Brazil: BRAZILIAN TAX REVIEW – April 2017

Brazilian Supreme Court Holds that the Inclusion of State VAT ("ICMS") in the Calculation Basis of Social Contributions on Gross Revenues ("PIS/COFINS") Is Unconstitutional

After more than a decade of discussions, the Brazilian Supreme Court has held that taxpayers should exclude the ICMS amount from their gross revenues in order to calculate the PIS/COFINS levied on it.

Although the decision was issued in a case that benefits all taxpayers, the Court's position regarding the precise effects of this decision is still pending and might be issued with the analysis of the motion for clarification the federal government will file.

This is because it is possible that Supreme Court will hold that the exclusion is mandatory solely for taxpayers who have already filed lawsuits regarding this matter in Court, limiting the decision's enforcement to the post-final decision period for those who are not litigating regarding this matter. In the worst-case scenario, the Supreme Court could decide that the effects of the decision should be enforced from a future date for all taxpayers (including those with pending lawsuits) because the decision will result in a major revenue loss for the Brazilian government.

The Supreme Court Decides that Social Contributions on Payroll are Levied on Employee's Usual Payments

The Brazilian Supreme Court has held that all usual payments made to employees should be subject to the Social Contribution on Payroll, dismissing taxpayers' main argument that some amounts should be considered compensation and not remuneration for work.

Some examples of such payments are the Christmas bonus, hazardous duty pay, one-third extra payment for vacation time, etc.

According to the court, all these payments are usual and, for this reason, should be considered in the payroll. As a consequence, the Social Contribution on Payroll should be levied on them.

Brazilian Federal Revenue Consolidates its Positions Regarding the Calculation of Corporate Income Tax, CSLL, PIS and COFINS taxes

Brazilian Federal Revenue ("BFR") issued Normative Ruling 1,700/17, which consolidates its positions related to the calculation of the corporate income tax, CSSL, PIS and COFINS taxes, especially in view of the relatively recent changes introduced by Law 12,973/2014.

Previously, BFR's positions regarding the calculation of these taxes were scattered among several other normative rulings. BFR now consolidates its positions in this new rule, bringing more clarity and unity to the regulation of the mentioned taxes.

Additionally, Normative Ruling 1,700/17 is innovative since it expressly provides that certain expenses are non-deductible only from the corporate income tax calculation basis and not from that of the CSLL (for example, expenses with bonuses paid to administrators). Prior to this, BFR had taken the position that the calculation bases of these taxes were identical.

Brazilian Government Extinguished the Additional Rate of COFINS-Import and Social Security Contribution on Gross Revenue ("CPRB")

The Brazilian Government has enacted the Provisional Measure 774/2017, which has (i) made substantial changes regarding the Social Security Contribution on Gross Revenue ("CPRB") and (ii) extinguished the 1% additional COFINS-Imports rate.

According to the new rule, construction (infrastructure), collective transportation (roads, rails and subways) and journalism or radio will continue to be allowed to calculate the Social Security Contribution on Gross Revenue ("CPRB"). For these activities, the tax rates are going to be raised to 4.5% for construction, 2% for collective transportation and 1.5% for journalism or radio. Taxpayers engaged in other activities will be required to return to the former tax on payroll as soon as the new rule comes into effect (June 1, 2017).

Finally, the 1% additional rate of Cofins-Imports will no longer be levied from June 1, 2017.

Brazilian Government Authorizes the Full Outsourcing of Company Activities (Including Core Activities)

The recently passed Law 13,429/2017 authorizes unlimited  outsourcing of services by companies located in Brazil. Prior to this law, only services known as "middle-activity services," i.e., those unrelated to a company's core business, could be outsourced.

Under the new rules, companies will be allowed to hire third parties to perform any of their activities, basically through temporary labor supply agreements or simple service agreements. Nevertheless, no matter the case, the hiring company will remain liable for any labor debts that the outsourced company fails to pay to its employees.

Other obligations related to the maintenance of minimal acceptable working conditions, such as security and hygiene standards, continue to be the hiring company's responsibility. However, companies are no longer required to provide outsourced workers the same transportation assistance or meal tickets as they give their own employees.

These new rules do not apply to security companies or companies that transport valuables because they are governed by special legislation.

Brazilian Government Reopens the Program to Legalize Undeclared Foreign Assets of Brazilian Taxpayers

In 2016, the Brazilian Government created a program to legalize undeclared foreign assets held by Brazilian taxpayers abroad. This program was called the RERCT. Through the RERCT, a taxpayer could legalize undeclared assets and have their criminal liability for the crimes involved extinguished.

The program has been reopened by Law 13,248/17. Under the new law, taxpayers can legalize assets held until July, 31, 2017, subjecting them to the income tax at a 15% rate and to the payment of a fine of one hundred thirty five percent (135%) of the amount paid as income tax (effective rate of 35.25%). The deadline for joining the program is July 31, 2017.

Brazilian Federal Revenue Issues Understanding Regarding the Taxation of Software as a Service ("SaaS")

Brazilian Federal Revenue ("BFR") has issued its position on the taxation of remittances related to transactions involving Software as a Service with non-residents.

According to the tax authorities, the case analyzed had no proper "sale" of the software but merely the right to access and use it remotely in the cloud. The remittances were made by the Brazilian company to the non-resident but the software was accessed directly by the Brazilian company's clients (the taxpayer sells a sort of "access authorization" that enables its clients to use the software).

Therefore, according to BFR, transactions with such software must be taxed as a technical services (i.e., taxed by WHT at a 15% rate and by CIDE-tax at a 10% rate).  Despite BFR's position on this matter, it bears noting that there are legal arguments against these transactions being subject to these taxes.

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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