Through Provisional Measure 1602/97, published in the Official Gazette on 13 November 1997, Brazil introduced a series of spending cuts and tax increases. The emergency measures are designed to reduce the budget deficit and restore the confidence of investors. The tax measures deal with tax avoidance, the reduction of tax incentives, export promotion, disincentives for imports and international travel. Some of the tax measures became effective upon publication, but the main ones become effective on 1 January 1998.
Corporate income tax
Foreign-source income derived by a Brazilian company through a foreign subsidiary or branch will be included in the Brazilian company's taxable base for the calendar year in which the income is made available to the company. In the case of a foreign branch, income is deemed to be made available to the company on the date of the relevant balance sheet and, in the case of a foreign subsidiary, on the date of payment.
No deduction is allowed for interest or loans paid by a Brazilian resident company to a nonresident subsidiary if the latter's balance sheet shows undistributed profits for the Brazilian company.
The tax credits pertaining to foreign-source profits, income or capital gains are included in the Brazilian income tax liability only if the profits, income or capital gains are included in the Brazilian company's taxable base by the end of the 2nd year after the tax period in question. For tax years 1996 and 1997, the deadline is 31 December 1999.
Reduction of tax incentives for companies
As from tax periods closed in the calendar year 1998, each regional and sectorial tax incentive is reduced by 50%, including the incentives for mutual funds such as FINAM, FINOR and FUNRES.
The credits relating to regional tax incentives (SUDENE and SUDAM) are limited to 40% of the investor's tax liability. To qualify for these regional tax incentives, companies are now required to remain in operation in the region for a minimum period of 5 years.
The maximum credit for computer-related expenses (PDTI/PDTA) and for employee nourishment, training and transport has been reduced from 8% to 4% of the corporate employer's tax liability.
A new regulation contains the definitions and procedures relating to exemptions for entities. The former exemption for certain nonprofit activities (e.g. education, health care and professional sports) is abolished, and new conditions are imposed for the exemption for the immovable investment funds.
Other provisions include:
- new tax rules on mergers and acquisitions are introduced to prevent tax fraud;
- no credit is allowed against tax liability calculated on deemed income;
- the deduction for contributions to private social security entities and individual pension funds (FAPI) is limited to 12% of the individual taxpayer's gross income; and
- self-assessed corporate income tax returns must be submitted on magnetic tape, except for SIMPLES companies.
Individual income tax (IRPF)
The tax liability resulting from applying the progressive tax rates of IRPF is increased by a 10% surcharge.
For 1998 and 1999, the credit for contributions to private social funds and educational expenses is limited to 20% of gross income.
Excise tax (IPI)
Additional taxable persons are introduced for purposes of the excise tax. The term "industrial establishment" also includes a company's establishment that trades in manufactured products or orders manufactured goods from another branch of the same company.
Self-supply is now considered a taxable transaction.
An IPI deferral regime applies when an export company acquires goods for export or when goods are place in an export warehouse.
Tax on financial operations (IOF)
Factoring is now considered a taxable transaction. The tax credit for technological industrial development projects (PDTI/PDTA) is reduced from 50% to 25%.
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.
For further information contact Carlos S Romero, Deloitte Touche Tohmatsu, Sao Paulo, Brazil on Tel: +55 11 257 0122, Fax: +55 11 258 8456.
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