Brazil: GSGA – Special Report – Brazilian Tax Review 06/2014 – July/August

Brazilian Government extends Manaus Free Trade Zone

The Manaus Free Trade Zone was conceived as an import and export free trade area with special tax incentives (tax breaks, extra tax credits and deferrals) that was supposed to last until 2023. However, the Brazilian Congress enacted Constitutional Amendment 83/2014 on August 6, extending the life of the Manaus Free Trade Zone for an additional fifty years, from 2023 to 2073.

New rules to facilitate Drawback System

Drawback is a special customs method that allows tax and duty suspensions or exemptions on imported goods used to manufacture products for export. This tax break applies to the Import Duty, PIS/COFINS taxes, IPI (Excise Tax) and ICMS (State Value-Added Tax), as well as to the domestic acquisition of items used to manufacture products for export.

The Brazilian Federal Revenue Office and the Foreign Trade Secretariat recently published a joint ordinance that contains new regulations for the drawback method. The most significant change is the possibility of substituting products imported using the method for equivalent products acquired without the tax break in order to meet export commitments. This option eliminates the need to keep drawback inventory separate from products that do not take advantage of the tax break, which has been a major inventory control problem for exporters.

New regulations for "Ex Tarifarios"

Importers can apply for a temporary reduction in import duties when importing equipment or machinery (capital goods and IT goods) for which there is no equivalent produced in Brazil. This tax break reduces all the taxes levied on customs clearance (IPI, ICMS and PIS). This tax break is referred to as "ex tarifario" in Portuguese.

On August 15, the Chamber of Foreign Trade (CAMEX) published new requirements and procedures for the ex tarifario method. The new regulations fully describe all the procedures for applying the ex tarifario method and will help to eliminate subjective criteria and will make it easier to grant the tax break.

New decision on service exports holds that Services Tax (ISS) does not apply when the result of the service is received abroad

Under Brazilian law, the Services Tax (ISS) does not apply to the export of services. However, if the result of the services is manifest in Brazil, the ISS tax is due to the city where the entity that provided the service is located, even if the party purchasing the service has no establishment in Brazil. In this context, there is disagreement about the meaning of "result of the services" since the law does not define this expression.

A recent decision by the São Paulo Court of Justice held that the term "result" should be interpreted as the economic result of the services rendered. Therefore, under this definition, if the economic result takes place exclusively abroad, the ISS tax is not due.

This is contrary to a prior decision from the Superior Court of Justice. That case involved a company that performs repair and maintenance services for aircraft engines and turbines for foreign airlines. In that case, the Superior Court of Justice held that, since the service is begun and completed in Brazil, it should not be classified as exportation of services, despite the source of payment being abroad.

New rule on the withholding income tax triggering event on service transactions

On September 2, 2014, the Brazilian Federal Revenue Office issued Interpretative Declaratory Act 8/2014, which addresses the moment of the triggering event for the withholding income tax on service transactions.

The new rule formalizes the tax authorities' position in a long-term conflict with taxpayers. The rule says that the withholding income tax is due on the date the party purchasing the service enters the amount for the service received in its books. According to the rule, whether payment was made for the service is irrelevant.

Although this interpretative declaratory act is related to services provided within Brazil, Brazilian Federal Revenue applies this rule to remittances abroad too.

Despite this rule, it should be noted that there are good arguments to defend the position that the withholding income tax is due only at the moment of actual payment or remittance abroad for the service received.

Revenue on dispositions of corporate shares

On July 9, 2014, Provisional Measure 651/2014 made significant changes to PIS and COFINS legislation. These are two social security taxes levied on gross revenue.

Under the rule, revenue from the sale of corporate shares is subject to the PIS and COFINS taxes using the cumulative tax method, which is levied at rates of 0.65% (PIS) and 4% (COFINS). The new rule allows taxpayers to deduct the acquisition cost of the investment from the revenue received when calculating the taxes due. This results in a capital gain tax on the investment.

This new rule applies only to operational investments since revenue from the sale of shares recorded as noncurrent assets and classified as not being operational is exempt of PIS/COFINS.

This legislative change may lead to future disputes about which equity investment sales transactions are subject to PIS and COFINS taxes, i.e., which ones should be considered operational assets and which should not.

The provisions regarding this matter become effective January 1, 2015.


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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