Brazil: Brazilian Tax Review – June 2019

Brazil and Uruguay Sign a Double Taxation Convention

On June 7, 2019, Brazil and Uruguay signed a Double Taxation Convention, which contains several rules aligned with the BEPS Project (Base Erosion and Profit Shifting) minimum standards, such as general anti-avoidance rules and exchange of information among the contracting states' tax authorities.

This new DTC aims to contribute to Brazilian companies' internationalization, as well as to promote a better business environment for both countries. One must note that the DTC still needs to be ratified by the Brazilian Congress and implemented through a presidential decree in order to become effective.

Brazilian Congress Moves Forward with Tax Reform Proposal

The Lower House lawmakers recently approved a tax reform bill in the House Constitution and Justice Committee. This proposal was drafted by the Fiscal Citizenship Center ("Centro de Cidadania Fiscal" – CCiF), which is an independent institution established to consider improvements to the Brazilian tax system based on the principles of simplicity, neutrality, fairness and transparency.

The reform intends to replace the IPI, PIS/COFINS, ICMS and ISS taxes with a unique Tax on Goods and Services ("IBS"), to be levied on: (1) domestic transactions with goods, services, intangibles, assignment and licensing of rights, and lease of goods; and (2) imports of tangible and intangible goods, services, and rights. The IBS will be a non-cumulative tax, not levied on exports, and not subject to tax incentives that, directly or indirectly, reduce its tax burden.

The bill still has to be approved by the whole Lower House and the Senate in order to come into force.

The tax reform has been awaited with great expectation by the productive sector and is deemed to be the second-most important reform for recovering Brazil's economic growth, after the pension reform.

New Disclosure Requirements on Crypto Asset Transactions

After a public consultation, the Federal Revenue Office issued Normative Ruling 1,888/2019, implementing ancillary obligations on crypto asset transactions, which will become effective on August 1, 2019.

This is the first guidance from the tax authorities that specifically addresses crypto assets and crypto asset exchanges. Further information on the reporting format will be provided by the tax authorities within 60 days of the enactment date of Normative Ruling 1,888/2019

Administrative Tax Tribunal Held that Brazil-Austria DTC does not Prevail over Brazil's CFC Rules

Recent decisions issued by the Federal Administrative Tax Tribunal (CARF) held that profits earned by Austrian companies controlled by Brazilian entities are subject to income taxation in Brazil, according to the domestic Controlled Foreign Corporation ("CFC") rules.

These decisions hold that articles 7 and 23 of the Brazil-Austria Double Taxation Convention do not prevail over the Brazilian domestic CFC rules, which remain applicable to Brazilian subsidiaries in Austria.

Despite this, these administrative decisions should be challenged by Brazilian taxpayers since there is a judicial precedent, issued by the Superior Court of Justice, holding that article 7 of the DTCs prevails over the domestic CFC rules.

Brazil's IRS Defines "Premiums" for Social Security Contribution Purposes

Since the 2017 reform, labor legislation states that "premiums," even if paid on a habitual basis, are not part of the employees' salary, thus not being subject to labor and social security contributions.

The recent Private Letter Ruling 151/2019 stated that "premiums," in order not to be subject social security contributions, must meet the following requirements: (1) be paid either to a specific employee or a group of employees; (2) be paid in goods/utilities or in cash; (3) be voluntary, without a prior agreement or a legal obligation; and (4) arise from better-than-expected employee performance.

These requirements could be challenged by taxpayers, especially the requirement that the payment be voluntary, which is not provided for by law. Also, the definition of "premium" is pending analysis in the labor courts and their interpretation might influence future changes in the tax authorities' requirements.

Administrative Tax Tribunal Authorizes PIS/COFINS Credits on Commissions Expenses

In 2018, the Superior Court of Justice decided a leading case on the definition of "inputs" for PIS/COFINS non-cumulative credit purposes. In that instance, the Court held that an "input" must be analyzed under the essentiality and relevance criteria in relation to each company's economic activity.

Since this decision, the Administrative Tax Tribunal (CARF) has issued several decisions on PIS/COFINS non-cumulative credits, adopting a broader definition of "inputs."

In this context, in a recent decision, the Administrative Tax Tribunal held, for the first time, that commissions paid to brokers by taxpayers are essential and relevant to their economic activities and, thus, can generate PIS/COFINS non-cumulative credits.

Superior Court Authorizes REINTEGRA Reduction by Presidential Decree

REINTEGRA is a tax benefit aimed at promoting the export of goods by granting PIS/COFINS credits to exporters based on their export revenues.

Originally, the credits were calculated at a 3% rate; however, Federal Decree 8,415/2015 gradually reduced the rate to 0.1%. Taxpayers challenged this reduction, arguing that it is a tax increase, which could only be implemented by a law approved by Congress.

The Superior Court of Justice recently decided this case and held that a specific law had granted discretionary power to the executive branch to regulate the benefit rates in a range of 0.1% to 3%, according to its economic policy. The reductions implemented by Federal Decree 8,415/2015 were therefore allowed by the court.

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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