Brazil: CARF Newsletter - June

Last Updated: 25 July 2019
Article by Koury Lopes Advogados

CSRF UNDERSTANDS THAT THE CONCEPT OF WHOLESALE MARKET PRICE IS NOT RESTRICTED TO MARKETS LOCATED IN A MUNICIPALITY, BUT ALSO TO METROPOLITAN REGIONS

The 3rd Panel of the Superior Chamber of Tax Appeals - CSRF innovated in a recent judgment that analyzed the concept of ‘wholesale market price’ which is used as reference to obtain the Minimum Taxable Value (VTM) in the tax basis of the Tax on Industrialized Products – IPI in operations between related companies. According to art. 195 of the IPI Regulations (RIPI), the VTM in such cases cannot be lower than the regular wholesale market price applicable in the municipality of the sender.

The case analyzed by the CSRF involved a cosmetics company that had its factory in a large industrial center and sent its finished products to a wholesale distributor located outside the city, where wholesale market prices are usually lower.

The Federal Revenue Service assessed the prices used by the factory to calculate IPI on the remittances made to the wholesale distributors, since they were much lower than the wholesale market prices applicable to the factory’s municipality. According to the Tax Assessment, this structure would provide a reduction of the IPI tax base, since the relevant operation for IPI purposes is the one between the factory and the wholesaler.

The vote was tied, so the ruling was decided via the casting vote of the Federal Revenue Service in favor of the tax administration. The prevailing opinion was that the concept of ‘wholesale market price’ cannot be segregated between markets in a designated municipality, but extends to the whole metropolitan region, which would put the manufacturer and the wholesale distributor under the same applicable wholesale market price, allowing the determination of the VTM according to the price applicable in the municipality of the factory. The decision is controversial and may impact similar cases currently under trial before the CARF.

CARF: STOCK-FOR-STOCK MERGERS IN A CONTEXT OF CORPORATE REORGANIZATION AND THE ABSENCE OF CAPITAL GAINS TAXATION

The 1st Panel, 2nd Chamber, 1st Section of CARF recently issued a ruling in a case involving a stock-for-stock merger within the same economic group. CARF made an overall analysis of the operations carried out by the taxpayer and did not limit its examination to the merger itself.

The Federal Revenue Service argued that when the operation was carried out, the taxpayer ended up selling its shares at zero value and getting shares from the merging company at a high value. Therefore, the positive difference between the shares would represent a taxable capital gain.

According to most of the judges, however, the operation in the context analyzed would not result in an asset increase from the perspective of the shareholders, but rather a mere economical reorganization at par value. Consequently, the collection of income taxes over this alleged difference was deemed undue. The Federal Revenue Service may still appeal the decision before the Superior Chamber of Tax Appeals.

CARF: VALUATION OF GOODWILL AND INTANGIBLE ASSETS AT MARKET VALUE

In analyzing a case involving the deductibility of goodwill calculated without considering the market value of a certain brand, the 1st Panel, 2nd Chamber of the 1st Session of CARF understood, by a majority, that the goodwill calculation in question was legal and that the resulting amount was completely deductible. The operation occurred in 2007, with the use of a vehicle company, and produced effects in calendar years 2008 through 2011.

According to the Federal Revenue Service, the acquired company’s net equity would have been undervalued, since the high value attributable to intangible assets would not have been accounted. Therefore, since the booked net equity of the company would not correspond to the reality, the goodwill generated at the time of the sale (and calculated based on this net equity) would have no economic substance and could be dismissed.

For most of the judges, however, the taxpayer strictly followed the accounting rules applicable at the time when the operation took place, which prohibited booking intangibles at market value in cases that did not involve a third-party transaction. In this sense, they found no grounds to disqualify the company’s books, and the charges where therefore dismissed. Furthermore, the judges understood that the mere use of a vehicle company, without any evidence of abuse, has no effect on goodwill deductibility.

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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