Introduction Tax Desk Book BRAZIL Demarest e Almeida CONTACT INFORMATION Luiz Felipe Ferraz Demarest e Almeida Av. Pedroso de Moraes, 1.201 - Centro Cultural Ohtake São Paulo - SP - Cep: 05419-001 5511 3356-2190 fferraz@demarest.com.br www.demarest.com.br 1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.) The Brazilian tax system is primarily governed by the Federal Constitution of 1988 and by the National Tax Code (Law 5,172) which was issued in 1966. This basic legislation contains all general provisions, definitions, competences, procedures and limitations concerning to tax administration and assessment. The National Tax Code is of universal application and must be observed by all federal, state and municipal tax authorities within the country. The Federal Constitution determines the taxes which each member of the Federation has the competence to impose and also set forth which are the main principles of taxation to be followed by the legislators in all levels. The federal taxes are described by Federal Constitution on Section 153 and 154, being the main ones those below: (i) Import tax (II)
(ii) Export tax (IE) (iii) Income tax (IR) (iv) Tax on Manufactured Products (IPI) (v) Financial Transactions Tax (IOF) (vi) Rural and land tax (ITR) (vii) Contribution Tax for Social Integration Program (PIS) (viii) Social Contribution Tax on Business Entities' Profits (CSLL) (ix) Social Contribution Tax for Social Welfare (COFINS) State and Federal District taxes described in Section 155 of the Federal Constitution are the following: (i) Value-added Sales and Transportation Tax (ICMS) (ii) Inheritance and Donations Transfer Tax (ITCMD) (iii)vehicles Ownership Tax (IPVA) Finally, the Brazilian legislation provides for Municipal taxes which are determined by Section 156 of the Federal Constitution: (i) Service Tax (ISS) (ii) Real Estate Tax (IPTU) (iii)property Transfer Tax (ITBI) INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS Calculation of Income/ Profit Taxes 2. How is the taxable base determined? Business entities - There are three methods for the calculation of the Corporate Income Tax (IRPJ), namely: (i) real profit system; (ii) presumed profit system; and (iii) arbitrated profit system. In the real profit system, the taxable basis is the net profit reported on the balance sheet, adjusted by additions and exclusions authorized by the fiscal rules (Sections 219 and 247 of RIR/99). In the presumed profit system, the taxable basis is presumed at a pre-established percentage of the gross revenues, plus other income (financial income, capital gains etc.). Finally, the arbitrated profit system is only applicable when a taxpayer fails to comply with the rules for keeping records or computing taxable income. The taxable income basis would be arbitrated based on the company's activity presumed percentage of profits.
Individuals - Brazil adopts the universal income taxation rule, which means that all income and capital gains earned by the individual are subject to the individual income tax (IRPF), regardless of the denomination, location, legal status, means of earning or nationality of the paying source or goods yielding the income or revenue. 3. What revenues are included? Business entities - As a general rule, all revenues accrued by a legal entity must be included and recognized in accrual basis. Individuals - Taxable revenue is the gross amount received by the individual less the deductions allowable (Section 8 of Law n 9.250/95). 4. What deductions are allowed? Business entities - If there is no specific rule, deduction of expenses under the real profit system should follow the general rule of Section 299 of RIR/99, which establishes that expenses are tax deductible if they are regular in the company s activities and necessary in its due course of business. Deduction of an expense should follow a case-by-case analysis. Individuals - The main deductions allowable are the following: (i) Social Security Contribution Tax (INSS); (ii) R$ 144,20 (for the 2009 calendar year) per month for each dependent: (a) son and stepson under twenty one years old (twenty four if he or she is in the University, or any age when he or she is unable to work); (b) grandson, great-grandson, brother under twenty one years old with no support of their parents; (c) spouse; (d) commonlaw spouse; (e) person under twenty one years old under the guardianship of the individual; (f) parents, grandparents, great-grandparents with no income; (g) unfits under the guardianship of the individual (Law n. 9.250/95, Section 35 and Law 10.451/02, Section 2) (iii) child maintenance in compliance with a court decision (Law n. 9.250/95, Section 4); (iv) medical care and dental expenses (Law n 9.250/95, Section 8º, II, "a"); (v) educational expenses at an individual annual limit of R$ 2.708,94 (for the 2009 calendar year). 5. What are the major expenses that are not deductible?
Business entities - Companies may not deduct the expenses expressly prohibited by legislation (e.g. promotional gifts), as well as those that are not necessary for the activity of the company or to keep its revenue source. Individuals - Individuals may only deduct expenses expressly authorized by the legislation. 6. What are the applicable federal rates? Business entities - Corporate income tax is levied at a rate of 15% on each month's taxable profit (Section 541 of RIR/99). An additional of 10% is levied on the portion of real or determined profit exceeding R$ 20,000 monthly (Section 542 of RIR/99). Social Contribution Tax on Profits is due at a 9% rate. Individuals - For income tax to be calculated in the 2010 Annual Tax Return (related to income received during the 2009 calendar year), the following progressive rates are applicable monthly: Tax Basis (R$) Rate (%) Deduction (R$) Up to 1.434,59 - - From 1.434,60 to 2.150,00 7,5 107,59 From 2.150,01 to 2.866,70 15 268,84 From 2.866,71 to 3.582,00 22,5 483,84 Over 3.582,00 27,5 662,94 7. What are the applicable state and/ or other local rates? There are no state and/or other local rates. 8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc? Business entities - The taxable base of capital gains consists of the positive difference between the price obtained on the sale of the asset and its purchase cost. (Sections 418, 1º and 425 of RIR/99). There is no specific rate for capital gains obtained by corporations, which are included in the companies profits and taxed accordingly by the Corporate Income Tax and by the Social Contribution Tax on Profits. Individuals - According to the Brazilian legislation, capital gains (as such the difference between the sales price and the cost of acquisition of the asset or right) are
subject to income tax at a 15% rate to be calculated and paid by the taxpayer himself/herself (i.e., not withheld by a third party). 9. How are operating losses handled? Business entities - Tax losses may offset only up to 30% of the profits accrued by corporations as from the following years (Section 510 of RIR/99). Individuals - As a general rule, individuals are not allowable to handle losses. However, when the individual is exercising a rural activity, considered as cattle breeding, agriculture, vegetal and/or animal extraction, and any other animal cultures, he/she is allowable to recognize losses on these activities and offset them against taxable income for the following periods (Section 65 do RIR/99). 10. How are capital losses handled? Business entities - Capital gains and losses on business-related assets are treated as ordinary business income and are subject to corporate income tax at normal rates (Section 418 do RIR/99). Individuals - Individuals may not handle capital losses. Territorial Rules 11. What are the residence rules? Business entities - A corporation shall be considered as a resident in Brazil if its headquarters are located within the country (Section 147 of RIR/99 and Section 127 of CTN). Individuals - The individual becomes a Brazilian tax resident: a) upon his/her entrance in Brazil carrying a permanent visa; or b) upon his/her entrance in Brazil carrying a temporary visa, but with employment bond in Brazil; or If the individual enters Brazil under a temporary visa but with no employment bond in Brazil, he/she will be considered a Brazilian resident after a period of 183 days (consecutive or not) of permanence in the country during a period of twelve months.
Note: the individual will become a resident of Brazil for tax purposes as of the date that he/she obtains a permanent visa or establishes an employment bond in Brazil before his/her arrival. 12. Is worldwide income taxed? Business entities - As from Law n. 9.249/95, profits, earnings and capital gains made by branches, subsidiaries or affiliates of Brazilian companies operating abroad are subject to the taxation in Brazil. On the other hand, the income tax paid abroad on such profits, earnings and capital gains may offset the income tax due in Brazil (Sections 394 and 395 of RIR/99 / Law nº 9.249/95, Sections 25 and 26). However, the losses of such branches, subsidiaries and affiliates are not taken into consideration for purposes of calculating the Brazilian income tax, and may only offset future profits of the same subsidiary or of other branches in the same country (Section 394, 8º of RIR/99). Individuals - Individuals who are residents of or domiciled in Brazil are taxed on a cash basis, on their worldwide income. 13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others? Business entities - In the absence of a Double Taxation Treaty, the foreign tax credit for income tax paid in a given country may only offset Brazilian income tax on the income received from that country, limited to the amount of the Brazilian tax on such income (Section 395 of RIR/99). Individuals - The income tax paid abroad may offset the income tax due in Brazil, either at the time of the monthly payments or at the Annual Tax Return, provided that Brazil has a treaty to avoid double taxation or a reciprocity treatment of foreign tax credits with the country where the source of the income is located. The tax offset, however, may not exceed the difference between the Brazilian tax calculated including the income obtained abroad and excluding such income. Withholding Taxes 14. What are the rates on dividends for withholding taxes? Dividends are not subject to withholding income tax (Section 692 and 693 of RIR/99).
15. What are the rates on royalties for withholding taxes? Royalties are subject to withholding income tax at a 15% rate (Section 710 of RIR/99). 16. What are the rates on interest for withholding taxes? Interest is subject to withholding income tax at a 15% rate (Section 702 of RIR/99). 17. What are the rates of withholding tax on profits realized by a foreign corporation? Profits realized by a foreign corporation are not subject to withholding tax in Brazil (Section 694 of RIR/99). 18. Please list any other rates on withholding taxes that we should be aware of. Capital gains on sale or transfer of shareholdings are taxed at normal rates. In case of sale or transfer of shareholdings to foreign shareholders, the capital gain is subject to withholding income tax at a 15% rate this rule and rates also apply if even if both the buyer and the seller are nonresidents of Brazil and the asset is located in Brazil. Payments relating to services in general are subject to the withholding income tax at a 25% rate. However, if the service agreement involves the rendering of technical services, or yet of technical, scientific or management assistance, the withholding income tax rate is reduced from 25% to 15% (except if the beneficiary is domiciled in a so-called low tax jurisdiction). In respect of technical services, technical or management assistance and similar services, however, the payment is also triggers the levy of the so-called CIDE tax at a 10% rate. Unlike withholding income tax, CIDE is an ordinary burden of the counterparty domiciled in Brazil (it is therefore not deducted from the amount to be remitted abroad). Normative Ruling 252/02 defines a technical service as "work, project or initiative whose execution relies on specialized technical knowledge, rendered by independent professionals or by artists or artisans". That definition for tax purposes is very controversial, which means that a case by case analysis is necessary in order to confirm their nature in view of the effective activities that will be performed. Please note that if the beneficiary of the interest, service or capital gain remittances is resident in a low tax jurisdiction (i.e., a country or jurisdiction that does not tax
income or which income tax is equal or lower than 20%) the withholding income tax will be levied at a 25% rate. That rule does not apply to remittance of dividends. Tax Returns and Compliance 19. What is the taxable reporting period? The taxable reporting period is the calendar year (from January 1st to December 31st). 20. What are the due dates for the filing of tax returns? Business entities - Each year, the last business day of June. Individuals - Each year, the last business day of April. 21. What are the key compliance requirements? Tax returns shall be filed over the internet. For that purpose the taxpayer must download a software with the tax forms and another one for electronic transfer ("RECEITANET"), both of which are freely available at www.receita.fazenda.gov.br. 22. Are there any other requirements that we should be aware of regarding tax returns and compliance? In order to transmit the tax returns, companies are required to obtain a digital certification issued by the Federal Income Office. INDIRECT TAXES 23. Are there any indirect taxes in your jurisdiction? (i) Tax on Manufactured Products IPI (ii) Value-added Sales and Transportation Tax (ICMS) (iii)service Tax (ISS) 24. How does it operate? Is it a VAT or a sales tax? IPI is a federal excise tax levied on the importation of assets/goods or inputs, and during the manufacturing chain of assets/goods, working in a way similar to a VAT
tax, since it allows a tax credit for the receiver of the goods and a tax debt for remitter of the goods. The taxpayer collects the outstanding balance on a monthly basis or carries forward the credits to the following month. ICMS is a sales tax levied on importation of assets/goods, as well as on all operations during the chain of commercialization of the goods and services of transportation and telecommunication. ICMS works similarly to a VAT tax, as it allows debts and credits. ISS is a service tax levied on the services listed by the Federal Government. 25. How is the taxable base determined? IPI - The taxable basis is the effective value of the sale transaction subject to some adjustments provided for in the applicable regulation. In certain operations with no value the IPI Regulation establishes the basis for calculation of the tax. ICMS - The taxable basis is the effective value of the transaction subject to some adjustments. Unconditional discounts may be excluded from the taxable basis. Like the IPI, in certain operations with no value the ICMS Regulation establishes the basis for calculation of the tax. The ICMS value is included in its basis for calculation. ISS - The basis for calculation is the gross value charged by the services, exception made to civil construction in which the deduction of the subcontracted services is allowable. 26. What are the applicable rates? IPI - The "ad valorem" rates may range from 0% to 30% (average), and vary according to the tax classification of the goods in the IPI Schedule based on the Harmonized System. Some specific products like beverages have a special taxation basis of fixed amounts ascertained by the tax authorities per product. ICMS - The intrastate rates are 18% for some states like São Paulo and Rio de Janeiro and 17% for the others. The interstate rates are 12% or 7% depending on the origin and destination of the goods in the several regions of the national territory. On import operations the applicable rate is the intrastate rate. For some luxury and sumptuary articles the average rate is 25%. ISS - rates vary from 2% to 5%.
27. Are there any exemptions? IPI and ICMS - the regulations list several cases of tax exemption and tax suspension. ISS - each municipality lists some cases of tax exemption. 28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction? The IOF is a tax on credit transactions, foreign exchange transactions, insurance transactions, transactions with securities, and transactions with gold as a financial asset. The IOF rates range from 0% to 25% and there are circumstances of exemption or non-levy of the respective tax, according to the objectives of the monetary, foreign exchange and fiscal policies. The calculation basis of this tax varies depending on the transaction. PARAFISCAL CONTRIBUTIONS 29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)? In order to finance the social security, the Federal Government collects the following social contribution taxes: - Contribution Tax for the Social Integration Program (PIS) - Contribution Tax for the Social Investment Fund (COFINS) 30. How do they operate? There is more than one system to calculate PIS and COFINS taxes. The most common ones are the cumulative and the non-cumulative systems. Cumulative System - this system usually applies to legal entities that are subject to the presumed profit system. These taxes are levied on all the company s revenues, including, for instance, exchange variation income and also financial income. Few exceptions apply, such as cancelled sales and revenues from the sale of fixed assets. Non-Cumulative System - This system usually applies to legal entities that are subject to the real profit system. These taxes are levied on all the company s revenues. Few exceptions apply, such as cancelled sales and revenues from the sale of fixed assets in this system, exchange variation income and financial income are exempt of the PIS/COFINS levy.
Differently from the cumulative system, legal entities in this system are allowable to take credits of PIS and COFINS on certain expenses and costs necessaries to develop their own activities within determined conditions. 31. How is the taxable base determined? PIS and COFINS are due by a legal entity domiciled in Brazil and basically its basis of calculation encompasses the gross revenue accrued by this legal entity. 32. What are the applicable rates? Cumulative System - PIS is levied at a 0.65% and COFINS at a 3% rate. Non-Cumulative System - PIS is levied at a 1.65% and COFINS at a 7.6% rate. 33. Are there any exemptions? There are some exemptions concerning the PIS and COFINS taxes. The most relevant ones are (i) the exemption of exchange variation and financial revenues for companies in the non-cumulative system and (ii) the exemption for revenues from sales or services to beneficiaries domiciled abroad, provided that the payment represents the entry of currency (applicable to both systems). INHERITANCE AND GIFT TAXES 34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.? Yes 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base. The Tax on Donation and on Inheritances (ITCMD) is levied on the transfer of personal assets or rights resulting from legal or testamentary inheritance and donations. Rates vary from 1% to 8% of the fair market value of the transferred asset or right.
OTHER MATTERS 36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.? Yes 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti- Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules Transfer pricing - Law 9,430/96 introduced transfer pricing rules in Brazil, establishing reference prices for goods, services and rights imported and exported by Brazilian companies from and to related parties, for purposes of assessing Corporate Income Tax and Social Contribution Tax on Profits. The rules basically provide that, on the one hand, amounts paid by Brazilian companies in their imports from related parties which exceed certain parameters are not deductible for Corporate Income Tax and Social Contribution Tax on Profits purposes; on the other hand, if Brazilian companies charge for their exports to related parties less than certain other parameters, the difference between the amount charged and the minimum allowed will be considered presumptive income for Corporate Income Tax and Social Contribution Tax on Profits purposes. In brief, the following parties are considered related to a Brazilian party for transfer pricing purposes: parties with corporate connections, exclusive distributors and/or agents, parties domiciled in a low-tax jurisdiction and operations considered to be under a privileged regime. General Anti-Avoidance Rule - In general, a taxpayer is allowed the right to choose, among several possible operations, the operation that seems to it the most adequate or subject to the lower tax burden. The set of operations for this purpose is usually viewed as a legitimate tax planning provided that no artificial situations that might be characterized as tax evasion are created. The Brazilian tax system does not adopt the economic interpretation of certain transaction. In other words, for tax purposes, the economic substance of certain transaction should not prevail on the formal aspect of such transaction. This is so because the Brazilian Tax Law is governed by the principle of strict lawfulness and by the closed vagueness doctrine, according to which it is necessary that not only the elements that shape taxation are clearly described in law but also that the authority in charge of applying the law sticks to the strict terms of the legislation, whereas such person should not adopt an economic interpretation of the facts.
On the other hand, the tax legislation has been seeking to broaden the powers given to the authority that applies the law. From a legal standpoint, the latest and most evident attempt to this effect was the amendment to article 116 of the Brazilian Tax Code (CTN) made by Supplementary Law 104/01, which introduced the concept of dissimulation: The administrative authority may disregard acts or juristic acts performed for the purposes of dissimulating the occurrence of the fact that generated the tax or the nature of the elements that make up the tax obligation, subject to the procedures to be established in ordinary law. Notwithstanding the introduction of this new concept in the text of the CTN, no ordinary laws have yet been enacted to regulate it. 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed. Brazil has concluded about twenty eight double taxation conventions with the following countries: South Africa, Argentina, Austria, Belgium, Canada, Chile, China, Korea, Denmark, Ecuador, Spain, Philippines, Finland, France, Netherland, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Norway, Sweden, Portugal, Czech Republic and Slovakia, and Ukraine. Each treaty should be analyzed to determine the proper method of eliminating double taxation of income (tax credit or exemption).