Article by Cristiane M. S. Magalhães and Stephanie Makin1
1. Upon the entry into force of Law 12973/142, regulated by Normative Instruction of the Brazilian Federal Revenue Service 1515/14 ("IN 1515"), Brazilian legal entities must calculate the Corporate Income Tax ("IRPJ"), Social Contribution on Net Profit ("CSLL") and Social Contributions on Revenue ("PIS and COFINS") based on these rules.
2. Articles 1, 2, 4 to 70 and 1173 of the mentioned Law introduced changes to the tax rules seeking to adapt them to the accounting rules in force as of January 1st, 2008, based on the International Financial Reporting Standards (IFRS), and revoked the Transitory Tax Regime ("RTT"). Under this regime, Brazilian legal entities calculated the IRPJ, CSLL, PIS and COFINS based on the results ascertained according to the accounting rules in force on December 31st, 2007, thus, disregarding any tax effects that could arise from the adoption of the IFRS.
3. For purposes of the transition to the system of Law 12973, companies are required to maintain several additional accounting controls in order to ensure the tax neutrality of transactions occurred before the initial adoption date. Therefore, the companies must consider any differences between the transaction amounts registered in the RTT and in the accounting records of the company in the calculation of the IRPJ and CSLL if such differences are not evidenced in subaccounts.
4. Subaccounts are also required for Present Value and Fair Value adjustments not to be considered in the calculation of IRPJ and CSLL upon their recording. In summary, Law 12973 maintains the treatment set out under the RTT, allowing Present Value and Fair Value adjustments to be considered in the calculation of IRPJ and CSLL (i) upon the taxation of the respective income; (ii)when the asset if sold, written off and/or depreciated; and (iii) the expense or cost is incurred, provided such amounts are evidenced in subaccounts.
5. Law 12973 allows companies to deduct the depreciation calculated on the acquisition cost using the straight line method and the rates established by the Brazilian Federal Revenue Service, despite of the criteria and method adopted for accounting purposes4. Thus, if the depreciation for tax purposes exceeds the depreciation for accounting purposes, the legal entity may exclude such excess from the IRPJ and CSLL taxable bases.
6. If the asset is sold or written-off, the difference between the total depreciation considered for tax purposes and the total depreciation registered in the accounting books must be included in the IRPJ and CSLL taxable bases. The sum of the total depreciation registered in the accounting books and of the additional amounts excluded from the taxable basis of IRPJ and CSLL may not exceed the asset's cost of acquisition.
7. According to IN 1515, depreciation expenses not deducted in the correct period cannot be deducted cumulatively with the expenses of subsequent periods, nor is the taxpayer allowed to use higher depreciation rates than the ones set out by the Brazilian Federal Revenue Service.
8. As regards goodwill arising from the acquisition of an investment in another Brazilian legal entity, Law 12973 continues to allow its tax deduction, provided additional requirements are complied with. According to the new rule, upon the acquisition of the equity stake, the investment cost must be segregated into:
(i) proportional net equity value of the target company;
(ii) the surplus or deficit arising from the difference between the fair value of the net assets of the target company and item (i); and
(iii) goodwill, which corresponds to the remaining balance from items (i) and (ii).
9. In case a bargain purchase gain is recognized (if the fair value of the net assets exceeds the investment acquisition cost), such gain must be excluded from the calculation of the IRPJ and CSLL, in order to be included at a later time.
10. The recording of the investment must be supported by an appraisal report prepared by an independent expert appraiser. Such report must be registered before the RFB or have its summary registered with the Public Register for Deeds and Documents up to 13 months after the acquisition.
11. Similar to the previous rules, upon the sale or write-off of the investment, surplus or deficit and goodwill amounts shall be considered as part of the cost of the investment for the purposes of calculating the capital gain and any bargain purchase gain must be considered in the taxable basis of IRPJ and CSLL.
12. In principle, the legal entity that absorbs the net worth of its invested or investing companies, upon merger, amalgamation or spin off:
(i) may consider as part of the cost of the respective assets the corresponding surplus for the purposes of calculating the capital gain or loss and of depreciation/amortization, provided the target company was acquired from a non-related-party5;
(ii) shall consider as part of the cost of the respective assets the corresponding deficit for the purposes of calculating the capital gain or loss and of depreciation/amortization;
(iii) may consider as a deductible expense at the maximum rate of 1/60 per month of the goodwill balance, provided the target company was acquired from a non-relatedparty; and/or
(iv) shall consider the bargain purchase gain at the minimum rate of 1/60 per month in the calculation of taxes.
13. The regulation establishes additional rules in order to consider the amounts mentioned above in the calculation of IRPJ and CSLL.
14. Law 12973 also provides specific tax treatment for certain transactions previously not regulated by tax legislation such as:
(i) impairment (IAS 36): must be considered as a provision. Thus, may not deducted from the IRPJ and CSLL taxable bases upon its recording, but may be excluded upon the sale or write-off of the asset;
(ii) borrowing costs (IAS 23): if recorded as a cost of the asset, it may deducted for tax purposes when the borrowing costs are incurred, case in which such amounts must be added to the taxable bases of IRPJ and CSLL upon the depreciation, amortization, sale or write-off of the asset;
(iii) share-based payments to employees or similar (IFRS 2) – includes officers and members of the Board of Directors: expenses are only considered as tax deductible after the actual payment or definitive delivery of the shares or equity instruments by the entity to the employee; and
(iv) intangibles (IAS 38): amortization expenses shall be considered as tax deductible as long as the intangible is closely related to the production or sale of the assets and services.
1. Cristiane M. S. Magalhães and Stephanie Makin of the Direct Taxes area at Machado Associados Advogados e Consultores.
2 As of January 1st, 2014 or January 1st, 2015, at the taxpayer's .option.
3. Changes promoted in the rules for the taxation of profits earned abroad (articles 76 to 92 of Law 12.973) were analyzed in detail in Legal Letter 199 (November/2013).
4. The accounting depreciation is calculated based on the cost less residual value and considering the useful life of the asset (IAS 16).
5. In summary, the acquirer and the seller are considered as related parties, as per article 103 of IN 1515, if: (i) they have a common shareholder; (ii) the acquirer controls the seller (or vice versa); (iii) the seller is an individual who is a partner, director, member of the Board of Directors etc. of the acquirer; etc.
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.