Few issues in the tax area have had so many repercussions in recent times as Provisional Measure 627/2013 ("MP 627/3013"). It has led to a series of alterations in tax legislation, some of which were discussed in our 'November 2013 Alert' (http://migre.me/jd2mG).
The variety of issues and countless changes have caused a great deal of confusion amongst taxpayers. The repercussions of the legislation have been such that a group made up of top businesspeople met with representatives of the President's office and the Ministry of Finance, in Brasília, to discuss some of the more sensitive issues, as was widely reported in the press.
The fact that hundreds of proposals for changes to the original wording were presented to the National Congress is a clear indication of the importance and extent of the issues that the Provisional Measure covers. The enormous expectations surrounding the matter moved up to a new level with the conversion of the Provisional Measure into Law nr. 12.973, published in the Official Gazette of the Union on May 14, 2014.
An initial analysis of the new text reveals a few changes in relation to the original wording of the old Provisional Measure. On the other hand, many of the controversial areas remain unaltered, which leads us to the conclusion that the previously raised controversies are still a long way from being resolved. For greater clarity, this bulletin will limit itself to commenting upon some of the changes found in the new law, in comparison to the original wording of MP 627/3013:
- Despite maintaining the creation of the 'LALUR Digital', which should be submitted to the IRS in digital form by means of SPED, there was an alteration in the form of calculation and the manner in which applicable penalties could be reduced should there be any non-compliance with this secondary obligation, as follows: (i) the late-payment fine, which had been 0.025% of gross income, was changed to 0.25% of the net profit before income tax; (ii) should the statement of sums be incorrect or inexact, the fine of 5% on the amount of the information in question, never being less than R$500.00, has been reduced to 3%, with this never being less than R$100.00. New scenarios for the limitation of the penalties, as well as mitigating circumstances, have also been created, which will reduce the impact;
- The new regulations concerning gains arising from advantageous purchases and goodwill in the acquisition of a corporate interest remain unaltered. However, a new paragraph has been inserted into article 21 of Decree-Law nr. 1.598/77 (see paragraph VI) concerning investment in branches, subsidiaries and affiliates overseas, which will be required to then be answerable to the accounting legislation of the domiciled country of this investment;
- New wording has been provided for the provision which covers the taxation of real estate exchanges. This alteration clarifies certain aspects, and mentions that its simple reclassification as a non-current/fixed asset represents income for tax purposes, which will certainly cause a great deal of discussion;
- Another new point involves the inclusion of article 38-A in Decree-Law 1.598/77. This provision establishes that the remuneration, charges, expenses and other costs relating to equity instruments and subordinated debt instruments, issued by companies, except in the form of shares, may also be excluded from the calculation of the actual profits and from the CSLL calculation base. For commercial, investment, development and savings banks, as well as credit companies and others listed in § 1 of article 22 of Law nr. 8.212/91, allowance will be made for the reduction/exclusion of the mentioned remuneration and other charges when calculating PIS and COFINS contributions;
- Exemption from IRPF (individuals income tax) has been established on income received by residential complex administrations, when limited to R$ 24,000 per calendar month, as long as such income is directed to benefits for the residential complex, with certain conditions established in article 3 of the new Law being respected;
- Another alteration appears in article 9 of Law nr. 9.249/95, concerning payment of interest on net equity ("JCP"). MP 627 had already proposed alterations to §8 of this provision, making it clearer. When it was converted into law, as well as the previously proposed alterations, it was clarified that all the different types of shares/activities covered in article 15 of Law nr. 6.404/76 should be considered, even if such are accounted as liabilities rather than in the company's capital stock. On the other hand, one innovation in the new legislation concerns the inclusion of §2 in article 10 of Law nr. 9.249/95, which establishes that those amounts paid or credited as profit or dividends to beneficiaries of the mentioned types of share will not be deductible in the calculation of the actual profit or as part of the calculation base for the CSLL, even though they are accounted as a financial expense;
- In the part concerning the valuation of the fair market value referring to transactions involving the exchange of assets or liabilities, new prescriptions are also found. In these cases, it has been made clear that any possible gain arising from the evaluation of the fair market value should be taxed in relation to the performance of the asset or liability under the exchange.
- In relation to the adjustment of the fair market value, should there be any capital gain as a result of share subscription, certain changes have also been noted. Initially, a provision was included establishing that any gain arising from the evaluation of assets incorporated into the equity of another company (when these assets can neither be depreciated nor amortized) should be taxed during the five calendar months following the subscription in assets of the capital stock (at a monthly rate of 1/60). Furthermore, a provision was excluded from PM 627 which had established that the gain should be calculated in actual profit showing it to be equal to profits, dividends and shares received by the taxpayer, that correspond to the share or to the values of acquired movable assets, with an increase in the value of the assets. Similar alterations have been noted in the loss resulting from evaluation based upon the market value of the asset incorporated into the equity of another company, in the underwriting of capital goods.
- MP 627/2013 strived to approximate the tax legislation to accounting practices by adopting clear concepts relating to capital gains and goodwill, and most of this was repeated in Law nr. 12.973/2014. Two alterations deserve special mention: the version converted into Law removed one of the hypotheses in which the fiscal amortization of goodwill was forbidden by the old PM; that is, the goodwill relating to corporate interest extinguished as a result of a corporate interest share or quota substitution operation. On top of this, it was clarified that a definition of the relationship of dependence, in cases of acquisition of corporate shares in stages, will be verified upon performance of the first acquisition, as long as the conditions of the deal are included in the negotiating tool.
- As had been included in MP 627/2013, Law nr. 12.973/2014 has established that financial expenses incurred by the lease holder in commercial leasing contracts are not deductible in the calculation of actual profit. On the other hand, the new law has also established that the financial expenses relating to considerations paid or credited pursuant to a commercial leasing contract will be considered in the establishment of the actual profit, when the contract relates to moveable or fixed assets that are intrinsically related to the production or commercialization of goods and services;
- Another innovation arising from the conversion refers to an alteration included in Law nr. 9.718/98 concerning PIS and COFINS social contributions. It has been clarified that income arising from the sale of long-term assets will not be subject to these contributions, not only from the sale of fixed assets. Furthermore, the exemption of income received from the construction, recovery, expansion or improvement of infrastructure has also been clarified, where the counter-entry of such activities is a non-tangible asset representing the right to business development, in the case of public service concession contracts, including for taxpayers who calculate the contributions in question under the non-cumulative system.
- In relation to non-cumulative PIS and COFINS, the possibility of booking credits on non-tangible assets was clarified. This means possible discounts not only on fixed assets for PIS and permanent assets for COFINS, as previously expected. This adapts PIS and COFINS legislation to some alterations previously included in Law 6.404/76.
- As far as the provisions seeking to standardize tax legislation with corporate/accounting legislation are concerned, the general regulations outlined in MP 627/2013 remain applicable. It should be noted that a provision has been included that establishes a specific regulation for corporate transactions subject to approval of the regulatory organs. In addition, a specific article was also inserted relating to the accounting control of financial institutions and others authorized to operate by the Central Bank, whilst this control does not affect the tax regulations established by Law nr. 12.973/2014.
- In relation to the Transitional Tax Regime ("RTT"), the provisions of MP 627/2013 were adapted to include the 2014 calendar year for exemptions in the distribution of profits and dividends, which will be taxed on that which exceeds the sum established under the new tax regulation. It should be noted that this exemption is conditional upon the taxpayer's adoption of the new regulations before the new year starts in 2015. This issue, without any shadow of a doubt will be the subject of lengthy debate.
- Some new items have also been noted in the chapter entitled "Taxation on Universal Bases", which involves taxation of the results of controlled and affiliated companies domiciled overseas. Initially, it is worth noting that an exchange rate has been established which should be used for calculating the accounting result of the sum of the investment equivalent to profits and losses accrued during the previous year.
- Further considering this area, the new legislation has covered some of the limitations contained in MP 627/2013. It was clarified that, for tax purposes, only profit earned overseas should produce effects in Brazil (i.e. should be presented for taxation). Any possible losses should be "kept" in order to be used in the future, in accordance with the system and periods defined by the IRS. Also included, in a more detailed manner, has been an exception to taxation of the profit earned overseas corresponding to time charter or bareboat freight activities, operating lease activities, leasing activities, and loans of goods or provision of services directly related to drilling for oil and natural gas.
- Furthermore, the possibility of consolidated results earned overseas being included was extended to 2022 (in MP 627/2013, this possibility was restricted to 2017). This possibility includes two exceptions, in that Law nr. 12.973/2014 has presented a new hypothesis: companies with an active income of less than 80% of the total income, whilst, on the other hand, the limit of 5 years to "use" the loss registered overseas no longer exists.
- In relation to taxation of the results earned by affiliated overseas companies, such companies continue to be accountable for tax purposes on December 31 of the calendar year in which they have been made available to the company domiciled in Brazil. According to MP 627/2013, this rule will not apply if certain conditions are noted to have occurred cumulatively. In the new legislation, one of these conditions was withdrawn: the existence of an active income equal to or greater than 80% of the total income. To the extent that the recognition of these criteria should be cumulative, the withdrawal of one makes the application of this order a little more "difficult".
- One last issue concerning affiliated companies is found in the new paragraph 5 of article 81 of Law nr. 12.973/2014, which establishes that the rules applicable to these companies also apply to "those enterprises controlled jointly with unconnected parties". This provision is certain to generate a great deal of heated discussion. The equation of affiliate companies with controlled companies, under certain scenarios, remains unaltered.
- One piece of good news to be found in the new Law is in §10 and §11 of article 87, in which it is established that, until 2022, a Brazilian controlled company may deduct up to 9% as presumed credit on income falling on the positive part calculated on actual profit, relating to investment in companies overseas that perform activities involving beverage and foodstuff manufacturing, building construction, and infrastructure projects, with certain conditions being taken into account. It has also been confirmed that the Executive Power may expand this list depending upon public interest. This possibility shows that the Federal Government is finally opening its eyes to the fact that Brazilian companies are 'outbounding', i.e., are looking at business opportunities overseas, with an upgrading of the relevant legislation therefore being essential.
- Another innovation concerning this matter relates to the procedure for payment of the IRPJ and the CSLL in relation to results earned overseas. It is up to the taxpayer whether these taxes are to be paid in relation to the profits distributed during the years following the ending of the corresponding calculation period, with the 8th year following the calculation period being observed for distribution of the remaining balance of profits still not presented for taxation purposes, along with a minimum distribution of 12.5% during the first subsequent year.
- One of the most important new points brought in by Law nr. 12.973/2014 concerns the withdrawal of the provisions concerning profit earned by companies overseas in which a Brazilian resident (individual) holds a share. Considering this, individuals will continue to be taxed only when any possible income becomes available.
- Other alterations have been noted in the final points included in the Law. Firstly, a new provision was included (see article 96), which concerns the taxation of investment funds constituted with regulations that require that the investment of their resources is made exclusively in cash deposits or in assets subject to exemption from income tax or assets taxed at a tax rate of zero when paid, credited, delivered or remitted to a beneficiary resident or domiciled overseas (excepting countries with favorable tax treatments), establishing that these shall be subject to the zero tax rate of the tax on income falling on its generated revenue.
In addition to the abovementioned alterations, and the many others found here and there in Law nr. 12.973/2014, one other issue has generated discussion. This concerns situations involving payment in installments, and is covered in article 93 and those following. Since this is an extensive issue, we have decided to prepare a specific bulletin on this matter, and this will be published shortly.
Finally, it should be mentioned that Law nr. 12.973/2014 has nominated the Federal Revenue Department as having jurisdiction over the regulation of the many issues that it covers. It is probable that non-statutory texts will be published in the near future, meaning that the extent and generality of the wording of the new legislation may give rise to many other discussions. As such, many of the issues covered here are still a long way from reaching a conclusion.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.