Brazil: Provisional Measure No. 601/12 - Amendments To Tax Legislation

Provisional Measure ("MP") no. 601 was published on December 28, 2012, amending a number of tax incentives for 2013, as well as altering and regulating on measures related to the development and industrial policy plan called "Brasil Maior" (Greater Brazil), created by the government recently.

As the mentioned MP encompasses several topics, the tax changes will be analyzed per topic, as follows:

  • Special System of Reinstatement of Tax Amounts for Exporting Companies ("REINTEGRA") – Extension of Term

REINTEGRA, created by Provisional Measure no. 540/2011 as part of the Brasil Maior plan and aimed at reinstating amounts relative to residual tax costs existing in the production chain of exporting companies, was extended until Dec. 31, 2013.

Thus, the producing entities exporting goods manufactured throughout 2013 may compute amounts with the purpose of reimbursing, partially or fully, any tax residue existing in their productive chain.

In this regard, it should be mentioned that the amount to be reimbursed to the exporting companies will be set by the Executive Branch, and may vary from 0% (zero percent) to 3% (three percent) on the revenue deriving from the export of produced goods.

  • Payroll Release – Extension of the list of sectors included

Another measure in connection with the "Brasil Maior" plan was the release of payroll granted to legal entities of specific sectors (IT, furniture, shoes, textile, and leather), through the creation of a percentage of the social security contribution on the gross revenue ("CPRB"), substituting the social security contributions established in article 22 of Law no. 8,212/91.

Along these lines, MP no. 601/2012 extended the sectors comprised by this new system, so that among the legal entities that are also to apply the new tax rate 1% (one percent) relative to the CPRB, we have retail businesses1 and companies engaged in the maintenance and repair of vessels.

Furthermore, the MP excluded international airline companies of foreign association of countries that establish, under reciprocal treatment, tax exemption of the revenues generated by Brazilian airline companies, from the CPRB benefit.

Nevertheless, the MP also altered the revenues that can be excluded from the CPRB basis, so that, in addition to the export revenues, revenues arising from the international cargo transportation may be excluded from the CPRB basis.

Thereafter, the MP set forth that in the case of hiring of companies for the performance of services related to any type of transportation2, by way of labor assignment, the hiring company must withhold 3.5% (three point five percent) of the gross value of the tax invoice or the invoice for service rendered.

It is worth noting that the rules regarding the CPRB benefit come into force as of April 1, 2013 and will be valid until Dec. 31, 2014, except for the rules related to the exclusion of revenues from the tax basis of the contributions and the exclusion of the international airline companies mentioned above, which came into force on the date MP no. 601/2012 was published, and therefore have already been producing effects since Dec. 28, 2012. ·

  • Special Tax System of Protected Assets ("RET") – Tax Rate Reduction

Law no. 10,931/2004 was amended by MP no. 601/2012 with the purpose of reducing the tax rated of the RET in real estate ventures.

Therefore, the 6% (six percent) rate applied on the monthly revenue received in each real estate venture under the RET was reduced to 4% (four percent).

Of these 4% (four percent), 1.71% (one point seven one percent) corresponds to the Contribution for the Social Security Funding ("COFINS"), 0.37% (zero point three seven percent) to the Contributions to the Employee Profit Sharing Program ("PIS") and to the Formation of the Civil Servants' Fund Program ("PASEP"), 1.26% (one point two six percent) to the Corporate Income Tax Imposto ("IRPJ"), and 0.66% (zero point six six percent) to the Social Contribution on the Net Income ("CSLL").

These changes came into force on the date of their publication and started producing effects as of January 1, 2013.

  • COFINS-Import – Alterations

Provisional Measure no. 601/2012 extended the COFINS-Import levy, at the rate of 8.6% (eight point six percent), provided by article 8, paragraph 21, of Law no. 10,865/2004, to the cases of product acquisition added to Annex I of Law no. 12,546/2011, such as copper pipes, locks, sanitary products, among others.

In addition, there was the exclusion of products related to civil construction and hospital medicine, such as, for example, iron bars and X-ray equipment, from the mentioned Annex I to Law no. 12,546/2011, which, due to this exclusion, will now have a 7.6% (seven point six percent) COFINS-Import rate.

The alteration of the COFINS-Import' rate will only come into force as of April 1, 2013.

  • WHT – Levy on certain earnings

Another change brought by MP no. 601/2012 concerns the amendment to Law no. 12.431/2011, aimed at redefining the levy events of the Withholding Income Tax ("WHT" [IRRF]) on the remittance of earnings to beneficiaries, whether individuals or legal entities.

In this regard, it was established that in addition to the earnings provided for in article 81, paragraph 2, letter "a" of Law no. 8,981/953, the following earnings will be entitled to the zero tax rate of the WHT on remittances abroad: (i) those produced by securities acquired as of January 1, 2011, of public distribution and issued by private legal entities not classified as financial institutions, and/or (ii) those earned through investment funds of credit rights formed as closed-end funds, whose creator(s) or assignor(s) of the credit right portfolio is not a financial institution.

It is worth noting that the reduction does not apply in the case of remittances to jurisdictions that do not tax income or which tax it at a maximum rate lower than twenty percent.

In addition, the tax treatment provided for in Law no. 12,431/11 for debentures issued by specific purpose companies ("SPE"), formed under a share structure, was extended to shares issued by investment funds in credit rights ("FIDC"), formed under a closedend fund structure, requiring that, as with SPEs, such FIDCs be related to the raising of funds with the view to implement investment projects in the infrastructure area, or intensive economic production in research, development, and innovation, considered a priority by the Executive Branch.

Therefore, the earnings deriving from these debentures or shares, earned by individuals or legal entities resident or domiciled in the Country are subject to the income tax charged exclusively at source, at the following rates: (i) 0% (zero percent), when earned by individuals; and (ii) 15% (fifteen percent), when earned by legal entities that are taxed based on the taxable income, presumptive income or determined by the authorities, exempted legal entity or which opted for the Federal Simplified Tax System for Small Businesses (Simples Nacional).

Still on this matter, the MP provides for a fine of 20% (twenty percent) of the amount raised by debentures or FIDC in case there is no allocation of the earnings obtained in the investment project. In this regard, the fine will be applied to the issuer of debentures in the case of FIDC.

Lastly, it is of note that the above changes come into force on the date of publication of the mentioned MP no. 601, that is, they have already been producing effects since Dec. 28, 2012.

  • COFINS – Exclusion of service remuneration related to federal collections from the tax basis

Pursuant to article 6 of the MP, legal entities integrating the Collection Network of Federal Revenues ("RARF") may exclude from the COFINS' basis the amount earned in each ascertainment period for the rendering of federal revenue collection services.

If it is not possible to exclude this amount from the COFINS's basis relative to the ascertainment period, the exceeding amount paid may be excluded from the COFINS's basis in the subsequent periods.

It should be noted that this tax benefit is still to be regulated by the Federal Revenue of Brazil ("RFB") and will come into force in January 1, 2013.

Footnotes

1.Department stores classified into Subclass CNAE 4713-0/01; Retail trade of construction material, classified into Subclass CNAE 4744-0/05; Retail trade of construction material in general, classified into Subclass CNAE 4744-0/99; Specialized retail trade of IT equipment and supplies, classified into Class CNAE 4751-2; Specialized retail trade of telephone and communications equipment, classified into Class CNAE 4752-1; Specialized retail trade of household appliances and audio and video equipment, classified into Class CNAE 4753-9; Retail trade of furniture, classified into Subclass CNAE 4754-7/01; Specialized retail trade of fabric and bed and bath linen, classified into Class CNAE 4755-5; Retail trade of other household articles, classified into Class CNAE 4759-8; Retail trade of books, newspapers, magazines and stationery, classified into Class CNAE 4761-0; Retail trade of records, CDs, DVDs and tapes, classified into Class CNAE 4762-8; Retail trade of toys and recreational articles, classified into Subclass CNAE 4763-6/01; Retail trade of sporting goods, classified into Subclass CNAE 4763-6/02; Retail trade de of pharmaceutical products, without the handling of prescriptions, classified into Subclass CNAE 4771-7/01; Retail trade cosmetics, toiletries, and personal hygiene, classified into Class CNAE 4772-5; Retail trade of clothing articles and accessories, classified into Class CNAE 4781-4; Retail trade of shoes and travel items, classified into Class CNAE 4782-2; Retail trade of household cleaning items, classified into Subclass CNAE 4789-0/05, and the retail trade of photographic and filming items, classified into Subclass CNAE 4789-0/08.

2. Such as companies rendering air cargo transportation services; regular air passenger transportation; maritime cargo transportation in coastal navigation; maritime passenger transportation in coastal navigation; maritime cargo transportation in long-distance navigation; maritime passenger transportation in long-distance navigation; cargo transportation by inland navigation; passenger transportation by inland navigation in regular lines; and navigation for marine and port support.

3. "Any amounts constituting remuneration of invested capital, including the one produced by variable income securities, such as interest, premiums, commissions, discounts, and profit sharing, as well as the positive results earned in fund investments and investment clubs".

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.

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