Brazil: Brazilian Tax Review – September/October/November 2015

1) THE SUPERIOR COURT OF JUSTICE HOLDS THAT THE FEDERAL EXCISE TAX (IPI) IS LEVIED ON SALES OF IMPORTED GOODS

Even though an earlier ruling from the Superior Court of Justice was favorable to taxpayers, in a decision under the repetitive appeals system (Recursos Repetitivos), the Court held that sales of imported goods are subject to the Excise Tax (IPI) even in cases in which the imported goods were not subject to any manufacturing process.

The decision is binding on lower courts in cases regarding the same issue.

2) THE STATE OF SÃO PAULO CHANGES ICMS TAXATION ON TRANSACTIONS INVOLVING SOFTWARE

The São Paulo State Treasury Office issued Decree 61,522, to introduce changes to the tax calculation basis for the ICMS (the State VAT) levied on transactions involving software. The decree revoked a previous rule (Decree 51,619/2007) that the ICMS calculation basis for transactions involving software (whether customized or not) should be twice the market value of the physical media that stores the software (CD, pen drive, etc.).

This rule was followed by a national agreement (92/2015) that establishes that these transactions will be subject to a minimum 5% ICMS tax rate.

In this context, the new legislation stirs up controversy over ICMS taxation of software, even though the tax will not be levied in São Paulo on acquisitions through downloads until a new rule establishes where these transactions take place and which state should collect it (given that there is no physical movement of goods in these transactions).

3) SÃO PAULO STATE TREASURY OFFICE REGULATES THE INCLUSION OF THE ADDITIONAL FREIGHT CHARGE FOR RENEWAL OF THE MERCHANT MARINE ("AFRMM") IN THE CALCULATION BASIS OF THE STATE VAT (ICMS)

Based on a previous ruling from the Supreme Court, which held that the Additional Freight Charge for Renewal of the Merchant Marine (AFRMM) is a kind of tax, the São Paulo State Treasury Office enacted CAT Normative Decision 1/2015 to state that the AFRMM must be included in the ICMS calculation basis for imports.

The AFRMM is levied on the freight charged by Brazilian and foreign navigation companies operating in Brazilian ports. By doing so, state authorities are formally stating the state's position on this issue, which must be complied with by importers in order to avoid tax assessment notices.

4) FEDERAL DECREE 8,543/2015 ESTABLISHES NEW RECOVERY RATES FOR PROGRAM TO ALLOW EXPORTERS TO RECOVER RESIDUAL TAX COSTS (REINTEGRA)

Federal Decree 8,543/2015 establishes new recovery rates for exporters who wish to recover residual tax costs incurred in the export production chain, ranging from 1% to 3% of their total export revenue (REINTEGRA). The new recovery percentages are:

Period

Percentage of recovery

From March 1, 2015, to November 30, 2015

1%

From December 1, 2015, to December 31, 2016

0.1%

From January 1, 2017, to December 31, 2017

2%

From January 1, 2018, to December 31, 2018

3%

5) SUPERIOR COURT OF JUSTICE DECIDES THAT INTEREST ON NET EQUITY IS SUBJECT TO THE PIS AND COFINS TAXES

On October 14, 2015, the Superior Court of Justice held that Interest on Net Equity (IOE) is subject to the PIS and COFINS taxes, calculated using the method in Law 10,637/02 and 10,833/03 (PIS/COFINS non-cumulative). This issue was decided on a Special Appeal and will serve as a precedent for lower court decisions on the same issue.

6) BRAZILIAN GOVERNMENT INCREASES THE TAXATION OF CAPITAL GAINS EARNED BY INDIVIDUALS

On September 22, 2015, the Brazilian Government issued Provisional Measure 692/15, which changes the taxation of the capital gain earned by individuals.

Currently, capital gains are subject to a 15% Withholding Income Tax (WHT) rate. With this new Provisional Measure, the WHT will be levied progressively, as shown in the table below:

Capital Gains Range

WHT RATE

Up to BRL 1 mi

15%

BRL 1 mi to BRL 5 mi

20%

BRL 5 mi to BRL 20 mi

25%

Above BRL 20 mi

30%

These new rates are applicable to residents and to non-residents (individuals and legal entities), with the exception of those located in blacklisted jurisdiction and of those who invest in the Brazilian market under the conditions established in Brazilian Central Bank Resolution 4,373/14.

To become effective, Provisional Measure 692 needs to be approved by the Brazilian Congress, what has not happened yet. If Congress approves the text, there is a chance that the new rates will become effective on January 1, 2017 (even though its original text mentions January 1, 2016).

7) BRAZILIAN GOVERNMENT REDUCES THE TAX BENEFITS FOR INTEREST ON NET EQUITY (IOE) AND THE INCENTIVES FOR TECHNOLOGICAL INNOVATION

Provisional Measure 694 was published  September 30, 2015, reducing the tax benefits related to the payment of IOE and to investments in technological innovation.

Regarding the IOE, the Provisional Measure limits the deduction of the IOE from the corporate income tax and the CSLL tax calculation basis, imposing a ceiling of 5% on the interest rate used to calculate it, which is the Long Term Interest Rate, or TJLP. Additionally, this Provisional Measure increases the WHT rate applicable to IOE payments from 15% to 18%.

With respect to incentives for technological innovation, the Provisional Measure suspends the benefits related to the exclusion of R&D expenses from the corporate income tax and CSLL tax calculation basis for the 2016 calendar year.

To become effective, Provisional Measure 694 needs to be approved by the Brazilian Congress, what has not happened yet. If Congress approves the text, there is a chance that this new measures will become effective on January 1, 2017 (even though its original text mentions January 1, 2016).

8) TAXATION OF PROFITS EARNED BY FINANCIAL INSTITUTIONS INCREASED

Law 13,169/15 was published on October 7, 2015, increasing the Social Contribution on Net Profit (CSLL) rate applicable to the profits of financial institutions (banks, insurance companies, etc.) from 15% to 20%.Under the new law, this rate will apply from January 9, 2015, to December 31, 2018.

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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