Answer ... Under both the real profit system and the deemed profit system, the taxation of capital assets depends on the accounting value attributed to the capital asset in question and varies depending on whether the company elected or was required to account for such asset at fair value. Gains accrued in the fair value step-up can be deferred to the moment of sale or any other form of change of ownership of the asset, and this deferral can be transferred upon a corporate event under certain circumstances.
Under the real profit system, depreciation expenses are deducted from the taxable base based on their accounting value. Taxpayers under the non-cumulative turnover tax regime may also take input Social Integration Programme (PIS)/Social Investment Fund (COFINS) tax credits over depreciation expenses of capital assets.
Generally, capital gains from the sale of capital assets, regardless of whether such properties are in Brazil or abroad, will be taxed at the general corporate income tax rate, including the deferred tax on the step-up basis, if applicable.
The rules regarding write-offs are set out in the accounting standards. The tax law states whether such losses may be deducted from the taxable base or whether they generate any right to credits. In specific sectors, the tax law allows for the depreciation to be accelerated for tax purposes.
Answer ... Tax incentives for research and development (R&D) aim to encourage investment in the research of new products and manufacturing processes, and in improvements to the quality, productivity and competitiveness of existing products and manufacturing processes.
Under Law 11,196/05, corporate income tax (IRPJ), withholding income tax (IRRF), social contribution on net profits (CSLL) and federal excise tax (IPI) benefits are granted for such purposes, as well as government subsidies to fund the remuneration of professionals with master’s or doctorate degrees hired by Brazilian companies to conduct research activities.
The benefits granted to encourage technological R&D include:
- full depreciation in the year of acquisition of new machinery, equipment and tools used in R&D when calculating IRPJ and CSLL;
- accelerated amortisation of expenses relating to the acquisition of intangibles linked exclusively to technological R&D, by means of the deduction of such expenses as operational expenses in the year in which they are incurred;
- government subvention of up to 60% of the value of the remuneration of researchers holding master’s or doctorate degrees;
- a reduction of the IRRF rate to zero for payments or credits to non-residents for the registration and maintenance of trademarks, patents and cultivars abroad; and
- a 50% reduction in the IPI levied on the purchase of equipment, machinery, devices and instruments, spare parts and tools, as long as such products are used for technological R&D.
In late 2018 a new tax incentive programme for R&D in green technologies and greater efficiency in the auto industry, called Route 2030, was introduced to replace Inovar-Auto, which ended in 2017. The tax incentives available for products that benefit from the Route 2030 initiative are wider in scope than those originally available under Inovar-Auto, extending beyond IPI to potential IRPJ and import tax benefits, as follows:
- the possibility to take a 10.2% credit of qualified R&D expenses directly from IRPJ and CSLL due by the company, with the possibility to credit an additional 5.2% of qualified ‘strategic’ R&D expenses. The available tax credits are limited by the amount of tax due in each period, with a possibility to carry forward credits for subsequent periods of up to 30% of the tax due;
- an exemption from import tax for automotive parts and components that have no locally produced equivalent, listed in Annex X of Decree 9,557/2018, provided that they are used before the third anniversary of the date of the taxable event; and
- a reduction of up to 2% in the tax on industrialised products for vehicles that comply with the energy efficiency requirements set forth in Annex III, Items 3 to 8 of Decree 9,557/2018 and the structural performance requirements set forth in Annex VIII of that decree.
Answer ... Inventories should be booked and valued at cost and may be subject to the following taxes:
- IPI on the sale of imported fixed assets, if such assets are sold less than five years after the relevant import. IPI may also be triggered on the sale of inventory items. IPI rates vary depending on the tax classification of the relevant items. IPI is a value added tax, but the buyer should only take IPI tax credits in the case of items that would be subject to a subsequent taxable sale (mainly items imported for resale or used in the production of goods for resale);
- value added tax on goods and services (ICMS), generally at a rate of 18%, 12% or 7%, on the sale of inventories (in some states, ICMS may also be charged on the sale of fixed assets). ICMS is also a value added tax and the buyer may be entitled to ICMS tax credits; and
- IRPJ and CSLL (34%) on that part of the sales price which exceeds the book value of the relevant fixed asset or the cost of the relevant inventory item.
Answer ... No. Derivatives are taxed in the same way as other financial instruments. In the main, financial transactions involving derivatives – such as swaps, options and hedges – are subject to IRPJ, CSLL, PIS and COFINS and IOF. Financial entities are subject to different rules regarding PIS and COFINS on derivative transactions.