Brazil: Brazilian Tax Review – January/February 2018

States Make Progress in Resolving the ICMS "Tax war"

Following the rules in Supplementary Law 160/2017, the states have approved an agreement (ICMS Convention 190/2017) that establishes rules for validating tax incentives granted improperly, as well as authorizing the granting of amnesty and the forgiveness of past debts.

This convention sets a deadline for the states to disclose all the tax incentives they have granted in recent years without certification by the National Council for Fiscal Policy (Conselho Nacional de Política Fazendária), or CONFAZ, as well as to register them with that body, in order to disclose them to all taxpayers.

Once this has been done, the tax incentives will have an effective term according to the nature of the activity with which they are connected (industry, commerce, etc.).

Because the convention has been approved, it is essential that taxpayers who use tax incentives that have not been properly approved verify whether their incentives have been listed among those disclosed to and recorded with CONFAZ. Taxpayers should also determine whether they can adhere to a tax benefit that reduces their ICMS tax burden, particularly if direct competitors are taking advantage of such a tax break.

Attorney General's Office for the National Treasury Can Freeze Taxpayers' Assets without a Court Order

Law 13,606/2018, which was passed recently, authorizes the Brazilian Treasury to record past-due debt certificates at agencies that record assets and rights subject to attachment or lien (for example, real estate and automobile registry offices), making these assets unavailable, before a tax execution action is filed.

In practice, the law authorizes the Attorney General's Office for the National Treasury to make the assets of debtors unavailable when those debtors have been notified that they have been placed on the list of people with past-due federal tax debts (or in other words, before the tax execution action) and have not paid the debt within five days of receiving the notice. Moreover, the law authorizes the Brazilian Treasury to notify credit bureaus regarding debts placed on the past-due federal tax list.

This controversial measure could be challenged in court because it appears to conflict with provisions of the Brazilian Constitution and National Tax Code.

The State of São Paulo Regulates the ICMS Tax on Digital Goods

In keeping with Tax on the Circulation of Merchandise and Services Convention 106/2017, the state of São Paulo has published in-state regulations governing the collection of the Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, on what are referred to as digital goods. These include standardized software, computer programs, digital games, apps, electronic files, etc.

Under the new rules, the platform that digitally transfers these goods, even if this is done by means of periodic payments, must pay the tax to the state in which the recipient of the goods is located.

These provisions provide even more fodder for discussions concerning the "tax war" among the states and municipalities. This is because a large part of the services covered by the decree are considered services subject to taxation by municipalities under the Service Tax (Imposto sobre Serviços), or ISS.

The decree goes into effect on April 1, 2018, with the collection of taxes on these transactions being expected from that date.

Notwithstanding the fact that this tax is to take effect very soon, there are lawsuits before the Brazilian Supreme Court seeking to suspend or even cancel the ICMS tax levy on digital goods. These lawsuits are based not only on conflicts with the ISS tax legislation, but also on the fact that there is no law to implement the tax and on arguments that the ICMS tax should not be levied on intangible goods.

Important Changes to the List of Jurisdictions with Favorable Taxation and Privileged Tax Systems

Normative Instruction RFB 1,773/2017 excludes Singapore, Costa Rica and Madeira from the list of countries or dependencies with favorable taxation (the blacklist).

On the other hand, the normative instruction includes certain tax systems from these countries on the list of privileged systems (the gray list). These are: the Free Trade Zone System of Costa Rica, the Madeira International Business Center, established under Portuguese law, and various systems that exist under the law of Singapore.

Brazilian Federal Revenue Issues a Regulation on the Tax Effects of Financial Reporting Standards on Accounting for Revenue from Contracts with Customers (IFRS 15)

Normative Instruction RFB 1,771 governs the tax rules regarding accounting entries under Accounting Standards Committee Pronouncement 47 (IFRS 15) on revenue from contracts with customers, which was issued in November 2016 and becomes effective in January 2018.

This normative instruction approves the model statements to be used by taxpayers in controlling the differences between the corporate criteria and the criteria in effect for tax purposes regarding revenue, costs and expenses, and the respective adjustments under the laws governing this matter.

Brazilian Supreme Court Suspends New Rules for the ICMS-ST Tax

The Chief Justice of the Brazilian Supreme Court issued a preliminary injunction suspending certain provisions of Tax on the Circulation of Merchandise and Services Convention 52/2017, which sought to make the rules relative to the tax substitution method for the Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, uniform.

The suspended provisions include the controversial rule requiring the inclusion of the tax in its own calculation basis. In practical terms, this increased the amount of tax paid in certain situations. The main reason given by the Chief Justice of the Brazilian Supreme Court was the need to issue a supplementary law to deal with the matters included in the convention.

The decision will be reevaluated by the reporting justice chosen for the hearing of the challenge to the convention's constitutionality when the Supreme Court returns from recess.

Important Changes in ISS Law in the Municipality of São Paulo

São Paulo Municipal Law 16,757/2017 made important changes in that municipality's Service Tax (Imposto sobre Serviços), or ISS, law by adopting the changes made by Federal Supplementary Law 157/2016 at the municipal level.

Among other matters dealt with, the list of services subject to the ISS tax has been updated to include making content available through streaming (item 1.09) and publishing advertising on the Internet (item 17.24).

Under São Paulo municipal law, all information technology services will be taxed at a 2.9% rate, as will the services under item 17.24.

Moreover, the new law changes the place of payment of the ISS tax for certain, specific activities. These include health insurance plans, credit and debit card administration and commercial leasing, among others, in keeping with Federal Supplementary Law 157/2016. Certain rules regarding the "tax war" among municipalities have also been included.

Brazilian Federal Revenue Ratifies Its Position on the Taxation of Licensing for the Commercialization and Distribution of Foreign Software in Brazil

Through Interpretive Declaratory Act RFB 07/2017, Brazilian Federal Revenue has ratified and formalized its position that payments sent abroad as consideration for licensing for the commercialization or distribution of software are royalties. This means they are subject to the withholding tax at a rate of 15%.

The new rule also clarifies that, if the beneficiary of the payment is resident or domiciled in a country with favorable tax treatment, the withholding tax rate for the transaction will be 25%.

Brazilian Federal Revenue Simplifies the Rules for Offsetting Income Tax Paid Abroad against the Brazilian Corporate Income Tax (IRPJ)

Normative Instruction RFB 1,772/2017, which was issued recently, makes changes to the procedures for offsetting income tax paid abroad on profit, income and capital gains received by corporate entities domiciled in Brazil.

Under this normative instruction, corporate entities established in countries that are parties to the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents are released from the obligation of having the documents that prove payment recognized by the respective agency collecting the payment and by the Brazilian consulate. All that will be necessary now in these cases is an apostille on the payment document and a sworn translation.

Authentication and recognition of the documents continue to be necessary for countries that are not party to the Hague Convention.

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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