INFORMATION ON INDIRECT TAX PROGRAMMES IN BRAZIL

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1 INFORMATION ON INDIRECT TAX PROGRAMMES IN BRAZIL The tax programmes described in this paper illustrate the use by Brazil of indirect taxes in particular, exemptions from sales taxes- for the purpose of supporting domestic manufacturing and exports. Sales taxes have a direct impact on the cost of goods and, therefore, on their competitive position on the market place. Questions arise as regards: possible differential taxation of domestically produced and imported goods; and conditions linked to local content or export performance. Inovar-Auto The current legal framework of INOVAR-AUTO is set out in Articles 40 through 44 of Lei of 17 September 2012, and further implemented in Decreto of 3 October INOVAR-AUTO seeks to foster the production of vehicles in Brazil through tax incentives under the Imposto de Produtos Industrializados (IPI). To this effect, the programme grants an IPI credit to be calculated on the basis of expenditures on "strategic" input and tools purchased in Brazil. The tax credit must be used to offset up to 30 percentage points of the IPI tax on motor vehicles produced in Brazil (and, only to a limited extent, a capped number of imported vehicles). According to the expected operation of the measure, it appears that INOVAR-AUTO, in effect, requires the purchase of domestic input and tools that is, produced in Brazil in order for a company to avail itself of the IPI credit of up to 30% of the pre-tax value of vehicles. As a result, manufacturers in Brazil would have an incentive to source an increasing proportion of car components domestically, and importers of vehicles would be excluded from the tax benefits as imported vehicles will rarely be produced with components purchased in Brazil. INOVAR-AUTO includes specific rules for companies intending to build production plans in Brazil, whether they are landing in Brazil for the first time or they intend to expand existing plants or build additional plants. Until such time as the projected plant is operational, the company may be entitled to apply IPI credits on imported cars. Thus, INOVAR-AUTO makes access to IPI credits conditional upon implementing an investment plan that, in the future, will enable the company to ultimately substitute imports for domestically produced vehicles. In addition, INOVAR-AUTO beneficiaries must make expenditures related to research, development, and innovation, and technology support to auto part suppliers in Brazil above a minimum threshold (the Programme also grants some limited IPI credits in respect of expenditures on those areas). Those conditions entail an inherent advantage to domestic producers, as they are the ones that, by definition, are more likely to conduct already today R&D and other eligible activities in Brazil. IPI tax breaks for computing and automation goods Article 4 of the Law Nº 8,248 of 23 October 1991 (as subsequently amended) grants significant tax benefits concerning the IPI tax for companies that develop or produce computing and automation goods (Article 16A) and that invest in IT-related R&D. In particular, until 31 December 2014 the IPI tax otherwise due is reduced by 80%; the reduction in 2015 will be 75%; and from 2016 to 2019 the reduction will be 70%. Those percentages are slightly different for some specific categories of goods (laptop computers and small digital equipment Article 4 5) and, by regulation, are to be increased for certain goods developed in Brazil (Article 4 7). 1

2 Article 4 1ºC establishes a general requirement to produce the relevant computing and automation goods in conformity with the "Basic Productive Process" (PPB) for them to benefit from the tax breaks. The R&D requirements are based on a minimum amount of expenditure calculated as a minimum percentage of gross turnover in the Brazilian market, including specific requirements to grant certain amounts to public and other research institutions (Article 11). Decree Nº 5,906 of 26 September 2006 implements the provisions of the Law (as amended by later acts). The Decree establishes different tax rates depending on the Brazilian region where the goods are produced: total exemption (or 95% reduction for some products) until end of 2014 for good produced in the Centre-West, North-East and Amazonia; 95% reduction (or 80% for some products) for good produced in other regions (Articles 3 and 4). Under Article 6 of the Decree, tax exemptions or reductions only apply to products that are manufactured in Brazil according to the relevant Basic Production Process (PPB). Articles 16 to 20 of the Decree lay down rules on the PPB. The Products must in addition be developed in Brazil, in accordance to conditions to be laid down in further implementing rules (Article 7). See also articles 22 to 23. Special Taxation Regime of the National Broadband Programme for the Establishment of Telecommunication Networks (REPNBL Redes) The Programme REPNBL-Redes is established by Articles 28 to 33 of Law Nº 12,715 of 17 September The Programme is aimed at supporting the development of projects for the establishment, enlargement or modernisation of telecom broadband networks, including terrestrial satellite stations that contribute to the objectives of Brazil s National Broadband Programme. REPNBL-Redes will apply to projects implemented until 31 December Projects need to be approved in accordance with implementing rules to be laid down by the government (Article 28 2). Those implementing rules will be based on the guidelines set out in the Law (Article 29 1), including conditions relating to the acquisition of network equipment and components produced in accordance with the Basic Production Process (PPB), up to a minimum percentage to be established by decree; and the acquisition of network equipment and components developed with national technology, also up to a minimum percentage. The government will establish a specific list of equipment and components for the implementation of those provisions (Article 29 4). Projects must be submitted to the government before 30 June 2013 (Article 29 3). The Programme REPNBL-Redes foresees tax benefits in the form of exemptions from the IPI, PIS and COFINS taxes, whenever the relevant goods are purchased by a REPNBL beneficiary. Those exemptions apply only as regards sales in the domestic market, not as regards imports (Article 30). For those goods for which a PPB exists, the tax breaks only apply if the PPB requirements are fulfilled (Article 29 4). 2

3 IPI tax suspension for raw materials, intermediate goods and packaging materials Article 29 of Law Nº 10,637 of 30 December 2002 (as amended by Law Nº 12,715 of 17 September 2012) suspends the IPI tax on the sale of raw materials, intermediate gods and packaging materials to companies that produce certain categories of goods (meat, fish, dairy, fruits, coffee and tea, cereals, malt and gluten, seeds, fats and oils, PAPs, chemicals, pharmaceuticals, shoes, and several other products). Tax benefits appear to apply both in the case of domestically produced inputs (Article 29 caput) and of inputs that are directly imported by the companies producing covered goods (Article 29 4). Tax benefits apply also to sales of raw materials, intermediate goods and packaging materials to Brazilian companies manufacturing: parts and components of motor vehicles (including industrial vehicles); parts of aircraft; and computing and automation goods produced in Brazil in accordance with the so-called Basic Productive Process (PPB Processo Produtivo Básico). Tax benefits also apply to sales of raw materials, intermediate goods and packaging materials to predominantly exporting legal persons (Article 28 1 para. II). Predominantly exporting legal persons are those whose gross export turnover in the year before adherence to RECAP was 50% or more of their total gross income from sales of goods and services, without considering sales taxes (Article 29 3). While IPI is an indirect tax, and exports may therefore be exempted from it, tax benefits accorded to exporting companies are not limited to the remission of indirect taxes on exports. Special Regime for the Acquisition of Capital Goods for Exporting Companies (RECAP) The RECAP Programme is established by Law Nº 11,196 of 21 November 2005, in its Articles 12 to 16 (as amended by Law Nº 12,715 of 17 September 2012). The Programme s implementation is regulated in Decree Nº 5,649 of 29 December RECAP is open to predominantly exporting companies, defined as those companies whose gross export turnover in the year before adherence to RECAP was 50% or more of their total gross income from sales of goods and services, and which commit to maintain such levels of exports for at least 2 calendar years (Article 13 of the Law). There is a specific, lower percentage (20%) for companies producing certain goods listed in Article 1 of Law Nº 11,529 of 22 October 2007 (textiles, shoes, machinery, motor vehicles etc.). Sales taxes are not taken into account to calculate the company s turnover. New companies or companies that do not yet reach the 50% threshold can nevertheless benefit from RECAP if they accept an export commitment of 3 calendar years. Companies interested in RECAP benefits need to be recognised by the tax administration (Article 2 of Decree Nº 5,649). Certain companies may not have access to the system depending on their tax status (Article 13 3 of the Law). RECAP benefits consist in an exemption from the PIS and COFINS taxes when relevant goods are bought on the domestic market or imported by RECAP beneficiaries (Article 14 of the Law). Those goods (capital goods) are to be listed in an implementing Decree. The tax exemption also extends to inputs, intermediate products and packaging materials, in accordance with Article 40 of Law Nº 10,865 of 30 Abril 2004 (as amended). While PIS and COFINS are described as indirect taxes, and exports may therefore be exempted from them, tax benefits accorded by RECAP to exporting companies are not limited to the remission of indirect taxes on exports. 3

4 Programme for Digital Inclusion The Programme is established in Articles 28 to 30 of Law Nº 11,196 of 21 November 2005 (as amended by Law Nº 12,715 of 17 September 2012). It consists in an exemption from PIS and COFINS taxes on revenue from sales of certain products. In particular, for some product categories, the exemptions appear to apply only to domestically produced goods: - Laptop computers of less than 3.5 kg of weight - Some categories of basic desktop computers - Touch screen devices - Smartphones - Digital routers - Other data processing equipment, as identified in the Law In order to benefit from the tax exemption, the above-mentioned goods must be produced in the country (i.e. in Brazil) in accordance with requirements laid down by the government for each product through the so-called Basic Productive Process (PPB Processo Produtivo Básico). The Law includes provisions on acquisitions by public bodies (Articles 28 2 and 5) but it applies generally to sales of the relevant equipment to any natural or legal person (public or private). The Programme covers sales until 31 December Special Regime of Incentives for the Development of Infrastructure for the Fertilisers Industry (REIF) The REIF Programme is established by Medida Provisoria Nº582, of 20 September 2012, in its Articles 5 to 11. The Programme s duration is five years (Article 11). REIF is open to companies with approved projects for the establishment or enlargement of infrastructure for the production of fertilisers and of their inputs. Furthermore, projects that rely on such inputs to produce products other than fertilisers may also qualify as beneficiaries of REIF. The approval of projects is the responsibility of the Ministry of Mines and Energy. REIF benefits consist in an exemption from certain taxes (PIS, COFINS, IPI) on the sale to a REIF beneficiary, or the importation by a REIF beneficiary, of new machinery, tools, and equipment, and of construction materials, for use in approved industrial infrastructure projects (article 8). Similar exemptions apply to sales or imports of services, in so far as PIS/PASEP and COFINS are concerned (article 9), and to the lease of machines or equipment (Article 10). According to Article 7, REIF benefits are conditional upon the fulfilment of the following requirements: (a) investment in R&D and technological innovation, above a certain minimum; and (b) a minimum percentage of local content in relation to the overall value of the project. 4

5 Support Programme for the Technological Development of the Semiconductors Industry (PADIS) The PADIS Programme was established by Articles 1 to 11 of Law Nº 11,484 of 31 May 2007 (amended by Article 57 of Law Nº 12,715 of 17 September 2012). Companies that make a given amount of investments in R&D in Brazil (expressed as a minimum percentage of their gross turnover in the Brazilian market, according to the terms and conditions laid down in Article 6 of the Law) may benefit from the PADIS Programme. Beneficiaries must also carry out certain activities relating to: - design, processing, cutting and testing of semiconductor diodes and transistors, as well as photosensitive cells (including photovoltaic cells) and electronic circuits (processors, computing memory, etc); - design, manufacturing and installation of LCD, LED and similar displays; - inputs and equipment for the manufacturing of the above mentioned categories of goods, provided that they are manufactured in accordance with requirements laid down by the government through the so-called Basic Productive Process (PPB Processo Produtivo Básico). Companies that wish to benefit from the PADIS Programme cannot carry out activities other than those mentioned above (Article 57 3). The Programme foresees an exemption from IPI, PIS and COFINS taxes otherwise due on the sale of machinery, tools, instruments, and equipment that are to become fixed assets of PADIS beneficiaries. The Programme also foresees similar tax exemptions with regard to any inputs necessary to carry out the activities mentioned above. In addition, the sales of the devices manufactured by PADIS beneficiaries are exempted from IPI, PIS and COFINS (as well as from income tax), in accordance to Article 4: at least with regard to displays and to inputs and equipment, such tax benefits are available only if the goods are manufactured in Brazil (Article 4 2). Support Programme for the Technological Development of the Industry of Equipment for Digital TV (PATVD) The PATVD was established by Law Nº 11,484 of 31 May 2007 (Articles amended by Article 57 of Law Nº 12,715 of 17 September 2012). The Programme is very similar in its design and operation to the PADIS Programme. Companies that invest in R&D and that develop and manufacture digital TV transmitters in Brazil may benefit from IPI, PIS and COFINS tax exemptions (Article 13). Those tax breaks apply with regard both to equipment and inputs for the manufacturing of digital TV transmitters (a list of specific goods was to be issued by means of an implementing act Article 14 2). Import duties may also be suspended (Article 14 5). More importantly, sales of finished goods produced by PATVD beneficiaries are exempted from PIS, COFINS and IPI taxes (Article 15). 5