Newsletter no. 27 Year III October/2009

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1 Tax Bulletin tax report we enjoy and believe in our work Newsletter no. 27 Year III October/2009 We are pleased to present the twentyseventh edition of our Tax Bulletin, the newsletter whereby we update clients as well as those interested in the most recent tax issues. Enjoy your reading. Case Law Matters of General Repercussion in the STF The Federal Supreme Court (STF) has recently recognized the general repercussion of the matters below. This means that other proceedings involving the same topic will be set aside until a position of the Supreme Court is issued. ICMS. Refund of the difference of the overpaid tax in the tax substitution regime. Presumed tax basis and actual tax basis. Article 150, 7, of the Federal Constitution (CF). Suits for Declaration of Unconstitutionality (ADIN) no. 2,675 and 2,777 deal with the same matter, whose judgment has already been initiated by the Plenary (Justice Ricardo Lewandowski) Social Security Contribution. Additional amount of 2.5% (article 22, 1 of Law no. 8,212/91). Distinguishing tax rates due to the activity developed (Justice Ricardo Lewandowski) WHT / Responsibility of Collection of Financial Institutions in Damages for Pain and Suffering The 2 nd Panel of the Superior Court of Justice (STJ), on 10/06/09, deemed that a certain financial institution could not collect the WHT on amounts paid to an individual in damages awarded for pain and suffering. The institution contended that the Federal Revenue of Brazil (RFB) affirmed its responsibility in a previous consultation, which would therefore lead to its assessment in case it failed to collect the tax. According to the STJ, such collection would not be possible, as the income tax

2 is not levied on indemnifications awarded on the basis of damages for pain and suffering. The reason is that, concluding that the income tax is charged on damages for pain and suffering would lead to the dissolution of the actual refundability of the damage, since by characterizing the sum received as equity increase, the indemnification nature of compensation for damage suffered, and consequently the actual redress nature, would be diverged. It is important to point out that this judgment applies only to a specific event analyzed by the STJ, and does not result in any change in position on the part of the RFB with regard to the responsibility of financial institutions for collecting the WHT levied on amounts paid as damages for pain and suffering. Offsetting between Social Contributions and other Taxes Administered by the RFB The Federal Regional Court of São Paulo (TRF/SP) has rendered decisions authorizing the offsetting between social contributions and the other taxes administered by the Federal Revenue Office of Brazil ( RFB ), ruling out the prohibition contained in the legislation in force. We highlight two decisions rendered by the First Panel of that Court, which authorizes the offsetting of the social security credit against debts related to other Federal taxes, pursuant to article 2 74 of Law no. 9,430/96, as it deems that after the Super-Revenue, the same body became in charge of taxation, inspection and collection of said taxes, which legitimizes, in the view of the judges, the intended offsetting. There is also a decision rendered by the Sixth Panel, whereby the offsetting of FINSOCIAL credits against social security debts were authorized, representing an important precedent for companies that do not have debts with the treasury enough to be offset and accumulated credit balances as a result of their activities. We believe that such position, although it concerns payments made prior to the unification of the collecting bodies and does not deal specifically with the prohibition contained in article 26, sole paragraph of Law no. 11,457/07 ( The provision in article 74 of Law no. 9,430, of December 27, 1996, does not apply to the social contributions to which article 2 of this Law refers. ), indicates the orientation position of the Judiciary, in the sense that it is possible to seek compensation between the social contributions and the other taxes administered by the RFB. ICMS / Tax Basis / Bonuses On October 22 last, an appellate decision was rendered in the records of Special Appeal no /SP, examining the inclusion of unconditional bonuses, granted by the companies, into the ICMS tax basis.

3 Justice Humberto Martins, based on several precedents of the First and Second Panel of the STJ itself, considered that the bonus is a type of discount, comprising the delivery of a greater amount of sold products, instead of granting a reduction of the sale value. He affirmed, therefore, that the tax basis is the one effectively carried out, and the discounts granted unconditionally are not included therein (as is the case of the bonuses in the examined situation). Furthermore, Justice Martins pointed out that regarding the ICMS tax substitution regime, the controversy on the inclusion of bonuses into the tax basis remains, thus, the judgment does not encompass such situation. Lastly, the appeal was judged under the rite of Repetitive Appeals, serving as a paradigm for other analogous cases, pending judgment in the courts of origin. Our law firm will continue to follow the discussion concerning the inclusion of bonuses into the ICMS/tax substitution tax basis, and will inform you as soon as there is any news of a judgment. ISS / Civil Construction / Worksite In a recent decision, rendered in the records of Special Appeal no , in a judgment under the rite of the Law of Repetitive Appeal, the Superior Court of Justice ( STJ ) issued a position that the Tax on Services ( ISS ) levied on engineering consulting services is to be collected taking into account the worksite, 3 considering that for purposes of collection of this tax, the construction work must be considered globally (and not the several steps for its execution). According to Justice Eliana Calmon, reporting the appeal, the material fact to be taken into account is the location where the work will be executed, and to which all the efforts and work were shifted, even when some have been performed in a location other than that of the construction. Thus, Justice Eliana Calmon upheld that Complementary Law no. 116/2003, which altered Law-Decree no. 406/68, determining that the location of the head office of the service provider is the location for the collection of the ISS, is not a rule for civil construction, since article 3 of this Complementary Law made an exception to civil construction. Legislations and Rules Response to Administrative Inquiry no. 128/09 / ICMS/ST does not generate non-cumulative PIS and COFINS credits Response to Administrative Inquiry no. 270 was published in the DOU of 10/05/2009, whereby the Federal Revenue of Brazil ( RFB ) expressed its position that the ICMS/ST does not integrate the acquisition value of goods for resale, for purposes of calculation of the credit to be discounted from the

4 amount due related to the Contribution to the PIS/PASEP and to Cofins, pursuant to article 3 of Laws no. 10,637/02 and /03. The ICMS/ST (progressive tax substitution) is that in which the ICMS is entirely collected by the first to integrate the chain, the tax substitute, based on a presumed amount for the final phase. Within this system, the substituted taxpayers do not collect more than any amount related to the ICMS on such goods and services, as everything has been reverted to the public treasury since the first phase of the economical circulation. The position expressed by the RFB, based on Normative Rule no. 594/2005, clearly limits the amount of PIS and Cofins credits from those companies that acquire goods for resale, as the ICMS was collected under the progressive tax substitution system (ICMS/ST). Repatriation - Bills The legalization and/or repatriation of funds not declared by individuals or legal entities domiciled in Brazil maintained abroad are subject matter of two Bills ( PL ) in voting phase: (i) PL no. 5,228/05, proposed by Representative José Mentor, and attached to PL no. 113/03; and (ii) PL no. 354/09, of Senator Delcídio Amaral. Said Bills, in addition to the tax amnesty, also provide for the 4 discontinuance of punishment for crimes related to such undeclared amounts. PL no. 5,228/05 was approved on by the Taxation and Finance Committee, with amendments, has been currently made available to the Constitution, Justice and Citizenship Committee, and provides for the following: - exclusive focus on assets held abroad; - assets transferred to Brazil: definitive taxation of the income tax ( IR ) at a 10% tax rate; - assets held abroad: definitive taxation of the IR at a 15% tax rate; - permanence in Brazil of repatriated amounts for at least 2 years. PL no. 354/09, however, currently under analysis by the Economical Matters Committee, has more comprehensive terms: - it comprises undeclared assets held in Brazil or abroad; - Individuals: - assets held in Brazil: definitive taxation of the IR at a 5% tax rate; - assets held abroad and transferred to Brazil definitive taxation of the IR at a 5% tax rate; - assets held and maintained abroad (not repatriated): definitive taxation of the IR at a 10% tax rate %; - single payment with 5% discount or in 10 monthly equal installments; - reduction by half of the respective tax rates in case of investment of at least 50% of the amounts and rights declared in shares of specific investment funds to be ruled by the Brazilian Securities and Exchange Commission ( CVM ) (funds destined to the investment of resources

5 in infrastructure, housing, agribusiness, innovation and scientific and technological research projects, bonds or debt securities issued by Brazilian companies offered in foreign markets). - those that do not use the benefit mentioned above may update their assets and rights contained in their income tax return (fiscal year of 2009, base year of 2008) by the market value on The increased amount deriving from the reassessment must be subject to taxation of 4%, by way of a single amount (with a 5% discount) or in 10 monthly equal installments. - Legal Entity: - assets held in Brazil, abroad, repatriated or not: definitive taxation of the IR at a 10% tax rate and of Social Contribution of the Net Income e ( CSLL ) at 8%, excluding any other deductions on the basis of tax incentive; - those that do not use the benefit mentioned above may update their real estate and equity interest by the market value on The increased amount deriving from the reassessment must be subject to taxation of the IRPJ at a 5% taxpayer rate, and of CSSL, at 4%, and the deductibility of any losses at the disposal of such assets is prohibited. This payment may be made through a single payment (with a 5% discount) or in 10 monthly equal installments. One noteworthy observation is that such Bills were strongly opposed by the Technicians of the Ministry of Justice, of the Central Bank of Brazil and the Financial Activity Control Council ( COAF ) in a formal manifestation to be sent to the National Congress, as released by the media on According to the Technicians contrary to the Bill, the major problem lies on the fact that the beneficiaries of these projects would need to prove the origin of the funds, conflicting with the fight against financial crimes and money laundering and affecting the agreements to be entered into by Brazil with other countries with this purpose. Spin-off / Use of Credits by the Incorporator Company The 9 th Tax Region of the Federal Revenue Office of Brazil ( RFB ) once again expressed (in line with Response to Inquiry no. 244/09), through Response to Inquiry no. 378, of , on the corporate transaction contemplating the spin-off of a company holder of accrued tax credits, with further incorporation of said spun-off portion by another company, which would use the credits earned through succession. Systematically, with regard to the possibility of using the credits by the incorporating company, the division of tax credits in some groups can be inferred from the amendment to the response to inquiry: (i) credits resulting from undue payments or overpayments that can be transferred to the succeeding company and refunded or offset, by the latter, against other taxes administered by the RFB of which it is a debtor; (ii) PIS and COFINS credits deriving from its non-accumulation two sub-groups can be distinguished (ii.1) credits related to article 3 of Laws no. 10,637/02 and no /03 tied to the revenue taxed

6 in the domestic market and agriindustrial presumed credits of article 8, of Law no. 10,925/04; and (ii.2) other credits listed in article 3 of Laws no. 10,637/02 and no /03 tied to export revenues or sales with suspension, exemption, zero tax rate of non-levy. Credits of sub-group ii.1 may not be subject matter of offsetting or refund by the incorporating company, regardless of the system to which it is subject. However, the mentioned credits may be discounted by the incorporating company subject to the non-cumulative system. As to the credits listed in sub-group ii.2, these may be subject matter of offsetting or refund by the incorporating company, regardless of being in the cumulative or non-cumulative system. If under the non-cumulative system, the incorporating company may also discount such credits in the subsequent months of contribution ascertainments. Therefore, such Response to Inquiry is very valuable to companies accumulating tax credits, among which we point out the export companies, to the extent it validates the transaction as it is structured, and also the use of tax credits accrued by the company e then spun-off by the one assuming the incorporating position. Team responsible for preparing the Tax Bulletin: Igor Nascimento de Souza (igor@ssplaw.com.br) Henrique Philip Schneider (philip@ssplaw.com.br) Eduardo Pugliese Pincelli (eduardo@ssplaw.com.br) Cassio Sztokfisz (cassio@ssplaw.com.br) Fernanda Donnabella Camano de Souza (fernanda@ssplaw.com.br) Angelo Tsukalas (angelo@ssplaw.com.br) Monique Haddad Knöchelmann (monique@ssplaw.com.br) Bruno Baruel Rocha (bruno@ssplaw.com.br) Ana Victória de Paula e Silva (anavictoria@ssplaw.com.br) Rafael Monteiro Barreto (rafael@ssplaw.com.br) Beliza Dias de Farias (beliza@ssplaw.com.br) Flávio Eduardo Carvalho (flavio@ssplaw.com.br) Rua Cincinato Braga, 340, 9º andar São Paulo (SP). Phone: (55 11)