TTN Seminar Monaco 2008 Recent Developments in Brazilian International Taxation Rio de Janeiro - Brasil Rua Sete de Setembro, 111 7º andar CEP: 20.050-002 Tel: 55 21 3231-5900 / Fax: 55 21 2531-9388 São Paulo - Brasil Av. Ibirapuera, 2.907, salas 320 e 321 CEP: 04.029-200 Tel: 55 11 5091-6778 / Fax: 55 11 5091-6705 www.brancoconsultores.com.br
PRELIMINARY CONSIDERATIONS The main recent developments in Brazilian international taxation, that will be discussed in our presentation, are the following: Law 11,727/2008 The new concept of Tax Haven Jurisdiction ; Offshore Structures of Individuals Information to be reported in Brazilian s Central Bank Declaration and Annual Income Tax Return; Agreement of Exchange Information Discussions regarding the agreement between the governments of Brazil and the US for the exchange of information related to taxes. 2
LAW 11,727/2008 The new concept of Tax Haven Jurisdiction 3
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN Brazilian tax law current in force (Law 9,430/96) generally considers as a tax haven jurisdiction any country or location that does not tax income, or that taxes income at a rate lower than 20%. It is also worth mentioning that in specific situations, according to that law, any country or location that imposes restrictions on the disclosure of shareholding composition or on the ownership of investments is also included in this concept of tax haven. In order to regulate that law, Brazilian tax authorities enacted, in 2002, Normative Instruction # 108, with a black list of countries and locations considered tax havens, which are the following: 4
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN BRAZILIAN BLACK LIST NORMATIVE INSTRUCTION # 108/2002 ANDORRA COOK ISLANDS MALDIVES SAINT VINCENT GRENADINES ANGUILLA COSTA RICA REPUBLIC MALTA SAINT LUCIA ANTIGUA AND BARBUDA DJIBOUTI MAN ISLANDS SEYCHELLES DUTCH ANTILLES DOMINICA MARSHALL ISLANDS TONGA ARUBA UNITED ARABS EMIRATES MAURITIUS ISLANDS TURKS AND CAICOS ISLANDS BAHAMAS GIBRALTAR MONACO VANUATU BAHRAIN GRENADA MONTSERRAT ISLANDS US VIRGIN ISLANDS BARBADOS HONG KONG NAURU BRITISH VIRGIN ISLANDS BELIZE LEBUAN NIUE ISLANDS BERMUDA ISLANDS LEBANON SULTANATE OF OMAN CAMPIONE D ITALIA LIBERIA PANAMA CHANNEL ISLANDS LIECHTENSTEIN ST. KITTS AND NEVIS CAYMAN ISLANDS LUXEMBOURG (*) AMERICAN SAMOA CYPRUS MACAO WESTERN SAMOA SINGAPORE MADEIRA ISLAND SAN MARINO (*) Only with respect to the holdings regulated by Law # 31/1929. 5
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN With respect to the new tax provisions regarding this subject, Law 11,727/2008, enacted on June 24, 2008, created a new concept of tax haven to the Brazilian legislation, which basically sets forth that: Art. 24, Paragraph 4th It is also considered a tax heaven the country where the law does not allow the access to information regarding the shareholders of the companies, its ownership or the effective beneficiary of income earned by non residents. Art. 24-A To the operations executed in tax havens are applicable the provisions related to prices, costs and taxes foreseen from arts. 18 to 22 of this Law ( ) Sole Paragraph It is considered tax havens countries which: I - do not tax income, or that tax income at a rate lower than 20%; II grant tax advantages to non-resident individuals or legal entities provided that: a) These tax advantages either do not require any type of substantial economic activity in the jurisdiction; b) Are conditioned to the absence of any economic activity on the jurisdiction. 6
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN III - does not tax income, or that taxes income derived from a foreign source at a rate lower than 20%; IV - imposes restrictions on the disclosure of shareholding composition, of the ownership of investments, of the ultimate beneficiary of earnings that are attributed to nonresidents, or of the economic transaction that are carried out. Based on the new legislation, which is effective for fiscal years beginning in January 2009, a new and enlarged definition of tax haven might be adopted by the Revenue Service. This new and enlarged definition will be probably based on the final part of article 24, paragraph 4th of Law 9,430/96 (introduced by Law 11,727/2008), which foresees that it is considered a tax heaven the country where the law does not allow the access to information regarding the effective beneficiary of income earned by non residents. This provision may authorize tax authorities to introduce a list of entities which will result in a higher rate of income and capital gains tax being incurred. However, until this moment, that list was not issued by Brazilian tax authorities. We are expecting to have this new black list in the next few months, and we are not sure whether they will attempt to include, for example, the Delaware Limited Liability Companies (LLC s) in it, but rumors say they will. 7
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN Finally, it is important to mention that, as done in the past, this new black list of countries and locations that are considered tax havens, may illegally broaden this concept to all types of transactions carried out in Brazil by non-brazilian residents, and without considering the different concepts of tax havens that should apply to the various types of transactions that may be carried out in Brazil, for example: (a) Capital gains arising from the sale or disposition of equity interest in a Brazilian entity held as a foreign portfolio investment, pursuant to Resolution of the National Monetary Council (CMN) 2,689 and other income earned in the Brazilian financial or capital markets; (b) Capital gains arising from the sale or disposition of equity interest in a Brazilian entity held as a foreign direct investment, pursuant to Law 4,131, other capital gains and earnings; (c) Remittances subject to transfer pricing control (imports of goods, services and rights). In this regard, please find below a summary of the new concept of tax haven jurisdiction which, in our view, should apply to different types of outflows and remittances made from Brazil, before and after Law 11,727/2008: 8
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN TIPE OF OUTFLOW OR REMITTANCE CONCEPT OF TAX HAVEN JURISDICTION PRIOR TO LAW 11,727 AFTER LAW 11,727 Capital gains pursuant to Resolution of the National Monetary Council (CMN) 2,689 and other income earned in the Brazilian financial or capital markets Capital gains pursuant to Law 4,131, other capital gains and earnings Transfer pricing control (i) Does not tax income, or taxes income at a rate lower than 20%. (i) Does not tax income, or taxes income at a rate lower than 20%. (i) Does not tax income, or taxes income at a rate lower than 20%. (ii) Imposes restrictions on the disclosure of shareholding composition or on the ownership of investments. (i) Does not tax income, or taxes income at a rate lower than 20%. (i) Does not tax income, or taxes income at a rate lower than 20%; (ii) imposes restrictions on the disclosure of shareholding composition, on the ownership of investments, or on the ultimate beneficiary of earnings that are attributed to non-residents. (i) Does not tax income (income in general or, specifically, income derived from foreign sources), or taxes such income at a rate lower than 20%; (ii) imposes restrictions on the disclosure of shareholding composition, of the ownership of investments, of the ultimate beneficiary of earnings that are attributed to nonresidents, or of the economic transaction that are carried out; or (iii) grants tax advantages to non-resident individuals or legal entities, provided that these tax advantages either do no require any type of substantial economic activity in the jurisdiction, or are actually conditioned to the absence of any economic activity in the jurisdiction. 9
LAW 11,727/2008 NEW CONCEPT OF TAX HAVEN In any event, since the predominant understanding is that this black list is exhaustive, we understand that only the tax jurisdictions that will be black-listed by the Brazilian Federal Revenue Service (or specific types of entities in these jurisdictions) should be regarded as tax haven jurisdictions for Brazilian tax purposes. 10
INDIVIDUALS OFFSHORE STRUCTURES Information to be reported in Brazilian s s Central Bank Declaration and Annual Income Tax Return 11
INDIVIDUALS OFFSHORE STRUCTURES I Information to be reported in Annual Income Tax Return: Normative Instruction # 820/2008 foresees in article 9th that the individual who is a tax resident in Brazil is obliged to report all his assets in the Annual Income Tax Return to Brazilian Internal Revenue Service. With respect to the specific rules regarding the obligation of reporting shares in a Brazilian or foreign company, sole paragraph of article 9th of Normative Instruction # 820/2008 sets forth that it is not necessary to be reported: The shares in a company, negotiated or not in the Stock Market, as well as golden or financial assets, which cost of incorporation or acquisition is less than R$ 1,000. In view of this, is easy to see that Brazilian tax rule to report shares in a company is based on the cost of acquisition of these shares. It means that if the amount paid by the shareholder to acquire the shares is equal to or higher than R$ 1,000, they shall be reported. 12
INDIVIDUALS OFFSHORE STRUCTURES II Information to be reported in Brazilian s Central Bank Declaration Firstly, it is worth to mention that the individual is only obliged to report to Brazilian Central Bank his assets in a foreign country when the totality of these assets amounts to a value equal to or higher than US$ 100,000. In this scenario, if an individual has a participation in a foreign company equal to or higher than 10%, shall inform it in Brazilian s Central Bank Declaration as a Direct Investment, in which, according to the rules of Central Bank, shall be reported the following information, among others: Value: inform the value of the shares based on the quoted value in the Stock Market. If the company does not have shares negotiated in the Stock Market, it shall be informed the cost and date of acquisition of the shares. Reinvestment Value: Reinvestment is the proportional participation of the shareholder in the net profit of the company, which was not paid as dividends. 13
INDIVIDUALS OFFSHORE STRUCTURES II Information to be reported in Brazilian s Central Bank Declaration Value of the profits/dividends: To inform net amounts received by the shareholder during the calendar year, as profits or dividends. In view of this, we may conclude that in Brazilian s Central Bank Declaration, the shareholder shall report not only the cost of acquisition of the shares, but also the equity value of the company (which will be represented by the sum of the value and reinvestment value that consists on the accumulated profit of the company). it is important to mention that if the transfers were made from an offshore structure to a second offshore structure, the individual is not obliged to report this second company considering that its shareholder will be the first one. 14
INDIVIDUALS OFFSHORE STRUCTURES III Conclusion In this case, if the profit is accumulated in this second offshore structure (a wholly-owned subsidiary ), its shareholder (a holding company) is not obliged to register in its books the investment in the subsidiary by equity and the capital in the holding was not paid up by the individual, he is not legally obliged to report this investment to Brazilian Internal Revenue Service or Central Bank, as demonstrated below: Individual Individual Cost of Acquisition < 1,000: Do not report to IRS Cost of Acquisition > 1,000: Report to IRS Cost of Acquisition < 1,000: Do not report to IRS Cost of Acquisition > 1,000: Report to IRS Holding Company Holding Company Equity Value < 100,000: Do not report to Central Bank Equity Value > 100,000: Report to Central Bank EQUITY Do not report to Central Bank or IRS Subsidiary 15
INDIVIDUALS OFFSHORE STRUCTURES IV Use of LLC s in Brazilian tax plans Finally, it is very important to mention that, since LLC s, according to American Law, do not have corporate entity, they are not the most appropriate vehicle to postpone Brazilian taxes using offshore structures. This is because Brazilian tax authorities may understand that the incomes earned by the LLC s were, in fact, earned by its shareholder (the individual) and, in view of this, tax these incomes, according to Carnê-Leão systematic (monthly rates from 15% to 27,5%). 16
AGREEMENT OF ECHANGE INFORMATION BRAZIL x US Discussions regarding the agreement for the exchange of information related to taxes 17
AGREEMENT OF EXCHANGE INFORMATION BRAZIL x US The agreement for the exchange of information related to taxes was signed on March 20th, 2007, by the Secretary of Brazilian Internal Revenue Service and the Ambassador of United States to Brazil and, now, is waiting for the approval of Brazilian National Congress to get in force in this country. The scope of that agreement consists on providing assistance through exchange of information that may be relevant to the administration and enforcement of the domestic tax law of the parties, including information that may be relevant to the determination, assessment, enforcement or collection of tax with respect to persons subject to taxes, or to the investigation or prosecution of criminal tax matters. According to article 3 of that agreement, it shall apply to the following taxes imposed by the US and Brazil: (a) US: Federal Income Taxes; Federal Taxes on Self-Employment Income; Federal State and Gift Taxes; and Federal Excise Taxes. 18
AGREEMENT OF EXCHANGE INFORMATION BRAZIL x US (b) Brazil: Individual and Corporate Income Tax; Industrialized Products Tax; Financial Transactions Tax; Rural Property Tax; Contribution for the Program of Social Integration; Social Contribution for the Financing of the Social Security; and Social Contribution on Net Profits. A quite polemical provision of the agreement (Article VI Tax Investigations Abroad) foresees that by reasonable notice given in advance, a country may request that the other one allow officials of the requesting country to enter the territory of the requested one, to the extent permitted under its domestic laws, to interview individuals and examine records of the individuals concerned. In addition, the requested country may authorize representatives of the other country to attend a tax examination in its territory. The controversy which arises from this provision is based on article 5th of Brazilian Constitution, which prohibits foreign agents to make investigations in Brazil. In addition, Brazilian attorneys claim that only the Brazilian President is authorized to celebrate international agreements, according to article 8th of Brazilian Constitution. 19
AGREEMENT OF EXCHANGE INFORMATION BRAZIL x US However, Brazilians tax authorities claim that both countries are committed to working together to try to find ways of reaching their ultimate objective of overcoming the tax policy differences that have prevented the conclusion of a bilateral tax treaty between Brazil and the US in the past. In addition, they say that the agreement does not hurt Brazilian Constitution, since the President, who is authorized to sign international agreements, delegated this power to the Secretary of Brazilian Internal Revenue Service. 20