Brazil: Brazilian Tax Review – February/March/April 2016

UNDECLARED FOREIGN ASSETS: TAX AUTHORITIES ISSUE REGULATIONS GOVERNING THE SYSTEM FOR TAXATION AND FOREIGN CURRENCY REGULARIZATION – RERCT

On March 11, 2016, the Brazilian IRS issued Normative Ruling 1,627 to govern the Special Methods of Taxation and Foreign Currency Regularization (RERCT) that was introduced by Law 13,254.

This program was created in order to bring undeclared foreign assets held abroad by Brazilian taxpayers into legal compliance. 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 pay a 30% fine and income tax on the amount to be repatriated.

The deadline to participate in the program is October 31, 2016. Participant must send the statement to IRS and pay the tax and fine levied on the amount to be repatriated by that date.

CITY OF SÃO PAULO TAX AUTHORITIES DECIDE THAT THE SERVICE TAX (ISS) IS DUE ON EXPORT OF SERVICES

On April 26, 2016, the tax authorities of the city of São Paulo published a controversial Normative Opinion (Normative Opinion 2) that states their position regarding the triggering event for ISS tax on the export of services. This new Normative Opinion is the rule tax auditors will follow during audits.

Under tax law, the export of services is not subject to the ISS tax. However, if the services are performed in Brazil and the results of the services are manifested in the country, then the ISS will be levied.

Even though Brazilian legislation does not define what the "result" of a service is, the tax authorities take the position that the ISS tax exemption applies only if the services are performed abroad. The tax authorities therefore maintain that if the services are rendered in Brazil, the ISS tax will be due, regardless of whether the benefits or consequences of the transaction are manifested abroad.

By taking this position, the tax authorities have limited the situations in which the ISS tax exemption applies. However, it bears noting that there are arguments to made that this new normative ruling is illegal and that, in some cases, the ISS tax should not be levied when the service is performed in Brazil and its results are manifested abroad.

ADVERTISING AND PUBLICITY (INCLUDED ON THE INTERNET): CITY OF SÃO PAULO CHANGES ITS POSITION ON THE SERVICE TAX (ISS)

Despite of its earlier position that the dissemination, provision and insertion of advertising and publicity on radio, TV broadcasting, websites and billboards are not subject to the Service Tax (ISS), the Treasury Department of the City of São Paulo enacted the Normative Ruling 1/2016 on March 2016, which says these services are subject to the ISS tax. This ruling does not levy the tax on advertising and publicity in books and newspapers, due to their constitutional immunity under article 150(VI)(d) of the Brazilian Constitution.

We note that taxpayers may be subject to double taxation because the São Paulo State Treasury Office also maintains that these services are subject to the State VAT (ICMS) tax, which was recently confirmed by the Superior Chamber of the Tax and Fees Court of São Paulo (TIT-SP).

However, the issue has not yet been definitively resolved by the courts, even though there are some precedents in similar cases from the State Court of São Paulo (TJ-SP) and the Superior Court of Justice (STJ).

SOFTWARE AS A SERVICE (CLOUD COMPUTING): BRAZILIAN IRS DECIDES THAT REMITTANCES ABROAD ARE SUBJECT TO FEDERAL TAXATION

According to Private Letter Ruling 267/2007, issued by the Brazilian Federal Revenue Office, amounts remitted abroad due to Internet remote use of off-the-shelf software through cloud computing (Software as a Service contracts) are considered payment for the provision of technical services. Taxpayers must therefore apply the Withholding Income Tax IRRF (15%), CIDE-technology (10%) and PIS/COFINS on Imports (9.25%) to these remittances. This rule may apply to all taxpayers.

Even though the Brazilian IRS does not have jurisdiction to decide on the municipal Service Tax (ISS), this ruling also states that these services are subject to the ISS, which is in keeping with an earlier decision from the City of São Paulo Tax Authorities.

However, we believe there are reasonable arguments to challenge the position taken in this private letter ruling.

STATE VAT (ICMS) TAX BENEFITS TO BE REDUCED BY STATES

The National Finance Policy Council (CONFAZ) enacted ICMS Convention 42/2016 in order to authorize Brazilian States to reduce ICMS benefits to a minimum of 10% of the benefit. This reduction will be implemented through (1) the deposit of the corresponding amount or (2) the increase of the ICMS taxation.

If there is no deposit for three months (whether consecutive or not), the beneficiary may lose the benefits permanently.

This convention revokes ICMS Convention 31/2016, which contained similar provisions. The reductions/deposits related to ICMS tax benefits will not become effective in individual Brazilian states until the state in question issues regulations governing the matter.

NEW WITHHOLDING TAX RATES ON CAPITAL GAINS WILL COME INTO FORCE ONLY IN 2017

Law 13,259/16 changes the way capital gains earned by individuals are taxed. Currently, capital gains are subject to a 15% Withholding Income Tax (WHT) rate. With this law, the WHT will be levied progressively, with a top rate of 30%.

On April 29, 2016, the Brazilian IRS issued Interpretative Declaratory Act 3, providing that the new rates will become effective on January 1, 2017. With this act, the Brazilian IRS eliminates doubts that existed about the date the new rates become effective.

WITHHOLDING TAX ON INTEREST ON SHAREHOLDER EQUITY, INCENTIVES FOR TECHNOLOGICAL INNOVATION AND OTHER MATTERS: PROVISIONAL MEASURE 694/15 BECOMES INEFFECTIVE

Provisional Measure 694, which introduced new rules regarding the withholding tax on Interest on Shareholder Equity (ISE), Incentives for Technological Innovation and on other tax matters, was not analyzed by Congress by the legal deadline, which means it becomes ineffective. The original text of the Provisional Measure provides:

  • Regarding the ISE, a limitation for the deduction of the ISE 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, the provisional measure increased the WHT rate applicable to ISE payments from 15% to 18%;
  • With respect to incentives for technological innovation, a suspension of 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.

The Brazilian Constitution states that, if a provisional measure is not converted into law within the legal deadline, Congress may issue regulations by legislative decree that govern the legal relations subject to the provisional measure during the period of its validity.

To date, Congress has not issued a legislative decree, which means the provisional measure is effective from January 1, 2016, to August 3, 2016. However, since this provisional measure introduced rules that increase taxes, the applicability of this provisional measure during this period (January 1, 2016, to August 3, 2016) is questionable.

BRAZIL JOINS HAGUE CONVENTION, ELIMINATING THE NEED TO LEGALIZE FOREIGN DOCUMENTS IN OVER 100 COUNTRIES

On January 29, 2016, the Brazilian Government issued Decree 8,660, which ratifies the Hague Convention of 1961. The Hague Convention will come into force in Brazil on August 14, 2016.

The Hague Convention provides that all public documents from the Contracting States (countries that have signed it – including the United States, Japan and the European Union countries) are recognized as valid and effective in other Contracting States.

However, a certified translation of these documents must still be made before they can be submitted to Brazilian courts or government agencies.

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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