The Brazilian Special Regime for Tax and Exchange Legalization ("RERCT") has been enacted by Law 13,254 from January 2016, aiming to regularize resources, assets and rights with legal background, not declared or declared improperly, remitted or kept abroad, or even repatriated by Brazilian residents.
Although it has been conceived by the Brazilian Government in the context of a very serious economic crisis, as another tool to leverage public revenues, it is important to note that it does not consist of a Brazilian invention. Actually, over forty other jurisdictions have implemented this type of procedure before, usually as a voluntary disclosure, such as the USA ("Offshore Voluntary Disclosure"), the UK, Germany, Argentina, amongst others.
And the timing of its enactment could not be more appropriate, once Brazil has recently signed an exchange of tax information agreement with the USA, under the FATCA context, besides being a signatory country of the OECD's Convention on Mutual Administrative Assistance in Tax Matters, based upon which the exchange of information amongst tax authorities around the world is expected to become much more effective, what increases considerably the risk of detection of the undeclared assets by the local authorities.
The RERCT is an optional procedure to which are eligible individuals and legal entities resident and domiciled in Brazil on the 31st of December 2014, who are or have been owner of assets abroad on or before this date. It benefits all types of assets, as long as their background is legal.
The asset value, if not yet repatriated, must be converted into Brazilian Reals based on the American Dollar exchange rate in 31.12.2014, which is BRL 2.66 and, over the full amount, income tax must be paid at a 15%, plus a 15% fine, which totals 30%1. The voluntary disclosure will be presented to the tax authorities by means of a special tax return (named "DERCAT"), to be filed until the 31st of October 2016, besides the rectification of income tax and Central Bank declarations from 2014 onwards.
Having the return been filed, and the tax plus penalty paid, there will be amnesty of the tax debits and exemption of all further applicable penalties, from both tax and Central Bank perspectives, besides the extinction of criminal liability with regards to the following crimes: tax information omission; tax audit sham; mandatory tax information denial; tax evasion; social security contribution evasion; falsification of public document; falsification of private document; ideological falsehood; use of false document; capital flight; and money-laundering.
Note that the subscription to the special regime does not necessarily mean that the resources abroad will have to be repatriated; they actually can remain elsewhere, since the tax is paid and the returns are filed/rectified. In this case, only the amount related to the tax plus penalty could be repatriated, if the taxpayer wishes so. On the other hand, if the money is repatriated, there will need to be intermediation by a local financial institution.
In the RERCT context, maybe the most polemic question refers to the consumption of resources before the 31st of December 2014. In one hand, taxpayers understand that only the balance of the assets existent on that date should be declared ("photography"), whereas, on the other, tax authorities understand that, in order to benefit entirely from the special regime, from both a tax and a criminal perspective, one should also declare the consumed resources ("film"), even though, in our opinion, this fiscal position lacks legal grounds and, thus, could be questioned before courts.
Nonetheless, despite the loopholes and uncertainties of this program, one may conclude that it appears to be an unprecedented opportunity for Brazilians to regularize undeclared resources kept abroad, from both a tax liability standpoint (especially considering the exchange of tax information amongst authorities worldwide), and a tax opportunity point of view (30% rate – minus exchange variation – seems attractive when compared to regular rates plus interest and penalties), not to mention the criminal amnesties.
However, much care must be taken with regards to some blind spots and traps found on the legislation, especially on the authorities' rulings, being also advisable to weigh out pre and post-subscription costs2 and benefits, depending on each specific case, reason why a serious study must be carried out before the decision to join the regime is finally made.
1. However, considering the current exchange rate, which is higher than that from 2014, the effective tax rate is actually lower than 30%.
2. Main post-subscription costs are basically the need to tax these assets indeterminately in the future.
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.