such as if its principle amount and term are defined: If the principle amount and the term are defined: 0.0041% tax rate per day, plus an additional 0.38%, on the principal amount. The daily rate is limited to 365 days (i.e. to a maximum 1.5% plus the additional 0.38%). If the principle amount is defined and the term is not defined: 1.5%, plus an additional 0.38%, on the principal amount. If the principle amount is not defined: 0.0041% per day on the sum of the daily outstanding balance calculated in the last day of each month, plus an additional 0.38%, on the principal amount. There are some transactions exempted from IOF/Credit taxation, such as those: Related to export transactions, as well as those supporting the production or encouraging export transactions; Related to advance payments of export foreign exchange agreements; 14 LAW Performed by financial instituitions with public or private resources, for the funding of transactions performed as of April 2 nd, 2013, destined to the acquisition, production and leasing of capital goods, including related parts and technology services, and working capital related to the production of consumer goods destined to exportation, electricity sector, export structures of bulk liquids, engineering projects, technological innovation and investment projects for the creation of technologic and productive capacity, as well as engineering and logistic infrastructure projects aimed at the construction of roads and railways object of concession granted by the Federal Government, under the terms established by the Brazilian Monetary Council and by the Central Bank of Brazil.
IOF/Exchange The taxpayer is the entity executing the currency exchange transaction and the party liable for the collection of the tax is the financial institution that will, in practice, perform the transaction. The general IOF/Exchange rate is 0.38% on the amount of the currency exchange transaction, exception made to the situations provided in the Section 15-A of the Decree. 6,306/07. However, the executive branch may change the IOF/Exchange rates at any time, provided that the rate does not exceed 25%. Among the hypothesis which are not subject to the general 0.38% rate, we highlight the following: Subject to 0% IOF/Exchange rate: Currency exchange transactions carried out for the payment of Brazilian exports; Currency exchange transactions carried out by foreign international airline companies, for the outflow of funds derived from their revenues originated in Brazil; Currency exchange transactions related to the inflow of foreign currency for the payment of expenses incurred in Brazil paid with credit card issued abroad; Currency exchange transactions related to the inflow and outflow of funds connected to cross-border loans to Brazilian borrowers with an average term exceeding 360 days; Currency exchange transactions for the return of investments and earnings, including dividends and interest on equity; Currency exchange transactions carried out as of December 1 st, 2011, for the inflow of funds to Brazil for the acquisition of shares of listed companies in the context of IPOs (Initial Public Offerings); 15 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
IOF/Exchange The taxpayer is the entity executing the currency exchange transaction and the party liable for the collection of the tax is the financial institution that will, in practice, perform the transaction. Currency exchange transactions carried out as of December 1 st, 2011, for the inflow of funds destined to variable income investments in stock markets, under the terms of the Brazilian Monetary Council, except for transactions with derivatives that lead to predetermined income; Currency exchange transactions, including simultaneous currency exchange transactions, carried out as of December 1 st, 2011 by non-resident investors for the inflow of funds for the acquisition of quotas of private equity investment funds ( FIP ), investment funds for investment in emerging companies ( FIEE ) and investment funds for investment in quotas of the aforementioned investments funds; Simultaneous currency exchange transactions carried out as of December 1 st, 2011, for the inflow of funds to Brazil in relation to the cancellation of depositary receipts, for the investment in shares tradable in the stock exchange; Simultaneous currency exchange transactions carried out as from December 1 st, 2011, for the inflow of funds to Brazil in connection with the change of the investment regime applicable to non-resident investors from direct investment in equity ruled by Law 4,131/62 into financial investments in shares tradable in the stock exchange (portfolio investment) according to the terms regulated by the Brazilian Monetary Council; 16 LAW Currency exchange transactions for the inflow of funds for the acquisition of long term private bonds (debentures) related to investment projects, infrastructure debentures and quotas of investment funds that invest in infrastructure bonds projects, which must be issued in accordance with the requirements set forth in sections 1 st, 2 nd and 3 rd of Law 12,431/62, respectively; and
Currency exchange transactions, including simultaneous currency exchange transactions, related to the inflow of funds into Brazil to be applied in Brazilian Depositary Receipts ( BDR ) certificates, under the terms of the Brazilian Security Exchange Commission. Subject to 6% IOF/Exchange rate: Exception made to transactions subject to a 0% IOF/ Exchange rate, as general rule, foreign investments carried out in Brazilian financial and capital markets are subject to a 6% rate on the inflow of funds into Brazil; Currency exchange transactions related to the inflow of funds to Brazil destined to external credit with an average term not exceeding 360 days, and others. Subject 6.38% IOF/Exchange rate: Currency exchange transactions carried out for the payment of credit card debts related to the acquisition of goods and services abroad. Subject to IOF/Exchange exemption: Currency exchange transactions carried out for the payment of imported goods 17 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
Tax Taxpayer and Party Liable for the Collection of the IOF Current Tax Rate IOF/Insurance The taxpayers are the insured individual and legal entities and the party liable to pay the IOF is the insurance company or the financial institution responsible for charging the premium. The rate varies from 0% to 7.38% on the premium paid. The executive branch may change the IOF/Insurance rate at any time, provided that the rate does not exceed 25%. IOF/Securities As a general rule, the taxpayer of IOF/ Securities is the purchaser, in the hypothesis of acquisition of bonds or securities, and the owner of the financial investments, in case of redemption, assignment and renegotiation. On its turn, the Decree 6,307/07 lists several liable parties for each nature of transaction (e.g.: institutions authorized to operate in purchase and sale transactions involving securities). The rate varies from 0% to 1.5% per day limited to the earnings arising from the transaction, according to its term (if longer than 30 days, there will be no taxation). Below we present some specific IOF/Securities rules: IOF/Securities is imposed at a 1% rate on the notional adjusted value in the acquisition, sale or settlement of derivative instruments executed in Brazil that may have an impact in the currency exposure of the concerned party; IOF/Securities does not apply to currency derivatives executed for hedging purposes; IOF/Securities is imposed at a 0% rate on transactions involving variable income, including those performed in the stock and future exchange or similar entity. IOF/Gold The taxpayers are the institutions authorized by the Central Bank of Brazil which perform the first acquisition of gold, financial asset or exchange instrument. 1% on the acquisition cost. 18 LAW
CIDE CONTRIBUTION FOR INTERVENTION ON THE ECONOMIC DOMAIN The federal tax legislation establishes that payment for services rendered by foreign entities to Brazilian residents involving the supply of technical services, administrative assistance and technical services are subject to the Contribution for Intervention on the Economic Domain ( CIDE ) imposition. The CIDE is assessed based on the gross amount charged (i.e., the invoiced amount), without the deduction of the Withholding Income Tax ( WHT ) imposed on such payment. Differently from the WHT, the CIDE is due and payable by the Brazilian paying source and, consequently, it is not subject to any withholding mechanism. It should also be mentioned that the payment of CIDE on cross-border payments of patent and trademark royalties generates a credit, which may be offset against future CIDE payments derived from future remittances of the referred royalties. This credit represents 30% of the CIDE contribution paid, from January 1 st, 2009 through December 31 st, 2013. 3 As of January 1 st, 2006, remittances for software licensing are exempt from CIDE, provided that there is no transfer of technology (transfer of the source code). In certain circumstances, the CIDE contribution rate is reduced to 0% if the company paying the patent or trademark royalties of the service fees benefits from tax incentives targeting at certain technology activities (e.g. semiconductors, digital TV, etc.). 3. After 31 th December, 2013, the credit mechanism will no longer apply. The CIDE may also be imposed on the import and commercialization of specific products, such as combustibles. ITR PROPERTY TAX ON RURAL REAL ESTATE The Tax on Rural Property ( ITR ) is imposed on the ownership or possession of rural real estate, characterized as such the estate located outside the urban zone, under specific criteria established by the legislation. The taxable basis and rates vary in accordance with the size, location, nature and use of the land. Based on these aspects, the ITR rates ranges from 0.03% to 20%. The taxpayer is the owner or possessor of the real estate and the assessment of the ITR is made annually. AFRMM TAX ON TRANSPORTATION BY WATER The Freight Surcharge for the Renewal of the Merchant Marine ( AFRMM ) is imposed on the freight, defined as the remuneration for water transport of any cargo discharged in a Brazilian port, including the remuneration for the cargo transportation from port to port and all other expenses therein involved. The taxable event of the AFRMM is the beginning of the discharge of the vessel in a Brazilian port. The taxpayer is the consignee indicated in the bill of lading or the owner of the cargo if there is no consignee and the applicable rate may be of 10%, 25% or 40% of the freight. INSS SOCIAL SECURITY CONTRIBUTIONS Social security contributions are federal taxes also managed by RFB since 2008. The financing of the social security system in Brazil is made by means of contributions from both employers and employees or independent workers. 19 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
20 LAW The contribution due by the employee, or independent workers, must be withheld from the employee s or independent worker s earnings paid by a Brazilian company and duly remitted to the RFB. Concerning the social security contributions owed by the company, they can be generally described as follows: Brazilian Social Security Institute ( INSS ) contribution imposed at a 20% rate on the earnings paid or credited to employees and independent workers. Some specific activities are subject to an additional rate. According to a recent enacted legislation, a new systematic of INSS contribution was created, by means of which the legal entities of certain sectors (e.g. furniture, shoes, retail of textile, pharmaceutical products, retail business, among others) shall collect the referred contribution at a 1% rate on the gross revenues (in substitution for the regular regime of INSS contributions imposed at a 20% rate on the payroll). Under this new regime, legal entities also engaged in activities not subject to the substitute social contribution (secondary activities) in an amount exceeding 5% of its total gross revenues will assess the INSS contribution based on the payroll, but at a reduced rate resulting from the percentage ratio of the secondary activities and the total gross revenues. However, legal entities engaged in secondary activities will be excluded from the new regime if these activities generate 95% or more of the legal entity s total gross revenue; Workers Compensation Insurance ( GIll RAT ) imposed at the rate of 1%, 2% or 3% on the payroll (the applicable rate varies depending on the level of accident risk related to the company s business activities and may be decreased up to 50% or increased up to 100%); and 4. The credits must be related to taxes charged by the RFB. Contributions collected by the INSS and attributed to other official agencies at aggregate rates of up to 5.8%, depending on the company s activities. OTHER TAXES There are also several other federal contributions applicable only to very specific professional or economic categories. Therefore, some specific activities may be subject to other federal contributions other than the ones presented herein. Additionally, the federal government is authorized by the Federal Constitution to create other taxes, such as social contributions, compulsory loans and other fees related to the use of specific and dividable public service and police power, as well as improvement fees. MECHANISMS FOR THE REIMBURSEMENT AND OFFSETTING OF THE FEDERAL TAX CREDITS REIMBURSEMENT The reimbursement of federal tax credits 4 can be requested in the following hypothesis: (i) Overpayment or undue payment; (ii) Mistakes: (a) in the identification of the taxpayer, (b) in the applicable tax rate, or (c) in the calculation of the due tax amount or verification of any document related to the payment; and
(iii) Reform, annulment, revocation or termination of condemnatory decision. The reimbursement request must be presented, as a general rule, electronically, via the procedure called PER/DCOMP (or in written form based on a specific format provided by the applicable tax law in specific cases or in case it is not possible to adopt the PER/DCOMP). After the reimbursement request is accepted by RFB, the full amount of the credit is made available to the taxpayer which may opt to: Have the amount credited in its bank account (if there are no outstanding debts of the company); or Use the recognized amount to offset other federal taxes due by the taxpayer. Although this seems a simple procedure, the recognition of the right to reimburse the amount of credits requested is complex and time consuming. Additionally, from a practical perspective, the effective receipt of a bank deposit in the amount of the credits is hardly an option. 5. Please note that credit and debt shall be related to a tax managed by RFB. OFFSETTING Pursuant to the applicable legislation, the taxpayer who assesses a federal tax credit, which may be reimbursed (i.e. fulfill one of the conditions explained in the previous topic), is able to request the offsetting of such credit against its own tax liabilities currently due or those debts which are still maturing. 5 The offsetting request is also made via the electronic PER/DCOMP system (or via a specific form in case the electronic procedure is not possible). After the offsetting request is accepted by the RFB, the liabilities which were offset against the credits will be dully settled. On the other hand, if the offsetting request is not accepted, penalties and interest may apply. In any case, the taxpayer may file the proper administrative appeals against decisions that do not accept the offsetting/ reimbursement requests. Finally, it is important to highlight that the relevant rulings provide for several other conditions, restrictions and procedures to be observed as regards the reimbursement or offsetting of federal tax credits or offsetting of federal tax credits. 21 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
03. STATE TAXES 22 LAW ICMS STATE VALUE-ADDED TAX The Tax on the Distribution of Goods and on Interstate and Intermunicipal Transportation and Communication Services ( ICMS ) is similar to a value-added tax and is imposed on transactions involving the sales and other commercial operations with goods (including electricity), the rendering of any type of intermunicipal or interstate transport services and on communication services. Its main aspects are regulated by the National Complementary Law 87/96, which must be observed by all Brazilian States. As expressly established by the Federal Constitution, the ICMS is a non-cumulative tax, which means that the ICMS paid in each transaction may be offset against the tax due on upcoming transactions or service renderings. Regarding the credit mechanism for the acquisition of inputs or products for resale, as a rule, the tax may be immediately appropriated by the taxpayer. On its turn, the credit related to the acquisition of fixed assets is, as a general rule, limited to the proportion of 1/48 per month, i.e., the credits related to the acquisition of fixed assets, considered as such the machinery, equipment and vehicles directly used in the company s activities, will only be fully recovered after 4 years of their acquisition. There are, however, exceptions to such rule in the state legislations. The ICMS is also imposed on the import of goods or of communication services, including, in the case of goods, those acquired for the importer s fixed assets, such as machinery and equipment. The taxable basis, in this situation, is the customs value, plus II, IPI, PIS/COFINS and the ICMS itself assessed on a gross-up basis. In such event, in general, the tax paid by the importer may be offset against the tax due in future taxable transactions. The taxable basis of the ICMS due on the sale of products is, as a rule, the value of the transaction, added by insurance, conditional discounts and freight, if charged separately and rendered by the seller or on its behalf, always calculated on a gross-up basis. In the rendering of interstate and intermunicipal transportation and communication services, the ICMS is usually imposed on the price of the service. For domestic transactions and services carried out within the same Brazilian State, the respective tax rates will be determined by each State. The rate established for intrastate transactions is also applicable to the sale of products to non-taxpayers, even if they are located in a state different from the one of the seller. The general tax rate applicable to domestic transactions may be up to 19%, depending on the State where the transaction takes place. For certain products and services, such as perfumes, cigarettes and others, the states often establish a higher tax rate. On interstate transactions carried out between taxpayers, the rate is established by the Federal Senate and may be 4%, 7% or 12%.
The 4% rate was recently established in order to reduce the effects of the tax war between Brazilian States, which usually grant ICMS benefits on the sales of goods. Therefore, the Federal Senate decided to reduce the possible basis for the ICMS benefits granted by reducing the interstate transactions rate to 4%. As per the new legislation, the 4% rate applies to all interstate transactions except for the following situations: Transactions with products in which the amount of imported inputs does not surpass 40% (according to the calculation criteria determined by the relevant rulings); Transactions with any imported products with no similar manufactured in Brazil, listed by the foreign trade federal department; between the interstate rate applied to the transaction and the internal rate established by the respective state of the acquirer location. The ICMS is not imposed on the export of products or services. The ICMS may also be imposed under a tax substitution regime, by means of which one entity participant of the commercialization chain is elected to collect the ICMS imposed on the whole chain regarding transactions to be carried out in the same State. As a rule, the tax substitute, which is liable for the collection of the ICMS for the whole commercialization chain, is the manufacturer or importer. If the subsequent player in the chain does not perform transactions within the State, it is allowed to recover the ICMS that was previously collected on its behalf. ITCMD GIFT AND INHERITANCE TAX Transactions with imported products manufactured in accordance with the Basic Productive Process established for some regions and/or specific products; and Transactions with imported natural gas. For the transactions to which the 4% rate does not apply, the ICMS rate may be 7% on the sale of products from companies located in south and southeast states, except for Espírito Santo, to companies located in the North, Northeast and Central-West and Espírito Santo, or 12% for the remaining interstate transactions. If a taxpayer acquires fixed assets and consumable goods on an interstate transaction, as a rule, it must also collect the differential rate, which corresponds to the difference Under the Federal Constitution, States may impose the Gift and Inheritance Tax ( ITCMD ) on donations and inheritances of any assets or rights. Therefore, the ITCMD is a State tax that comprises two different taxable events: donations and inheritances. The legislation of each State of the Brazilian Federation shall regulate the imposition of the ITCMD, through local laws. Notwithstanding this, the general taxation limits imposed by the Federal Constitution and by the National Tax Code shall be observed. The Federal Constitution provided a situs principle that shall govern the Brazilian States imposition activity of the ITCMD on gifts or inheritance involving real estate: the State where the real estate is located is entitled to impose the ITCMD on transfer transactions implemented by means of a donation or an inheritance. 23 HOW TO MANAGE CORPORATE TAXES IN BRAZIL
With respect to movable property, the imposition power is attributed to: The State where the probate is processed, in relation to inheritances; and The State where the donor is domiciled, in case of donations. The tax rates of the ITCMD vary in accordance to the laws of the relevant State, though a maximum limit of 8% shall be observed. The ITCMD is generally imposed on the market value of the asset or right donated or transferred as a bequest upon death of the owner. Special rules normally apply to define the value of quotas or shares of legal entities, depending on the legislation of each State concerned. The taxable basis shall be determined on the date of the donation or on the date on which the probate process commences. IPVA PROPERTY TAX ON VEHICLES The Property Tax on Vehicles ( IPVA ) is imposed on the ownership of motor vehicles. The taxpayer is the owner of the vehicle and the taxable basis is, as a general rule, the vehicle s market value, being the assessment made annually. The IPVA is also imposed upon the acquisition of a new vehicle, case in which the taxable basis is the value indicated in the fiscal document of acquisition, proportional to the remaining months of the year of acquisition. The rates may vary in accordance with the type or use of the vehicle and are established by each state. OTHER TAXES Additionally, the state government is authorized by the Federal Constitution to create other fees related to the use of specific and dividable public services and police power, as well as improvement fees. 24 LAW
04. MUNICIPAL TAXES ISS TAX ON SERVICES The Tax on Services ( ISS ) is imposed on the rendering of services of any nature, except for communication and intermunicipal and interstate transportation services, which are subject to ICMS. The import of services is also subject to the ISS. Its main aspects are regulated by the National Complementary Law 116/03, which must be observed by all the Brazilian Municipalities. This federal law brings a list of services that can be taxed by the municipalities. The ISS rate may vary depending on the municipality in favor of which the tax is due as well as on the nature of the service, being the minimum and maximum tax rates of 2% and 5%, respectively. The ISS taxable basis is the price of the service. The export of services is not subject to ISS, except if the result of the service is verified in Brazil. As a general rule, ISS is collected in favor of the municipality in which the service provider is located. However, the national Law that rules ISS established that for some services expressly indicated, such as civil construction works, the tax must be collected in favor of the municipality in which the services are effectively rendered. IPTU PROPERTY TAX ON URBAN REAL ESTATE The Property Tax on Urban Real Estate ( IPTU ) is a municipal tax imposed on the ownership or possession of urban real estate, characterized as such the real estate located in the urban area, under specific criteria established by the national legislation. The taxable basis and rates vary in accordance with the size, location and use of the real estate. The taxpayer is the owner or possessor of the urban real estate and the assessment of the IPTU is made annually, as a rule. ITBI TRANSFER TAX ON REAL ESTATE The Transfer Tax on Real Estate ( ITBI ) is imposed on the inter vivos transfer of real estate, as well as on the transfer or assignment of in rem rights regarding real estate, except for in rem guarantee rights. The Federal Constitution expressly establishes that ITBI is neither imposed on the transfer of estate or rights thereto related in the case of capital contributions, nor on the transfer of real estates or rights resulting from a merger, consolidation, spin-off or liquidation, unless the legal entity receiving the asset or rights is engaged in the purchase and sale of real estates or rights thereto related or to the rental or leasing of real estate. 25 HOW TO MANAGE CORPORATE TAXES IN BRAZIL