This country-specific Q&A provides an overview to tax laws and regulations that may occur in Brazil.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-3rd-edition/
How often is tax law amended and what are the processes for such amendments?
Federative Republic of Brazil is composed by 26 states, approximately 5570 municipalities and 1 federal district. Brazilian tax system provides for federal, state and municipal taxes, thus, being very complex since more than 90 taxes are foreseen in our tax legislation.
Therefore, Brazilian legislation is amended on a daily basis, considering all the above public bodies.
From a federal perspective, Bills of Law may be proposed, pursuant to art. 61 of the Brazilian Constitution, by:
- Federal Deputies/Representatives
- Commissions within the House of Representatives, Senate or Congress.
- The President.
- The Supreme Court, Superior Court of Justice and other superior courts.
- The Attorney General and/or
- A group of Brazilian citizens, which initiative is presented to the Chamber of Deputies. The bill of law should be subscribed by at least one percent of the national electorate, distributed throughout at least five states, with not less than three-tenths of one percent of the voters in each of them.
Bills of law must be approved by both houses (Senate and Chambers of Deputies).
Afterwards, it has to be sanctioned by the Brazilian President. Both houses can propose a bill and once a house approves a bill, it will be sent to the other house for approval purposes.
Bills must be reviewed by at least two commissions:
i) the Constitution and Justice Commission, which reviews the constitutionality of the bill.
ii) another specific commission related to the subject matter of the bill, which reviews its convenience and relevance (for instance, a special commission was created to propose and discuss a “tax reform” in Brazil)
The bill is then put forward to the members of the house to vote on. As far as ordinary laws are concerned, voting can only take place if the majority of deputies or senators are present. The bill is approved in case of favorable vote of the majority of those present.
Certain matters (including the following tax matters: establishment of criteria to solve a conflict between two states in relation to tax matters, amendment to the Brazilian Tax Code; definition of a tax and its triggering event, tax calculation basis, taxpayer, among others) must be the subject of supplementary law and therefore must be approved by the majority of all deputies or senators.
If a bill is approved by the first house, the bill is consequently submitted for approval by the second house. If it is amended by the second house, it shall return to the first house for approval of the amended section.
Once approved by both houses of Congress, the bill must be sanctioned by the President. The President may veto the bill in whole or in part. If the President vetoes the bill, Congress will hold a special joint session to discuss whether to overturn the presidential veto. A quorum of the majority of all senators and deputies is required for this purpose. If the President does neither approve or veto the bill in 15 days, the bill will be considered approved.
Laws are enacted by the President and then published in the Official Gazette.
It is important to point out, that depending on the type of the amendment and the nature of the tax, the new amended tax law may only be effective after a determined time frame (90 days or in the following fiscal year), pursuant to the principal of prospective application.
Note: Provisional Measures
In certain relevant and urgent cases, the Brazilian President can enact provisional measures which have the force of law. Such measures must be immediately submitted to the National Congress for deliberation (C.F. art. 62).
Except as provided for in sections 11 and 12 of article 62 of the Federal Constitution, provisional measures lose their effectiveness as of the day of their issuance if they are not converted into law within a period of 60 days, which may be extended once for an equal period of time. It is the responsibility of the National Congress to regulate, by legislative decree, the legal relations stemming from such measures. The referred 60-day runs from the date of publication of the provisional measure, not counting periods in which the National Congress is in recess.
In addition, a provisional measure that involves the institution of a tax or an increase in existing taxes, except as provided for in articles 153(I), (II), (IV), (V), and 154(II) of the Constitution, may only have effect in the following fiscal year if it has been converted into law by the last day of the fiscal year in which it was issued (C.F. art. 62 § 2).
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
As a result of the complexity of the Brazilian tax system as outlined above, complying with all the ancillary tax obligations created by the three levels of tax authorities (federal, state and municipal) can be more challenging than paying the numerous taxes levied upon the Brazilian taxpayer and transactions.
In this regard, after timely paying the taxes, the principal procedural obligations of a Brazilian taxpayer is to fully comply with all other tax ancillary obligations, as set forth by each of the three levels of tax authorities. It is important to note that the non-compliance of tax ancillary obligations may result in huge penalties, that may be higher that the tax itself.
There are currently various tax returns, that are requested by Federal, State and Municipal authorities.
At the federal level, as described below in more details, the following tax returns shall be filed:
- Corporate income taxes - ECF;
- Digital Accounting Records - ECD
- Turnover taxes (PIS and Cofins social contributions) – EFD Contribuiçoes;
- Value added taxes – IPI – EFD
- Social contributions – GFIP;
- Withholding income tax – DIRF
- Tax Debts and Credits Statement – DCTF;
- Import and Export of Services declaration - SISCOSERV
- Statement regarding federal taxes that were offset (DCOMP).
The list above is not exhaustive.
At the state level, the main tax return is related to the ICMS tax (tax on the circulation of goods and transportation and communication services), a state sales tax. Since each of the 26 Brazilian States may create its own reporting system, with different payment dates, periods, forms and requirements, a Brazilian taxpayer must be very cautious in observing all different rules to avoid the imposition of heavy penalties that can reach up in some cases to 50% of the amount of the transactions.
The other State taxes do not require a monthly tax return; they are linked to specific events that must be filed whenever they occur. For instance, the Tax on Death and Donations (ITCMD) is only levied upon inheritance and donation.
At the municipal level, the main tax payable to the government is the ISS – tax on services, which is monthly levied at a rate that varies from 2% to 5%. As the ISS is a municipal tax, each municipality may again create its own compliance rules. In this sense, companies that, for instance, are established in more than one municipality, may observe different rules applicable in each location.
In order to provide a glimpse of the various bureaucratic ancillary obligations in Brazil, we will describe more in depth the main obligations at the federal level. All of them shall be submitted to the Brazilian Federal Revenue (RFB) via internet through the SPED, which is a Public digital bookkeeping system.
Electronically Commercial and Fiscal Bookkeeping (SPED) is a system which unifies the receipt, validation, storage and authentication of the books and documents that are part of a company’s commercial and fiscal bookkeeping.
The digital bookkeeping will include certain ancillary obligations that taxpayers will have to comply with such as (i) ECF, (ii) ECD and (iii) EFD-Contribuições.
a) Fiscal-Account bookkeeping (ECF)
The ECF replaced the Brazilian Corporate Income Tax Return (DIPJ) where Brazilian taxpayers need to inform all transactions that impact the computation bases for IRPJ (income tax) and CSLL (social contribution on profits) purposes.
The taxpayer must transmit the ECF on an annual basis through the SPED system up to the last working day of July of the subsequent year to calendar year it refers. In case of certain events, such as mergers, liquidation, spin-offs, it must be filled in the last business day of the third subsequent month following the event.
The penalties for nonsubmission or submission in delay is 0.25% per month or fraction (limited to 10%), of net profit before IRPJ and CSLL of the assessment period.
In addition, the presentation of the ECF with any missing or incorrect amount informed can result in penalties of up to 3% on the amount mistakenly informed or omitted. This last penalty shall not apply if the taxpayer amends the ECF file before any tax notice from tax authorities; and shall be reduced to 50%, if amended after a tax notice.
b) Digital Accounting Records (ECD)
The ECD has the purpose of turn into digital the company’s financial statement, such as the accounting book, ledger, trial balance, balances, etc.
The ECD must be filled once a year by May of the subsequent year to the calendar year it refers (January 1st to December 31st). In case of certain events such as mergers, liquidation, spin-offs, etc. occurs between the months of May and December, the ECD must be filled up to the last business day of the subsequent month of the event.
c) Turnover taxes (PIS and Cofins social contributions) – EFD Contribuições - PIS/COFINS Digital Fiscal Bookkeeping
The EFD-Contribuições is a digital archive related mostly to the payment of PIS and COFINS (gross revenue states) and other taxes like ICMS (State VAT)and IPI (Federal VAT). The archive contains documents and other information from the taxpayer, such as tax calculation related with the company’s operations, revenue, costs, expenses, among other important information.
The taxpayer must fill the EFD on a monthly basis until the 10th day of the subsequent month of the reference.
d) Value added taxes – IPI and ICMS – EFD
The Digital Tax Bookkeeping (EFD) for value added taxes (ICMS and IPI) is compulsory for taxpayers that are subject to State VAT (ICMS) and Federal VAT (IPI) and it replaces bookkeeping and printing of the following books and records: Inventory Ledger, IPI Control Register, ICMS Control Register, Fiscal Book Register for the entry and for the exit of goods and merchandise; Inbound Fiscal Book Register and Control over ICMS tax credits for fixed assets.
As mentioned above, due to the complexity of the system, each of the 26 Brazilian states may impose its own requirements for the filing of the ICMS information, as well as its own deadlines for the filing and paying of the tax. Thus, taxpayers could incur significant fines if they do not comply with such requirements.
For instance, failure to transmit the Tax SPED on a timely manner, may subject the taxpayer in some states to a 1% fine on the total amount shown in the missing file.
e) Social contributions – GFIP and DCTFWeb
DCTFWeb shall replace as of July 2018 on, the payment form of the Working Time Guarantee and Social Security Information Fund (GFIP) within the scope of the Brazilian Internal Revenue Service, generating simplification for taxpayers. This ancillary obligation will be automatically generated from the (eSocial) and/or (EFD-Reinf), new modules of the Public Digital Bookkeeping System (Sped).
f) Withholding income tax statement – DIRF
The DIRF (Income Tax Withholding Statement) is an ancillary tax obligation that shall be annually submitted by every corporate taxpayer to the Federal Revenue also through the SPED System. The purpose of DIRF is to allow the Federal Revenue to cross-check payments with income reported by taxpayers and avoid misreporting or undue claims for tax refunds. Since 2011, the DIRF shall also contain information related to cross-border payments made to nonresident beneficiaries, such as dividend and profit distributions, even if those payments are tax exempt.
Penalties are applicable if the taxpayer fails to deliver the DIRF or if it is sent with incorrect information. These are:
- Application of the percentage of 2% to the month calendar or fraction, incident on the value of the taxes and contributions informed in the document, even if paid in full, in case of non-delivery of the DIRF or its delivery after the deadline, up to the limit up to 20%;
- Minimum fine in the amount of R $ 200 for individuals, non-operational legal entities and legal entities opting for the Simplified National Regime (SIMPLES);
- Fine in the amount of R $ 500 in other cases.
g) Tax Debits and Credits Statement – DCTF
- DCTF (Federal Tax Debits and Credits Statement) is another statement submitted monthly to the Federal Revenue., whereby the corporate taxpayers report the taxes and contributions to the Federal Revenue, such as:
- Corporate Income Tax Statement, (IRPJ)
- Income Tax Withheld at the Source, (IRRF)
- Tax on Industrialized Products, (IPI)
- Social Contribution on Net Profits (CSLL)
- Tax on Financial Operations (IOF)
- Contributions for Social Integration Program (PIS)
- Contribution for Social Security Financing (COFINS)
- Contribution of Intervention in the Economic Domain (CIDE)
Entities which fail to submit their DCTF within the correspondent time frame or present it with incorrect information may subject to the following fines:
- 2% per month over the amount of taxes and contributions informed in the DCTF, even if fully paid, limited to 20% of the amount of taxes, in the event of failure of submission, or submission after the deadline imposed the Brazilian Internal Revenue Service.
- BRL 20,00 for every 10 incorrect or omitted information
The fines will be reduced:
- By 50%, when the Statement is submitted after the deadline, but before any legal procedure is taken by the Federal Revenue.
- By 25%, if the Statement is submitted within the period specified in the subpoena.
h) Import and Export of Services declaration - SISCOSERV
The SISCOSERV is another ancillary obligation related to transactions carried out between Brazilian residents and non-residents involving import and export of services, intangible assets, and other operations. The filing of this ancillary obligation shall occur whenever one of the previous situations take place.
i) Statement regarding federal taxes that were offset (DCOMP).
The scope of PER/DCOMP (Electronic Request for Refunds, Restitution or Reimbursement, and Offset Declaration) is to make it possible for taxpayers to request refunds for federal taxes that have been unduly paid or paid in excess, and to offset existing credits with tax authorities. The Revenue Service Offices decide on the requests. They have five years to approve or reject a request to offset credit. If there is no decision issued within that period, approval of the request is deemed tacit.
In view of the facts mentioned above, it is easy to understand why Brazilian companies are required to hire specialised accounting firms to comply with the municipal, state and federal tax regulations.
Considering that the statute of limitations for most taxes and social charges in Brazil is of 5 years - under certain circumstances, the statute of limitations can reach six years – it is advisable to keep all tax records for a period of at least 6 years. However, if taxes are being challenged before the administrative or judicial sphere, it is advisable to maintain those records until the end of the tax proceeding.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The key regulatory authority in Brazil is the federal tax administration agency, the Receita Federal do Brasil (RFB or Brazilian Revenue). The Brazilian Revenue is also in charge of inspection activities and the collection of social security contributions. States and municipalities also have their own tax administration agencies.
Each of the tax agencies is usually quite available for dealing with standard issues and taxpayers doubts and queries on a daily basis. Taxpayers may request assistance from the public servants by means of scheduling appointments with the tax authorities and pre determining the matter to be discussed. This kind of clarifications may be rendered in presence of the taxpayer during such meetings.
Pursuant to the Federal Brazilian Revenue, assistance to taxpayer is viewed “as a specialized service, essential to induce and facilitate voluntary compliance of tax obligations, and is provided at Taxpayer Assistance Centers - CAC.”
More complex issues can be dealt through a Voluntary Inquiry with the government, whereby a taxpayer may in case of doubt regarding the interpretation of a tax rule, file a direct inquiry with the correspondent tax authority (“consulta”). The government’s decision is binding to the taxpayer and the correspondent tax plus interest must be collected within 30 days after notification of said decision, without imposition of any penalty. If the taxpayer does not agree with the rendered decision, it can challenge it before the judicial courts. A response to the tax voluntary inquiry may be rendered within a 6-12months period.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, there are different levels of discussion: administrative and judicial.
A taxpayer that disagrees with certain tax obligations must challenge these it in court. However, tax authorities may issue an administrative tax assessment against the taxpayer to collect the corresponding debt (comprising principal, interest and penalties) if it considers that the taxpayer failed to fully comply with a certain tax obligation. Usually, this tax assessment notice is preceded by a tax audit, but in more recent years, it may be sent automatically to the taxpayer if, for instance, tax authorities verify that the information submitted electronically by means of a certain statement is not accurate.
Once a tax assessment notice is issued, taxpayers may:
- pay the debt within 30 days, with a discount on the penalty. Taxpayer may opt to pay the tax debt in a lump sum or in installments.
- file a defense to the tax assessment notice, which initiates the administrative sphere; or
- waive the administrative sphere by means of submitting the case directly to court.
(i) Tax Litigation in the Administrative Sphere
The taxpayer may challenge the tax assessment notice in the administrative sphere (federal, state or municipal, depending on the tax and tax authority charging the debt). At this sphere, no bond has to be posted.
Administrative spheres have three instances and are composed of technical judges.
Usually a taxpayer has a 30-day-term, counted as of the service of the tax assessment notice, to present its defense. At the federal level, for instance, the defense is sent along with the case records to the Federal Revenue Judgment Unit (DRJ), whereas at the State level, the defense is sent to the correspondent Regional Tax Judgment Unit (DRT).
The judges, who are usually representatives of the tax authorities with expertise on the matter under analysis, issue a first-instance decision. This why, this first instance decision, usually confirms the merits of the tax assessment notice. After receiving notice of said first grade decision, taxpayers may file and appeal (voluntary appeal) to the second instance bodies. At the federal level, the appeal shall be made to the Administrative Tax Appeals Board (CARF) and at the State level, the appeal should be made to the State Administrative Tax Court (TIT). Those bodies are composed by chambers with judges that are designated by both taxpayers and tax authorities. There is also a third administrative level instance that shall unify the administrative jurisprudence on a determined matter. An appeal to this third administrative level is only possible if the tax authority or the taxpayer is able to demonstrate that a different decision was granted by the same or distinct chamber on the same subject. Once the decision regarding this last appeal is issued by the Third Administrative level, the decision shall be declared final and unappealable (within the administrative sphere), and it shall be published in the Official Gazette. This is the time the decision becomes officially final in the administrative courts. The whole procedure should last approximately 3-6 years; however it may take longer if technical appraisals and additional proof is needed.
If the final administrative decision is favorable to the taxpayer, the tax authorities cannot take the case to the judicial sphere, except under very special circumstances. If the final administrative decision is not favorable to the taxpayer, taxpayer will be notified to pay usually within a 30 day period the remaining balance. If such 30-day term expires and the debt has not been paid, the Judging Tax Authority shall send the document representing the debt to the Office of the Attorney General. This authority, in turn, will register the debt as overdue State liability. After that, a certificate of overdue liability (“Certidão de Dívida Ativa” or simply CDA) will be issued. The CDA is the appropriate document to commence the tax foreclosure. In accordance with the law that governs the tax foreclosure, the certificate of overdue liability enjoys a presumption of certainty and liquidity.
According to the decree-law No. 1,025/1969 if the debt is registered as Overdue Liability, 10% of the debt amount will added to the certificate of overdue liability, corresponding to pubic attorney´s fees of the Office of the General Counsel to the State Treasury (10% when the debt is registered) An additional 10% of the total value will be added also in relation to the public attorney’s fees to the debt when the foreclosure procedure is filed.
After the debt is registered as overdue liability and the respective certificate is issued, the next step of the Municipal, State or Federal Tax Authorities shall be to bring a tax foreclosure and the taxpayer will have the chance to defend itself. In this case, Brazilian law sets forth that the debt has to be secured by a deposit, bank guaranty, a good, etc.
However, taxpayer may act before such procedure is filed, by means of filing some types of suits before the Judicial Courts.
(ii) Tax Litigation in the Judicial Sphere
As mentioned above, if the final administrative decision is unfavorable to the taxpayer (or if the latter has waived its right to challenge the tax assessment notice before the administrative sphere), the taxpayer may:
- file an annulment suit before courts, thus trying to annul the debt and / or the final administrative decision rendered pursuant to the same or different arguments already used in the administrative sphere,
- Writ of mandamus (are highly used against illegalities or abuses carried out (or about to be carried) by public authorities,
- restoration of undue payments (takes place when taxpayers wish to challenge the charges after having paid what the tax authorities deemed to be due) or
- await the enforcement of the debt by means of a tax foreclosure proceeding. In this case, taxpayer has to post a bond( cash, letter of guarantee, assets, surety bond etc) to discuss the merits and afterwards it may
Tax litigation disputes are decided by the State or Federal Justice, depending on the tax which is being challenged. The judicial proceeding is also decided within three instance levels. The judges of lower courts, as well as the ones of Federal and State Court of Appeals are hierarchically subject to the Superior Court of Justice and the Supreme Court, which is the highest body of the Brazilian court system.
A judicial litigation procedure in Brazil is also time consuming and could last approximately 5-8 years.
Voluntary Inquiry with the government
In order to avoid a dispute, a taxpayer may in case of doubt regarding the interpretation of a tax rule, file a direct inquiry with the correspondent tax authority (“consulta”). The government’s decision is binding to the taxpayer and the correspondent tax plus interest must be collected within 30 days after notification of said decision, without imposition of any penalty. If the taxpayer does not agree with the rendered decision, it can challenge it before the judicial courts.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
As already mentioned above, Brazilian tax system provides for federal, state and municipal taxes, thus, being very complex since more than 90 (ninety) taxes are foreseen in our tax legislation with different payment dates and regulations.
Please find below a chapter with information regarding the payment date related to the main federal taxes and social contributions:
until the 20th of each month
INSS – payroll tax
until the 20th of each month
IPI – Federal Tax on Industrialized Products
until the 25th of each month
Cofins – Contribution for the Financing of Social Security levied on the turnover
until the 25th of each month
PIS – Program of Social Integration levied on the turnover of company
until the 25th of each month
CSLL – social contribution on profits
up to the last working day of each month
IRPJ – corporate income tax
up to the last working day of each month
IRRF – withholding tax
until the 20th of each month
Note: there are exceptions to the dates mentioned above, which ratifies the complexity of the system. For instance, PIS and COFINS related to financial institutions shall be paid up to the 20th of each month, whereas the IPI related to tobacco cigarettes shall be paid up to the 10th of each month.
If the taxpayer fails to timely pay federal, state or municipal taxes, interest and penalties apply. Federal corporate taxes may be paid in arrears and must be updated based on the monthly SELIC. In case of a self-assessment (“denúncia espontânea”), the penalty is limited to 20%, but it may be increased to 75% in case tax authorities issue a tax assessment notice. Such penalty is reduced by 50% (i.e. a 37.5% penalty) in case the assessment is settled within 30 days.
Taxes in Brazil are usually paid on a provisionally basis.
With respect to municipal taxes, the IPTU tax, which is levied on the owners of real estate property located within the urban area of the municipality and which tax base is the fair market value of the property, calculated by adding the value of the land and the value of improvements or buildings, shall be paid annually, in a single payment or divided in up to 10 (ten) installments, in case of the municipality of Sao Paulo. The same applies to the IPVA state tax, which is charged over the property of any automobile vehicles. IPVA can usually be paid in a single payment (usually with a discount) or divided in up to three monthly installments.
With respect to tax disputes, taxpayers are not required to pay the disputed tax when discussing within the administrative sphere. At this stage, no bond has to be posted.
Pursuant to article 151, III of the Brazilian Tax Code, the tax is suspended in case of an appeal presented within the administrative sphere.
If, on the other hand, taxpayer decides to contest a tax in a judicial lawsuit, it is likely that the court will require a guarantee, which may be provided as a cash deposit, property, bank letter of guarantee or performance bond. Again, pursuant to article 151, II the tax may be suspended.
If the taxpayer seeks a writ of mandamus or files an ordinary action to challenge a certain tax obligation, it can request the judge to grant an injunctive relief or early relief to suspend the tax obligation and stay the payment of tax until the end of the litigation.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Yes, taxpayer data is recognized as confidential, however some exceptions are applicable mostly to assure that the confidentiality of the tax data will not be an obstacle for the proper administration of justice by the Brazilian courts. In this sense, there are judicial precedents ruling that information provided solely for the tax authorities is subject to such privacy. Therefore, if the tax authorities require documents and information from taxpayers as provided by law, taxpayers cannot refuse to provide them based on confidentiality.
Pursuant to article 198 of the Brazilian Tax Code, tax information obtained by the Brazilian tax authorities concerning “the economic or financial status of a taxpayer or third party and the nature and state of their business or activities” is treated as confidential and may not be disclosed by them and/or by its public servants.
As mentioned above, there are however exceptions, which are foreseen in sections 1 and 3 of the mentioned article 198, allowing for the disclosure of tax information when requested by:
- a judicial authority, in the interest of justice; or
- an administrative authority, in the interest of Public Administration, upon proof that an administrative proceeding was regularly initiated before the administrative body with the aim to investigate the taxpayer regarding administrative infringements supposedly committed by him.
Three other exceptions to the general rule of confidentiality are foreseen in section 3 of article 198, allowing the disclosure of tax information concerning (i) criminal prosecution for a criminal tax offence; (ii) tax debts registered as overdue Treasury liability and (iii) tax installments or moratorium.
At a transactional level, all of Brazil’s DTCs contain confidentiality provisions, based on the OECD Model Convention (as of 1963 or 1977). The aim is to assure that the information exchanged between tax authorities of both contracting parties will solely be disclosed to persons authorized by the DTCs.
In case of a conflict between a DTC and the domestic legislation, international treaties should prevail as already ruled by the Brazilian Supreme Court.
It is also important to mention that attorneys and clients are not obliged to disclose messages, information or documents exchanged within the scope of an attorney-client relationship to tax authorities, as they are deemed confidential by the Code of Ethics and Discipline of the Brazilian Bar Association (OAB).
With respect to the Common Reporting Standard (CRS), Brazil is a signatory to the automatically exchange of financial account information with the other countries and Brazil intends to maintain a public Register of beneficial ownership. Brazil is committed to promoting greater transparency in beneficial ownership information of legal persons and arrangements and to implementing the G20 High Level Principles on Beneficial Ownership Transparency. Brazil has taken concrete steps to enhance the effectiveness of national legal, regulatory and institutional frameworks.
In this sense, Brazil has already enacted a recent regulation in 2016, Normative Instruction from the Brazilian Revenue Service No. 1.634/2016, which has been amended from time to time. Pursuant to this regulation, a domestic or foreign company incorporated in Brazil before July 1, 2017 must report its ultimate beneficial owner (UBO) to Brazil’s Federal Revenue (RFB) by December 31, 2018 or immediately when processing any registration changes with the RFB or the Board of Trade. A company registered on or after July 1, 2017 must report its UBO within 90 days of incorporation.
Brazil’s definition of an UBO is a “natural person who ultimately, directly or indirectly possesses, controls or significantly influences the entity” or someone “on whose behalf a transaction is conducted.”
In this scenario, most Brazilian entities must comply with the UBO requirements. Companies that must disclose their UBO must provide that individual’s name, place and date of birth, place of residence and certified passport copy. In addition, the company must submit notarized and apostilled copies of the company bylaws, the power of attorney for the company’s local legal representative, documentation verifying that the person who signed the power of attorney has the power to do so, and photos of the person who signed the power of attorney and of the local legal representative.
Publicly-traded companies and certain non-profits organization need not to identify their UBOs.
If for any reason a company subject to the requirement is unable to identify its UBO, it must notify the RFB and inform them of this.
Companies that fail to identify their UBOs, will not be subject to any financial penalties. However, their CNPJ (tax registration number) will be suspended and they will also be “prevented from effecting transactions with financial institutions, including withdrawing funds from local bank accounts, the realization of financial investments and the obtaining of loans.”
What are the tests for residence of the main business structures (including transparent entities)?
As a general rule, a company is considered resident in Brazil when it is incorporated in the Brazilian territory.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Cross border transactions are not the main focus of the Brazilian tax authorities. Notwithstanding, when performing an audit, tax authorities will pay attention on the company’s cross border transactions (remittances of dividends, royalties, service fees, among others) and its compliance to the transfer pricing rules. Also, they will pay special attention on Brazilian multinationals with offshore business.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Brazilian thin capitalization rules were enacted by the Law 12,249/2010. According to such rules, interest paid to related parties not located in a tax haven or privileged tax regime jurisdiction may only be deducted if the interest expenses are deemed necessary and the debt is not greater than:
(i).twice the value of the lender’s participation in the net equity of the Brazilian Company (borrower);
(ii) twice the value of the borrower’s net equity, if the lender is a foreign related party with no participation in the Brazilian Company (borrower);
Interest paid to related parties located in a tax haven or privileged tax regime jurisdictions is deductible provided that the expenses are necessary and the debt with such related party does not exceed 30% of the Brazilian company’s equity.
Additionally, Brazil does also provide for CFC rules, which in general, impose taxation on undistributed profits from foreign controlled and affiliated companies. Accordingly, profits from foreign controlled companies should be considered deemed distributed to the Brazilian controlling company by December 31 of each calendar year. On the other hand, provided that some conditions are met, profits derived from foreign affiliates not located in tax haven or privileged tax regimes jurisdictions are only subject to taxation in Brazil when they are effectively distributed.
Moreover, Brazilian transfer pricing rules were enacted by Law 9,430/96 and its subsequent amendments. Such rules introduced transfer pricing controls, in order to avoid undervaluation of export prices, or overvaluation of import prices, for purposes of calculating corporate income taxes (Income tax – “IRPJ” - and Social Contribution on Profits Tax – “CSLL”). Transfer pricing rules are applicable to any import or export of goods, services and rights, performed between a Brazilian company and a related party abroad, or a party located in a tax haven or privileged tax jurisdiction.
There are five methods to calculate import transfer price, as well as there are four methods to calculate export transfer price. For import transactions, if the actual import price is higher than the calculated transfer price, the taxpayer cannot deduct the difference for purposes of IRPJ and CSLL. For export transactions, if the actual price is lower than the applicable transfer price, the difference shall be computed for IRPJ and CSLL purposes.
It is worth mentioning that the Brazilian transfer pricing rules differ from the OECD Guidelines related to the referred subject. Accordingly, Brazilian rules adopt fixed margins to calculate the transfer price, instead of the arm’s length principles.
Finally, please note that the transfer pricing rules do also apply to loan transactions between foreign related parties.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
The Brazilian anti-avoidance rule was introduced by in 2001 by article 116 of Supplementary Law 104, which established that tax authorities can disregard legal acts or transactions practiced with the objective of disguising the occurrence of a taxable event, or the nature of the elements that constitute the tax obligation, observed the procedures to be established by ordinary law.
Notwithstanding, the Anti-avoidance Rule still needs to be regulated by an ordinary law to become effective.
It is important to note that, although subject to discussion, Brazilian tax authorities tend to consider the “substance” of the transaction over the “form” in order to disregard transactions based on the concept of simulation established by article 167 of the Brazilian Civil Code.
According to such provision, simulation occurs whenever: (i) the performed business appears to provide or transfer rights to persons other than those to whom the rights are actually conferred or transferred; (ii) the performed business contains an untruthful declaration, confession, condition or clause, or (iii) the private agreement are backdated or post-dated or post-dated.
In practice, Brazilian tax authorities have been adopting such approach on corporate reorganizations.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
Brazil has already implemented various OECD BEPS recommendations and intends to be in compliance with the remaining actions soon. The actions already implemented are the following:
In relation to action 3, Brazil has amendment is CFC rules in order to Broaden its scope. As a general rule, the CFC rules impose taxation on undistributed profits from foreign controlled and affiliated companies. Accordingly, profits from foreign controlled companies should be considered deemed distributed to the Brazilian controlling company by December 31 of each calendar year. On the other hand, provided that some conditions are met, profits derived from foreign affiliates not located in tax have or privileged tax regimes jurisdictions are only subject to taxation in Brazil when they are effectively distributed.
As to action 4, Brazil has thin capitalization rules that are applicable to foreign intercompany loans. According to such rules, interest paid to related parties not located in a tax haven or privileged tax regime jurisdiction may only be deducted if the interest expenses are deemed necessary for the company and if the debt-to-equity ratio with the related party does not exceed 2:1.
Interest paid to related parties located in a tax haven or privileged tax regime jurisdictions is deductible provided that the expenses are necessary and the debt with such related party does not exceed 30% of the Brazilian company’s equity.
It is worth noting that as per Brazilian transfer pricing rules, interests paid or credited to a related party abroad are only deductible for corporate income tax purposes up to the amount which does not exceed the following rules plus a spread previously determined by the Brazilian Ministry of Finance:
(i) In case of transactions in US Dollars with prefixed rates: the market rate for Brazilian sovereign bonds issued in the external market in US Dollars;
(ii) In case of transactions in Brazilian Reais with prefixed rates: the market rate for Brazilian sovereign bonds issued in the external market in Brazilian Reais;
(iii) In all other cases: Libor for a 6-month period.
Currently, the pre-determined spread for cross border intercompany loan transaction is 3.5%.
In other to accomplish with BEPS recommendations, Brazil has included additional low jurisdictions to its “black list”.
In addition to that, several foreign country regimes were added to the “grey list” as privileged tax jurisdiction.
Besides, for purposes of identifying new privileged tax jurisdictions, the new tax regulations introduced the concept and definition of substantive economic activities for holding companies.
Moreover, Normative Instruction 1.689/17 establishes that upon the request of ruling regarding R&D incentives, permanent establishment and transfer pricing, taxpayer will have to disclosure the name of its controlling company abroad, final beneficiary, including the identification of their country of residence, among other information for purposes of exchanging of information with such jurisdictions.
Country by Country reporting requirements was implemented as of 2016 and is now part of the Annual Electronic Income Tax Return (ECF).
Brazilian IRS, through the issuance of Normative Instruction 1.669/46 established mutual agreement procedural rules in relation to tax treaties signed by Brazil.
It is worth noting that Brazil has recently signed a protocol with Argentina to amend the tax treaty between both countries. The amendments related to mutual agreement procedures show that Brazil is line with BEPS’ minimum requirements. Notwithstanding, there was no adoption of mandatory and binding arbitration to the tax treaty between the parties as recommended by Action 14 of BEPS.
In your view, how has BEPS impacted on the government’s tax policies?
Brazil has implemented several procedures and regulations to comply with BEPS. Among other implementations, both exchange of information and fiscal transparency have been fully observed.
Brazil shall implement the remaining measures as soon as it becomes a full member of OECD.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Brazil follows the principal aspects of the OECD Model Convention, with certain peculiarities.
Resident companies are subject to corporate income tax at the cumulative rate of approximately 34%. IRPJ is calculated and paid at 15% rate, plus a surtax of 10% on taxable income exceeding R$ 20,000 per month or R$ 240,000 per year. The CSLL current tax rate is 9%.
Brazilian Companies are also subject to gross revenues (PIS and COFINS) taxes levied at 7,65% (non-cumulative regime) or 3,65% (cumulative regime).
Tax losses carried forwards can be used only up to 30% of taxable income of a given year.
Tax losses carried forwards do not expire.
Employment income and pensions are also subject to personal income tax at progressive rates, varying from 0% to 27,5%, depending on the value of the income.
The State VAT is levied on import of goods into Brazil, on any sale or transfer of goods within Brazil, and on certain communication and transportation services, even if the import, sale or transfer of goods or rendering of services initiate abroad. It does not apply to transactions with products or services destined to the exportation. The State VAT paid in a determined transaction may be offset against future transactions involving the sale of goods or rendering of the services above mentioned. The State VAT rate varies depending on the type of good or service, and also depending on the State the transaction takes place. As a general rule, transactions within a same State vary from 17% to 18%. Interstate transactions involving remittances to the South and Southeast regions are subject to 12% State VAT rate. On the other hand, interstate transactions involving remittances to the North or Northeast, Mid-West regions and the State of Espírito Santo are subject to State VAT at 7% rate.
Federal VAT (IPI): is a federal tax levied at each production stage of manufactured products and on the import of manufactured products. The Federal VAT is generally applied on an ad valorem basis. It does not apply to products destined to the exportation. As a general rule, the Federal VAT paid on the acquisition or importation of raw materials can offset the tax due on subsequent transfers. The Federal VAT rate depends on the goods’ tax classification code under the Harmonized System of Classification of Goods. Tax rates vary according to the type of product, from 0% to 365.6% (luxury goods).
Services Taxes (ISS): the ISS is a municipal tax levied on the rendering of specific services set forth in the law, according to previously defined rates by each municipality. As a general rule, ISS rates vary from 2% to 5%, depending on each specific municipality. Please note that ISS is also levied upon the import of services into Brazil.
PIS/Import and COFINS/Import are also federal taxes also levied upon the importation of goods and services into the country at the rates of 1.65% and 7.6%, respectively.
Savings income and royalties received by an individual may be subject to personal income tax at progressive rates, varying from 0% to 27,5%, depending on the income’s amount. On the other hand, savings income and royalties received by companies are computed on the basis for calculating the company’s corporate income tax due.
Rental income paid to individuals is subject to personal income tax at progressive rates, varying from 0% to 27,5%, depending on the value of the income. On the other hand, rental income received by companies is computed on the basis for calculating the company’s corporate income tax due.
Capital gains realized by individuals and nonresidents that dispose of assets located in Brazil are subject to progressive income tax rates, which varies from 15% to 22,5%, depending on the capital gain value. On the other hand, capital gains realized by companies are computed on the basis for calculating the company’s corporate income tax due.
Stamp Duty: Brazil does not impose tax on stamp duty.
Capital Duty:Brazil does not impose tax on capital duty.
Transfer Tax (ITBI): The ITBI is levied on the onerous transfers of real estate properties and rights in rem related to real estate properties. The ITBI is levied at the rate of 3%, according to the actual value of the transaction or the appraised value of the property.
Municipal Tax on Urban Real Estate Property (IPTU): The IPTU is a municipal tax annually levied on the estimated value of the urban real estate. It is imposed over the market value of the real estate, at progressive rates, according to each the municipality.Tax on Transfer of Real Properties by Donation or Causa Mortis (ITCMD): The ITCMS is a State tax levied on transfer of the ownership or use of real estate properties by donation or inheritance. As a general rule, the ITCMD tax is levied at 4%, but may vary according to each specific State.
Vehicle Tax (IPVA): Annual tax levied on ownership of vehicles and its tax rates depend on the type and legal classification of the vehicle.
Import Taxes: upon the importation of goods into Brazil, the following taxes will apply:
Import Duty (II): the II is a federal tax levied on the customs value of the imported product and its rates may vary according to the product’s tariff code in the Common Harmonized Nomenclature of Mercosur (“NCM”). The I.I. is payable upon customs clearance of the imported goods and does not give raise to tax credits.
- Federal VAT(mentioned above)
- State VAT (mentioned above)
- PIS and COFINS on import: (mentioned above)
Tax on Financial Transactions (IOF): The IOF applies to various types of transactions, such as insurance, loans, currency exchange, among others. The IOF on currency exchange is levied at 0.38% tax rate. Foreign loan transactions are subject to 6% IOF rate if the minimum average maturity period of 180 days is not accomplished.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, corporate income tax is levied on business profits computed according to the principles of commercial accountancy (IFRS guidelines), adjusted by add-backs and non-taxable items.
Tax losses can be carry forward indefinitely, with no inflation adjustment, and its use is limited to 30% of the taxable income in a given year.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
The only transparent entity recognized by Brazilian legislation is the Consortium.
The Consortium is an agreement settled by and between two or more parties that have a common purpose. The Consortium shall neither be considered a legal entity, nor own properties or assume obligations before third parties.
Each member of the Consortium shall own the assets and/or rights and, also, assume obligations before third parties. As a general rule, there is no jointly liability among the members, even for tax purposes, in such a way that each member is responsible for its obligations individually.
The Consortium Agreement will determine (i) the contribution of each member for the common expenses; (ii) the sharing of revenues; and (ii) the criteria for division of results.
In this context, each member should recognize its income and expenses derived from the Consortium Agreement and include it in its respective tax return. Consortium members are responsible for the payment of the taxes levied on the income/revenues arising from the Consortium, proportionally to their participation in the Consortium Agreement.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
The liability to business taxation in Brazil depends on the registration concept. As a general rule, Brazil imposes taxation on a worldwide basis.
It is worth noting that the concept of permanent establishment is not yet regulated by Brazilian internal legislation.
Notwithstanding, it is important to mention that both, representatives (those who negotiate in the name and on behalf of third parties) and commissioners (those who negotiate on their own name but on behalf of third parties), are deemed as a corporate income taxpayer of their foreign principal in Brazil to the extent that they have powers to bind their principals on the local sales/services or enter into local transactions on behalf of them. In this case, the principal may be subject to tax in Brazil on a percentage of the sales revenue.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
In Brazil there are no special tax regimes for financial services or co-ordination centres.
There is a Free Trade Zone in Manaus where companies can enjoy federal, state and municipal tax benefits, for certain business.
Also, there are Export Processing Zones where companies can enjoy federal, state and municipal tax benefits for exporting business.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Law 11.196/05 establishes certain tax incentives for companies that develop technological innovation within the Brazilian territory. The fiscal incentives available in view of the referred legislation are the following:
- Deduction for corporate income tax purposes (IRPJ and CSLL). of the costs incurred in relation to R&D activities (observe that taxable income is necessary for the company to be able to enjoy from this benefit);
- Federal VAT reduction on the acquisition of machines and equipment for R&D purposes;
- Accelerated depreciation of machines and equipment for R&D purposes in the year such goods are acquired;
- Accelerated amortization of intangible goods;
- Withholding income tax exemption on the remittances related to the registration and maintenance of trademarks, patents and plant varieties abroad.
In addition to that, the Federal government, by means of Provisional Measure 843/18, established fiscal incentives as of January, 201 for the automotive industry in order to (i) increase investments in research, development and innovation in the country, (ii) stimulate the development of new technology and innovation and (iii) automate the manufacturing process of new technologies and the increase of Brazilian company’s productivity in relation to mobility and logistics as well as to integrate the Brazilian automotive companies.
Among the most important benefits implemented, the new legislation allows companies to deduct from their corporate income tax (IRPJ and CSLL) due, an amount corresponding to 34% calculated over up to 30% of the expenditures incurred in the country with (i) research and development, (ii) training of suppliers, (iii) basic manufacturing, (iv) basic industrial technology and (v) technical support.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
No, fiscal consolidation rules do not exist in Brazil. In view of that, each company shall pay its own corporate income taxes. Losses from one company can not be relieved across group companies.
Are there any withholding taxes?
Yes, Brazil imposes withholding taxes in relation to various types of cross-border remittances, such as:
- Dividends: exempt
- Interest payments: 15% WHT (non tax haven jurisdictions)/ 25% (tax haven jurisdictions)
- Technical services: 15% WHT
- Royalties: 15%
- Interest on Net Equity: (non tax haven jurisdictions)/ 25% (tax haven jurisdictions)
- Income from non-technical and personal services: 25% WHT
Please note that other taxes are usually applicable on remittances abroad.
Are there any recognised environmental taxes payable by businesses?
Yes, there is the Environment Inspection and Control Fee (TCFA tax), which is levied to all potential polluting companies. The TCFA rates varies from BRL 200 to BRL 10.000 per year.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividends received from resident companies are not subject to taxation in Brazil.
As to the distribution of dividends from foreign affiliate companies, provided that some conditions are met, dividends will only be subject to taxation in Brazil when they are effectively distributed. On the other hand, in view of the CFC legislation, profits from foreign controlled companies should be considered deemed distributed to the Brazilian controlling company by December 31 of each calendar year.
Foreign tax credit is allowed according to Brazilian tax legislation.
Please note that taxation on profits and dividends may be avoided in Brazil, depending on the existence of a favorable tax treaty between Brazil and the jurisdiction in which the Brazilian subsidiary is located.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
There is no advantage or disadvantage for the company to re-located activities from the UK in anticipation of Brexit since Brazil does not have a double tax treaty signed with the United Kingdom.