After the publication of Normative Ruling nr. 1.397, by the Brazilian IRS, on September 19, 2013, it was highly anticipated the publication of a new act by the Brazilian Government clarifying several aspects of the consequences to tax arising from changes in commercial and accounting rules that taken place over the last few years. Within this context, Provisional Measure nr. 627 ("MP 627") was finally published on November 12, 2013.
Surprisingly, MP 627 has gone way beyond the scope initially imagined. MP 627 brings several changes to the corporate income tax legislation, some of which are summarized below:
- Creation of a digital version of the 'Income Tax Calculation Book' ("Lalur Digital"), a new tax return which should be presented to the IRS electronically by means of the Public Digital System (SPED);
- Two penalties were established in case such auxiliary obligation fails to be observed: one equal to 0.025% of the gross monthly revenue of the legal entity that sends the 'Lalur Digital' in after the deadline. Such penalty will never be less than R$ 5,000.00 per month. The second penalty refers to a lack of information and to the provision of incorrect information to tax authorities. In this case, the penalty will be equal to 5% of the amount omitted or incorrectly informed to the tax authorities, never being less than R$ 500.00;
- It is strongly recommended to taxpayers pay attention to such obligations, especially to the second. Since this penalty is calculated upon each information incorrectly submitted, such penalty may be imposed several times, exceeding the amounts incorrectly informed. Penalties of this kind are common in the customs area, resulting in multimillion Real deficiency notices frequently being imposed by customs authorities.
- Another important modification (which was also expected) refers to the notion of 'goodwill'. Until now, the concepts of goodwill, surplus value, etc. adopted by tax legislation have differed from that used for accounting purposes. This topic has a history of dispute between taxpayers and the tax authorities.
- The concept of goodwill outlined by the new legislation is similar to that found in accounting rules. The old concept of goodwill and discounts are subdivided into: (i) surplus value and capital loss: the difference between the books and the 'fair value' of the assets; and (ii) goodwill;
- Differently from the lines followed in the past, a hierarchy between the foundations of goodwill was provided for and the capacity to earn future profits should only be registered after the registration of surplus value and capital loss. Such change may have an impact on corporate transactions since it reduces the amount to be amortized for tax purposes. It was established that the positive and negative adjustments arising from calculations at the fair value of the corporate interest should be made against the surplus value.
- MP 627 also incorporates the concept of "gains deriving from advantageous purchases" (please see CPC 15 and CVM Deliberation nr. 665) through accounting. This derives from transactions where the transfer of control occurs with the registration of a gain by the acquirer of the control. This topic was unclear in previous legislation. Ratifying the taxpayers' understanding, MP 627 clarifies that taxation will occur only on the sale of an investment (including mergers and split-off transactions).
- Other modifications in corporate income tax refer to: (i) trading profit ("lucro da exploração"); (ii) real estate exchange transactions; (iii) gross/net earnings and the adjustments arising from calculation at the fair value; (iv) calculation of capital gains by a company which has adopted the presumed profit method; (v) deductibility of expenses with amortization, depreciation and depletion by the lessee; (vi) performance and taxation of goodwill and gains from advantageous purchases; (vii) acquisitions of corporate shares in installments, including in the cases of merger and acquisitions transactions; (viii) taxation of lease agreements, etc.
Important changes in the legislation that governs Social Contributions to PIS and COFINS have also taken place. MP 627 clarifies that the gains deriving from calculation at the fair value of assets and liabilities will not be subject to said contributions. On the other hand, measurement at the fair value of the non-current assets will be considered when calculating PIS/COFINS credits.
The new rules apply to all Brazilian taxpayers after January 1, 2015, although Brazilian taxpayers may choose to adopt the new rules for the calendar year 2014. Taxpayers that do not adopt the new rules after this date will be subject to fiscal neutrality (previously systematic, i.e., Transitional Tax Regime – RTT) up to January, 2015.
Besides the changes above, MP 627 now regulates a controversial topic following the publication of Normative Rule nr. 1,397, 2013: the taxation of dividends. Shortly, this ruling provides that the distribution of dividends would be taxable if the amount distributed exceeds the profits calculated for corporate income tax purposes.
Within this context, MP 627 clarifies that such understanding – taxation of the amount that exceeds the profit considered for tax purposes – would be applicable as of January, 2015. Brazilian taxpayers were afraid of retroactive taxation being applied by the abovementioned normative rule. This topic will probably be subject to further discussion.
The last important topic provided for by MP 627 refers to the taxation of subsidiaries and affiliates of Brazilian companies (Brazilian CFC rules). This issue has been the subject of a dispute between taxpayers and the tax administration, with the Federal Supreme Court ("STF") being urged to solve the issue (which, unfortunately, it has failed to fully resolve).
On the other hand, the solution adopted by MP 627 was to assume the position adopted by the STF. According to MP 627, only the available profit of an affiliate company should be taxed in Brazil. Within this context, only the payment or the registration in a liability account of such profits by the affiliate situated abroad shall be considered as taxable profit. Another circumstance which obliges a Brazilian company to consider the affiliate's available profit is the contracting of a loan by such company when it registers accumulated profits.
Another change which is in line with the position adopted by others countries refers to the possibility of a Brazilian company considering the profits and the losses of its foreign affiliates and subsidiaries. Such measure has been in effect in other countries for a long time, with its origin dating back to the early 1960's in the United States of America. On the other hand, Brazilian legislation lacks sophistication when compared to foreign legislation.
In summary, MP 627 has provided more questions than answers and many of the issues addressed in it bring up sensitive issues that will certainly be widely debated. It is expected that the Brazilian IRS will soon being expressing its position on the matter.
The Tax Department of Felsberg e Associados is available for any further clarification on this matter that anyone should feel necessary.
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.