Brazil: Important Tax Changes For 2016

The year 2016 has begun with a series of significant changes in tax legislation. These changes range from an attempt by the Brazilian government to implement a "fiscal adjustment" to measures that redistribute Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços - ICMS) revenue, thereby making adjustments to the Brazilian federative system. This article will present a brief explanation regarding the alterations that may affect Brazilian companies and individuals in 2016, without delving deeper into the specific details of each one of these changes.

• Taxation of capital gains earned by individuals increased

Currently, capital gains are subject to a 15% Withholding Income Tax (WHT) rate. On September 22, 2015, however, the Brazilian Government issued Provisional Measure 692/15, increasing the taxation of the capital gains earned by individuals. On March 16, 2016, this Provisional Measure was converted into the Law 13,259.

With this new Law, the WHT will be levied progressively, as shown in the table below:

These new rates are applicable to residents (individuals) and to non-residents (individuals and companies), with the exception of those located in blacklisted jurisdictions, who continue to be taxed at a 25% rate, and those who invest in the Brazilian market under the conditions established in Brazilian Central Bank Resolution 4,373/14 (who are still exempt from the WHT).

It bears noting that Law 13,259 incorrectly maintained the original wording of Provisional Measure 692 for the effective date of these changes, stating they became effective January 1, 2016.

However, since the Federal Constitution states that provisional measures involving tax increase can take effect only the following year if they are converted into law by the last day of the year in which they were issued, and since Provisional Measure 692 was converted into law only in 2016, the new system of taxation of capital gains by WHT should take effect only from January 1, 2017.

• Program to regularize assets not declared by Brazilian taxpayers

Following the example of other countries (Italy, Mexico, Germany, etc.), the Brazilian Government has created a program to regularize undeclared foreign assets held abroad by Brazilian taxpayers ("RERCT").

The RERCT was created on January 14 by Law 13,254 and this program applies to all funds, assets or rights of lawful origin, such as bank deposits, capitalization transactions, loans and exchange transactions, equities, intangible assets, real estate, aircraft and others.

The amount to be regularized will be subject to the income tax at a 15% rate, and a fine of 100% on the tax, for a total tax rate of 30% on the amount to be repatriated. Those who take advantage of the RERCT will have their criminal liability for the crimes it provides for extinguished.

A taxpayer who wants to participate in the program must submit a unified statement of regularization to the tax authorities and to the Brazilian Central Bank and must pay the tax mentioned above. The deadline to participate in the RERCT program is October 31.

Although the local IRS has recently issued a Normative Ruling (IN 1,627) regulating the program, there are some points in this legislation that remain unclear and may raise doubts.

• New rules for the ICMS in interstate transactions with final consumers

Constitutional Amendment 87 changed how the ICMS should be shared in interstate transactions with goods and services with final consumers. Under the new rules, the interstate rate will apply to transactions with goods or the performance of services for a final consumer in another state, whether or not this consumer is an ICMS taxpayer, and the state where the recipient is located will be entitled to the difference between the internal ICMS tax rate in that state and the interstate rate.

The new rules are a significant change in the way the ICMS is shared for transactions involving a party who is not an ICMS taxpayer. In this case, the tax will no longer be paid in full to the state of origin, but shared between it and the state of destination of the goods or services.

New ICMS (State VAT) due on transactions with software

Despite the court cases concerning VAT taxes on software transactions (municipal Services Tax – ISS, state ICMS tax, or no tax), the National Finance Policy Council (CONFAZ) recently enacted an ICMS Convention Agreement that authorizes several Brazilian states to reduce the calculation basis of the ICMS tax for transactions involving software, electronic games, applications and electronic files, regardless of their carrier media (physical, digital, or otherwise), so that the tax rate must be over 5% of the transaction amount (states can decide what rate to use, so long as it is not less than the 5% minimum).

In light of the Convention, tax authorities might take a position that results in the levy of the ICMS tax on transactions involving software (whether custom-made or not) that are transmitted via download or electronic files accessed via streaming.

In this context, the state of São Paulo has issued Decree 61,791 to change the internal rules regarding the ICMS calculation basis so that the tax burden will be 5% of the transaction amount, including the value of the software. Before the new rule, the basis was twice the market value of the carrier media (e.g., CDs, flash drives, etc.). However, the decree determines that the ICMS due on transactions involving software transmitted via download or electronic files accessed through streaming will not be levied, at least until the government defines where the triggering event for the tax occurs (to determine to which state the ICMS tax must be paid).

Maurício Barros is Head of the Indirect Tax Consulting Area at Gaia Silva Gaede Associados. Ph.D in Tax Law from the University of São Paulo (USP). Master's degree in Tax Law from the Catholic University of São Paulo (PUC/SP). Taxpayer-Appointed Judge at the São Paulo State Taxes and Fees Court (TIT-SP).

Daniel Teixeira Prates is Manager of the Tax Consulting area at Gaia, Silva Gaede & Associados. Post-graduation degree (Lato Sensu) in International Tax Law and Tax Law from the Brazilian Institute of Tax Law – IBDT. Bachelor's degree in Law from the University of São Paulo (USP).

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.