Provisional Measure no. 627, published on Nov. 11, 2013 ("MP no. 627/13") brought profound changes to the tax legislation in force, affecting the ascertainment of the Income Tax of Individuals ("IRPF"), Corporate Income Tax ("IRPJ"), Social Contribution on Net Income ("CSLL"), Contribution to the PIS (Employee Profit Sharing Program), and of the Contribution to the Social Security Funding ("COFINS").
This MP was published in order to definitively deal with the tax effects arising from the profound changes to the accounting criteria and methods introduced in the tax legislation as per the enactments of Laws no. 11,638/07 and 11,941/09, revoking the Transition Tax System ("RTT") that had been created by articles 15 and 16 of Law no. 11,941/09, in addition to addressing other matters, such as profits abroad and installment plans.
As a general rule, the effects deriving from MP no. 627/13 come into force as of Jan. 1, 2014 for legal entities opting for applying the provisions of this MP in the calendar year of 2014, and as of Jan. 1, 2015 the application of the MP will be mandatory for all legal entities.
We present below the main changes brought by the mentioned MP no. 627/13.
1 - SPED: Taxable Income Bookkeeping
With the enactment of MP no. 627/13, the bookkeeping of the taxable income – provided for in article 8 of DL no. 1,598/77 – will be delivered digitally to the Public System of Digital Bookkeeping ("SPED"), with the due demonstration of all the records related to the adjustments to the net income, under penalty of fines, which will not be lower than R$ 500.00 and may reach up to 1% of the gross revenue earned by the legal entity in the period.
This mandatory requirement is in accordance with the SPED project created by the Tax Authorities, and is to be complied with as of Jan. 1, 2014 by legal entities opting for the MP at issue, and as of 2015 for all legal entities.
2 - Concept of Revenue
Another major change brought by MP no. 627/13 concerns the concept of gross revenue, which was extended in order to comprise, in addition to the proceeds of the sale of assets and the price of service rendering, the results earned in operations in third parties' accounts and other revenues arising from the activity or principal purpose of the legal entities.
With this, the legal entities will start using this concept of gross revenue in the ascertainment of the IRPJ and CSLL based on the presumptive profit, and for the calculation of the estimation of these taxes based on the gross revenue, for the purpose of ascertainment of these taxes based on the taxable Income. With this, the legal entities will start using this concept of gross revenue in the ascertainment of the IRPJ and CSLL based on the presumptive profit, and for the calculation of the estimation of these taxes based on the gross revenue, for the purpose of ascertainment of these taxes based on the taxable Income.
As to the net income, this is obtained from the gross revenue after the discount of returns and cancelled sales, discounts granted unconditionally, taxes levied on these revenues, and from the amounts deriving from the adjustment at present value of operations tied to the gross revenue.
3 - Assessment at Fair Value: Effects on the IRPJ and CSLL
Among the several changes to the accounting criteria and methods, we highlight the need for the legal entities to assess elements of the assets and liabilities according to the fair value, pursuant to article 183 and 184 of Law no. 6,404/76 and to Accounting Pronouncement Committee 46 – Measurement of Fair value.
According to MP no. 627, the gains and losses deriving from the assessment of an asset or liability at fair value will only be computed in the determination of the taxable Income and tax basis of the CSLL as the asset is realized (depreciation, amortization, exhaustion, disposal or write-off), or when there is the liquidation/write-off of the liability, and provided that it is possible to evidence this assessment in the bookkeeping, through a subaccount tied to an asset or liability. If it is not possible to have this separation at the accounting, the gains will be taxed and the losses will not be deductible.
In the event of takeover, spin-off, or merger, gains deriving from the assessment at fair value of the assets will not be considered for the calculation of the cost of the asset or right in the successor, and will receive a similar tax treatment to what they would have in the succeeded entity.
As to gains and losses deriving from the subscriptions of capital with assets (assets / ownership interest) or securities assessed at fair value will only be computed in the taxable income and tax basis of the CSLL in the provided events, namely: at the disposal or liquidation of ownership interest or securities; at the distribution of profits, dividends, interest, or ownership interest in each period, in the amount corresponding to the gains deriving from the assessment; at the realization of the asset, proportionally. It should also be pointed that such gains and losses are to be shown in the bookkeeping and tied to the asset or ownership interest that gave rise thereto.
4 - Dividends and Interest on Net Equity
MP no. 627/13 establishes that profits and dividends calculated based on the results ascertained between Jan. 1, 2008 and Dec. 31, 2013, by legal entities taxed based on the taxable income, presumptive or estimated, effectively paid by Nov. 12, 2013, at amounts superior to those calculated in accordance with the accounting methods and criteria in force on Dec. 31, 2007, will not be subject to the withholding income tax ("IRRF"), nor will they integrate the tax basis of the IRPJ In relation to Interest on Net Equity ("JCP"), the rule provides for the possibility of the legal entity calculating its limit, for the calendar years of 2008 to 2013, based on the shareholders' equity account measured according to the provisions of Law no. 6,404/76, except with regard to the equity assessment adjustment account, whose amounts should not be considered – this exception has been provided for since Law no. 11,941/09.
Such rules partly end the discussions arisen with the creation of Normative Rule no. 1,397, of Sep. 17, 2013 ("IN RFB no. 1,397/2013"), which determined the exemption of profits and dividends and the deductibility of the JCP only in the portion in which they are calculated in accordance with the accounting methods and criteria in force on Dec. 31, 2007 and, therefore, posed the possibility of taxation of the portion that, as it is obtained according to the rules created by Laws no. 11,638/07 and no. 11,941/09, would exceed this amount.
However, this exemption, provided for in article 67 of MP no. 627/13, as well as the possibility of calculating the JCP according to the new accounting rules, contained in article 68 of MP no. 627/13, are conditioned to the adoption of the changes introduced as of the calendar year of 2014. That is, the legal entities opting for the application of the provisions contained in article 1 to 66 of MP no. 627/13 only on Jan. 1, 2015, will not be ensured of the non-taxation of the profits, dividends, and JCP that exceed those calculated based on the regime in force on Dec. 31, 2007.
At any rate, as of the adoption of the rules created by MP no. 627/13 – which will be Jan. 1, 2014, for those opting for this or Jan. 1, 2015, for the others – the JCP is to be calculated exclusively based on the following shareholders' equity accounts: (i) capital; (ii) capital reserves; (iii) profit reserves; (iv) shares held in treasury; and (v) accumulated losses.
5 - Premium on the Acquisition of Ownership Interest
MP no. 627/13 changed the forms of ascertainment and recognition, for tax purposes, of the premium or discount deriving from the acquisition of ownership interest.
Until then, the premium for expectation of future profitability (goodwill) was defined in the tax legislation as the difference between the value of acquisition and the book value of the acquired equity share, allowing for the deductibility, within the minimum term of five years (one sixtieth per month), of the expenses with the amortization of this premium by a legal entity absorbing this equity from another, due to a takeover, spin-off, or merger.
With the new rules, which are aligned to the accounting concept of premium expectation of future profitability (goodwill) in force pursuant to Technical Pronouncement of the Accounting Pronouncement Committee ("CPC") no. 15, this premium is defined as corresponding to the difference between the cost of acquisition and the sum (i) of the equity value of the acquired ownership interest and (ii) added or subtracted value, which corresponds to the difference between the fair value of the net assets of the invested company, in the proportion of the acquired interest, and the equity value of the latter In other words, with the MP, the cost of acquisition of the acquired ownership interest is allocated, before, to the added or subtracted value of assets and only the residual value is classified as future profitability premium (goodwill), for which the rule of tax deductibility of expenses with its amortization was maintained for, at least, five years (one sixtieth per month) as of the takeover of the subsidiary by holding company, or vice-versa.
Likewise, the corporate combination, by way of a takeover, spin-off, or merger, of the invested and investing company, triggers the deductibility of the premium by added or subtracted value of the assets for, at least, five years, for the purpose of determining capital loss or gain and the calculation of the depreciation, amortization or exhaustion.
Within this context, the MP requires an assessment report in order to provide the basis for the added or subtracted value of assets, prepared by an independent expert and filed with the Federal Revenue of Brazil or registered in a Deeds and Documents Registry Office, until the last business day of the 13th month subsequent to that of the acquisition of equity.
The preparation of a report to support the future profitability premium (goodwill) is then not required, since, as seen, this will correspond to the residual value between the cost of investment and the sum of the equity value and the added or subtracted value substantiated by a report. In practice, the verification of the premium's basis by the tax authorities was made easier, since the previous legislation allowed taxpayers to classify the entire amount of the cost of investment acquisition exceeding the shareholders' equity of the invested company as goodwill and base this premium in several market variables.
The MP also included the concept of advantageous purchase gain (discount) in the tax legislation, which corresponds to the fair value excess of the invested company's net assets, in the proportion of the acquired ownership interest, in relation to the cost of acquisition. For such a case, a similar benefit is applied, but to defer the taxation within a five-year term.
Furthermore, the positive and negative adjustments, deriving from the assessment at fair value of the ownership interest in the invested company, are to be recorded as contra entry to the balance of the added or subtracted value.
Another measure already expected and adopted by the MP was the repeal of the use of deduction of what is known as "internal premium" – the premium created among companies of the same group – and which is being object of huge tax assessment and intense debates in administrative courts. In fact, the MP stated to expressly provided that the premium for added value or goodwill originated from transactions among independent parties will only be deductible for tax purposes. For such, the concept of dependent parties is defined as follows: (i) when the acquirer and the seller are direct or indirect subsidiaries of the same party or parties; (ii) when there is a relation of control between the acquirer and the seller; (iii) when the seller partner, holder, adviser or administrator of the legal entity acquirer or (iv) when the seller is a close relative or one up to the third degree, a spouse or companion of such persons: and, lastly (iv) when, for other reasons, dependence among the legal entities involved can be inferred, albeit indirectly.
Another relevant restriction introduced by the provisional measure was the prohibition of the deduction of the future profitability premium (goodwill) deriving from the acquisition of ownership interest through stock swap, in the manner occurring in case of stock incorporation transactions. Such rules come into force as of Jan. 1, 2014, for taxpayers opting for the application of MP's provisions in the next calendar year, or Jan. 1, 2015, for the other taxpayers.
6 - PIS/COFINS and PIS/COFINS-Import
6.1 - Cumulative System – Amendments to Law no. 9,718/98
The revenue, for purposes of the Contribution to the PIS (Employee Profit Sharing Program) and COFINS (Contribution to the Social Security Funding) for legal entities subject to the cumulative system, will now correspond to the gross revenue established as set in article 12 of Law Decree no. 1,598/77.
As to the exclusions of the gross revenue, it is worth noting that:
(i) the positive result of the investment assessment by the equity value will no longer be excludable from the gross revenue;
(ii) items IV and V of § 2, article 3, of Law no. 9,718/98 were repealed, which provided for the exclusion of the tax basis from the contributions of revenue deriving from the sale of assets from property, plant and equipment and from the revenue deriving from the burdensome transfer to ICMS taxpayers of the ICMS credits arising from export transactions.
Contributions charged in cases of contracts, with a performance term superior to one year, of piecework construction or supply, at a predetermined price, of goods and services to be produced, will be calculated on the ascertained revenue in accordance with the criteria of recognition adopted by the income tax legislation (article 407 of the Income Tax Regulation, approved by Decree no. 3,000/99 ("RIR/99").
6.2 - Non-cumulative system - Amendments to Laws no. 10,637/02 and no. 10,833/03
The tax basis of the Contribution to the non-cumulative PIS and COFINS will be the total revenues earned by the legal entity, comprising the gross revenue as per article 12 of Law Decree no. 1,598/77, added by all other revenues earned by the legal entity with its respective amounts deriving from the adjustment at present value of elements of the assets originating from long-term transactions.
The following revenues will not integrate the tax basis, in addition to the events provided for prior to the MP:
(i) those deriving from the sale of non-current assets, classified as investment, fixed or intangible assets;
(ii) financial revenues deriving from the adjustment at present value of elements of the assets originating from long-term transactions, relative to revenues exclude from the tax basis Contribution to the PIS and COFINS;
(iii) revenues relative to gains deriving from the assessment of assets and liabilities based on fair value;
(iv) of subventions for investment, including through exemption or reduction of taxes, granted as encouragement for the implementation or expansion of economic ventures, and gifts given by the Government;
(v) revenues recognized for the construction, recovery, remodeling, extension or improvement of infrastructure, whose consideration is an intangible asset representing the right to explore, in case of public service concession contracts; (vi) relative to the tax value that is not paid due to certain tax rate exemptions and reductions, referring to exploration profit; and
(vii) relative to the premium at the issue of debentures.
It is worth stressing that the amounts deriving from the adjustment at present value of the obligations, charges and risks classified in the non-current liabilities (article 184, item III, of Law no. 6,404/76) may be considered in the calculation of the credits relative to the non-cumulative system, increasing or reducing the incurred expense.
With specific regard to the credits calculated in relation to machinery, equipment, and other assets incorporated to the non-current assets, specifically in the fixed assets account, and on buildings and improvements (items VI an VII, article 3, of Laws no. 10,637/02 and no. 10.833/03, respectively), the MP determined that:
(i) they do not apply in the case of an assets subject to leasing, in the lessee legal entity;
(ii) the following does not generate credit (i) charges associated to loans registered pursuant to letter "b" of § 1, article 17, of Law Decree no. 1,598/77 (dealing with interest and other charges associated to financing of assets recorded in the non-current assets in the pre-operational phase); and (iii) estimated costs for disassembling and removing the fixed assets and renovation of the place where they are located; and
(iii) gains and losses deriving from the assessment of asses based on the fair value will not be computed.
Lastly, in the performance of contacts for public service concession, the credits generated for services in connection with the construction, recovery, remodeling, extension or improvement of infrastructure, when the corresponding revenue has as contra-entry a intangible asset representing a right of exploration, may only be used as the intangible asset is amortized, except for the credit on machinery, equipment, and other assets incorporated to the fixed assets.
6.3 - Contribution to PIS-Import and COFINS-Import – Amendments to Law no. 10,865/04
Pursuant to article 15, § 3, of the mentioned Law, added by article 50 of MP no. 627/13, for the calculation of the credits relative to the import of machinery, equipment, and other assets incorporated non-current assets, in the fixed assets account, the amounts deriving from the adjustment at present value of the mentioned assets may be considered as an integrating part of the acquisition cost. In turn, gains and losses deriving from the assessment of the assets based on the fair value, will not be computed.
As mentioned above, the credit relative to machinery and equipment subject matter of leasing was restricted, with regard to the legal entity lessee.
Lastly, MP no. 627/13 determined that the option granted to the Executive Branch to reduce and reestablish the tax rate of the contributions charged on financial revenues does not apply to the amounts deriving from the adjustment at present value of elements of the asset deriving from long-term transactions.
7 - Leasing
MP no. 627/13 regulated, lastly, for purposes of the Contribution to the PIS and COFINS, the taxation of leasing transactions.
In cases in which the transactions are not subject to the tax treatment provided for in Law no. 6.099/1974, in which there is a substantial transfer of the risks and benefits inherent to the ownership of the asset, the amount of the consideration will be computed in the tax basis of the Contribution to the PIS and COFINS by the legal entity.
Lastly, the legal entities subject to the non-cumulative regime may discount credits calculated on the cost of acquisition value or construction of the assets leased in proportion to the value of each consideration during the term of the contract.
8 - Profits earned by subsidiaries and associated companies abroad
MP no. 627/13 also introduced a new system with regard to the taxation of the profits earned by subsidiaries and associated companies abroad.
8.1 - Subsidiaries
With regard to subsidiaries, the taxation of the earned profits was maintained in relation to the provisions in article 74 of Provisional Measure no. 2.158-35/01, that is: regardless of the effective availability, the profits of the subsidiaries are to be recorded in the balance sheet of the holding company at December 31 of each calendar year.
Moreover, the MP brought another important change: until the calendar year of 2017, the Brazilian holding company may consolidate the profits and losses ascertained by its direct and indirect. However, this verticalization may only take place with regard to active income of the subsidiaries and provided that these companies are not located (i) in countries with which Brazil does not have an agreement, in force, for the exchange of information for tax purposes; (ii) in tax-favored countries or jurisdictions or which are beneficiaries of a privileged tax system; (iii) countries that tax income at a nominal rate lower than 20%; nor (iv) are direct or indirect subsidiaries of a legal entity subject to the tax treatment provided for in items (ii) and (iii).
Furthermore, the losses accumulated by the subsidiaries abroad may be offset against the future profits they earn. However, this offsetting, in addition to being limited to a 5-year term, has the same restrictions of the verticalization mentioned above.
Another provision of the MP refers to the payment of the IRPJ and CSL due on the profits earned by subsidiaries abroad, which may be paid in the following proportion: (i) in the first year subsequent to the ascertainment period, at least 25% of the computed result will be considered; and (ii) in the fifth year following the payment, the remaining balance of the results will be considered to have been distributed. However, this form of payment will only be possible if the company is not located: (i) in tax-favored countries or jurisdictions or which are beneficiaries of a privileged tax system; (ii) countries that tax income at a nominal rate lower than 20%; (iii) are direct or indirect subsidiaries of a legal entity subject to the tax treatment provided for in item item (i); or (iv) whose active income is lower than 80% of its total income.
8.2 - Associated companies
With regard to associated companies, the profits they earn will only be taxed at the time of the effect availability, which will occur (i) of the date of payment or credit into an account representing an obligation of the company abroad; (ii) in case of loan agreements, if the lender, the associated company, has profits or profit reserves; or (iii) in the event of advance of funds made by the associated company, due to a future sale, whose settlement through the remittance of the asset or sold service, takes place within a period superior to the production cycle of the asset or service.
However, the provisions above will only be applied to associated companies that present, cumulatively, the following characteristics (i) are not located in tax-favored countries or jurisdictions or which are beneficiaries of a privileged tax system; (ii) are not located in countries that tax income at a nominal rate lower than 20%; (iii) are not direct or indirect subsidiaries of a legal entity subject to the tax treatment provided for in item (i); or (iv) whose active income is lower than 80% of its total income.
Should the provisions above not be reached by the associated companies, such invested companies will receive the same treatment, both with regard to the taxation of the profits and to the payment of the IRPJ and CSLL, of the subsidiaries.
8.3 - Individuals
Another change brought by MP no. 627/2013 concerns the worldwide taxation of individuals.
Pursuant to article 89 and following articles of the MP, profits deriving from ownership interest in subsidiaries domiciled abroad will be considered to be available to the controlling individual resident in Brazil on the date of the balance sheet in which they were ascertained.
Such earnings will be subject to the charge of the IRPF, which is to be paid, on the basis of an advance, by the last business day of the month following that in which it was available, and must compose the tax basis of the IRPF in the Statement of Annual Adjustment. It is of note that at the time of the effective reception of dividends, if there is any positive exchange variation, it will be taxed as capital gain.
This taxation system of the profits of the subsidiary will only be applied if, alternatively (i) the subsidiary is located in a tax-favored country or jurisdiction or is a beneficiary of a privileged tax system; (ii) the subsidiary is located in a country that taxes income at a nominal rate lower than 20%; or (iii) the resident in Brazil has not filed the formation documents and of the amendments of the subsidiary in relevant agencies of public domain that identify the other partners.
Lastly, MP no. 627/2013 provides that the exercise of joint control by related parties, defined in the MP itself, authorizes the taxation of profits considered to be available abroad. Pursuant to the law, in case the related parties have a joint control of more than 50% of the voting capital of the subsidiary, the taxation rule of the profits considered to be available will be applied. of the profits considered to be available will be applied.
9 - Changed to Debt Installment Plans – Contribution to the PIS and Cofins and Profits abroad
Debt Installment Plan of the Contribution to PIS and Cofins: the debts of the Contribution to the PIS and Cofins of the financial institutions and insurance companies with the Federal Revenue of Brazil and the Attorney General of the National Treasury, as well as the debts that any legal entity has in relation to judicial actions on the inclusion of the ICMS on the tax basis of the Contribution to the PIS and Cofins , may be paid in installments pursuant to article 39 of Law no. 12.865/2013, regulated by the Joint Rule of the PGFN/RFB no. 08/2013.
MP no. 627/2013 brought some changes to this installment plan, mainly: (i) in case of payment on demand, the reduction of the official fines, late payment fines and single fines, and interest, are now 100%; (ii) it is no longer necessary to withdraw all the judicial actions whose subject matter are the mentioned contributions, but only the actions whose subject matter are the debts that will be paid, in installments or on demand; and (iii) the portion equivalent to the reduction of the value of the fines, interest, and legal charge legal in connection with this installment plan will not be computed in the ascertainment of the tax bases of the IRPJ, CSLL, the Contribution, and of the Cofins.
Debt Installment Plan relative to Profits abroad: article 40 of Law no. 12,865/2013, regulated by Joint Rule of the PGFN/RFB no. 09/2013, created the possibility to pay in installments the IRPJ and CSLL deriving from the application of article 74 of MP no. 2,158-35/01.
MP no. 627/2013 included some changes to the mentioned installment plan, mainly: (i) that the debts relative to taxable events occurring up to Dec. 31, 2012, may be paid in installments, instead of the debts due until said date; (ii) to option to for the payment in installments increased from 120 to 180 payments, with a greater reduction of late payment interest (the benefit increased from 40% to 50% of the interested); (iii) the possibility of using tax losses and negative tax bases of the CSLL ascertained by subsidiaries and holding companies (before: only subsidiaries) until Dec. 31, 2012 (before: Dec. 31, 2011) for the settlement of fines and interest was extended to up to 30% of the value of the due IRPJ and CSLL; and (iv) the portion equivalent to the reduction of the value of fines, interest, and legal charge legal in connection with this installment plan will not be computed in the ascertainment of the tax bases of the IRPJ, CSLL, the Contribution to the PIS and of the Cofins.
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.