This country-specific Q&A provides an overview to tax laws and regulations that may occur in the 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-4th-edition/
How often is tax law amended and what are the processes for such amendments?
Brazilian tax legislation is composed of several different rules, from tax-related rules contained in the Federal Constitution to normative regulations enacted by the federal, state and municipal tax authorities.
Each type of rule is subject to different procedures for amendment purposes and, despite the fact that more important and higher-level legislation is modified at a slower pace considering the quorum required to such end (example: a federal supplementary law must be approved by the absolute majority of Congress members), as per the survey conducted by the Brazilian Institute of Tax Planning, Brazil enacts approximately 800 new tax rules per day.
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?
Generally, taxpayers are required to keep tax records for a period of 5 years. As to the information to be furnished to the tax authorities, Brazil is the leading country in terms of the number of ancillary obligations to be submitted (currently, almost 100) and tax red tape, and for many years it has been the nation that spends most hours organizing such information, as per the study conducted by the World Bank. On the other hand, today there are several tax reform projects intended to simplify this system, which may increase GDP at significant percentages according to past studies on this matter.
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 main tax authorities in Brazil are: Secretary General to the Federal Revenue Service of Brasil (federal level), Treasury Secretary (state level) and the Finance Secretary of the Municipalities (local level). As the country has several different taxes and taxing authorities, the time required for ordinary activities depends on the authority involved, but we can say that for trivial matters the efficiency of those authorities has shown a progressive increase lately, as well as the transparency and availability of the tax authorities to discuss important cases.
At federal level, the tax authorities rely on one of the most efficient systems of communication and IT. For example, taxpayers have access to the entire interface of claims and administrative proceedings electronically, and also have the choice of face-to-face services that may be provided at scheduled appointments in order to obtain further assistance.
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?
Tax-related settlement is not fully regulated in Brazil, despite the existence of old projects involving this matter. An administrative proceeding may last 4 to 8 years, on average, whereas a legal action may last more than 10 years. Certainly, there are many cases that have been closed earlier than that, but it is not rare to find a case, both in the judicial and administrative spheres, that has been going on for more than 15 years. For a taxpayer to obtain a court order suspending the tax liability and to obtain certificates of good standing, the law requires that such taxpayer either deposit the disputed amount in court or offer a bank guarantee or insurance to secure the disputed liability.
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?
Given the number of taxes that a taxpayer is required to pay, there is an official calendar that is made available by the tax authorities stating the due dates of each tax. Certain taxes (such as income tax) in certain situations may be paid provisionally or in advance throughout the year and, at the end of the fiscal year, either a credit or a debt may be ascertained. Other taxes are due at their final amounts and on dates preestablished by the government.
Should the taxpayer fail to pay a given tax, but remedies the mistake before an audit, such tax amount may be subject only to the adjustment according to the SELIC rate, depending on certain premises. On the other hand, in the event of a tax assessment, the taxpayer will be required to pay the tax amount increased by interest at the SELIC rate plus an automatic fine ranging from 50% to more than 200%, in the most serious cases, depending on the type of tax.
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?
As a general rule, taxpayers’ data are protected by tax confidentiality and kept confidential between tax authorities. However, there are certain special circumstances such as agreements between tax authorities for the exchange of information (such as, for example, between federal and state tax authorities) and, in certain cases, automatic cross-checking of information (such as between financial institutions and the federal tax authority).
Brazil has adhered to the Common Reporting Standard (CRS), but there are no public records of the information concerning the ultimate beneficial owner, nor actual initiatives to implement such measure.
What are the tests for residence of the main business structures (including transparent entities)?
For individuals there are residence tests that are more objective, whereas for legal entities such tests are less objective and guided by more encompassing principles and concepts (e.g., permanent establishment, substance over form, etc.).
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?
Given the conceptual reach of the definition of residence of a legal entity, we have observed very few assessments and inquiries on the matter and that these are incipient, mainly if we consider the growing cross-border structure of large conglomerates. However, even if slowly, we observe a growing dedication to cross-border matters on the part of the tax authorities, such as the recent auditing initiative on transfer pricing control relating to intangibles.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Yes, there are CFC and Thin Cap rules provided in Brazilian law. In a great number of situations, the profits earned by foreign companies may be recognized in the Brazilian entity irrespective of its remittance to the country, and such entity will then be entitled to tax credits concerning income taxes collected abroad.
Transfer pricing controls were introduced in Brazil in 1996, but its rules are unrelated to the standards in force in the world, and this is an obstacle for Brazil to become a member of the OECD. Brazilian legislation has consulting mechanisms to check if the method utilized by a taxpayer is consistent with the interpretation of the tax authorities.
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?
Yes, there are a set of anti-avoidance rules and principles that are utilized by the tax authorities and courts, and these rules and principles are present not only in tax legislation, but also in civil and constitutional legislation. Nevertheless, there are many dissenting opinions on the matter in terms of concepts and case law concerning the limits a taxpayer should observe for tax planning purposes. The enforcement of the GAAR is usually sought through litigation.
Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?
In your view, how has BEPS impacted on the government’s tax policies?
Brazilian governmental and tax authorities are currently putting strong efforts to align local policies to several global standards, and especially OECD standards, since our country has indicated its willingness to join the entity in the near future as an effective participant. Such measures should foster the country’s adhesion to the modernization and transparency trends the world has been facing and, most importantly, provide a sort of new “accreditation seal” for investors who are still a bit skeptical after the country has been downgraded by the rating agencies. Therefore, Brazilian IRS and legislators have already adopted some of the BEPS guidelines (e.g., disclosure of final beneficiary, agreement to the CRS, friendly resolution procedures in disputes involving DTAs, etc.) and the implementation of many others is being carefully prepared.
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?
The Brazilian tax system does not follow strictly the OECD model, despite many taxation rationales are applicable. As mentioned before Brazil has a high number of taxes in force charged in three different levels: i.e.; federal, state and municipal. The most common applicable taxes for companies are the following:
Charged at the federal level: Corporate Income Taxes (“IRPJ and CSLL”). Withholding Income Tax (“IRRF”), Social Contribution for Economic Intervention tax (“CIDE”), Corporate Revenue Taxes (“PIS and COFINS”), Excise Tax (“IPI”), Tax on Financial Transactions (“IOF”) and Import Duties (“II”).
Charged at the state level: VAT (“ICMS”).
Charged at the municipal level: Service Tax (“ISS”).
a) IRPJ/CSLL: Varying from 0% or low rates (e.g., exempted entities, income derived from Manaus Free Trade Zone, etc.) up to 40% (e.g., financial institutions). General rule is 34%. For some cases and situations, taxpayer could choose regimes where profitability has a presumed percentage fixed by legislation, which could be more beneficial than the traditional taxation system.
b) IRRF: Usually varying from 0% up to 35%. Some examples: 15-25% (e.g., remittance of services and interest abroad), 15%-22.5% (e.g., fixed income financial investments, capital gains, etc.), 0% (e.g., dividends, several remittances made by some foreign investors, etc.)
c) CIDE: Most common is the application of 10% to several sorts of remittances, as royalties, technical services, etc. In addition, there are other specific CIDE charges and regimes, as for the import of oil and oil derivatives.
d) PIS/COFINS: Rates may vary depending on several items and circumstances, but some traditional ones are: 0% (e.g., exemptions, as service and/or goods export), 3.65% (e.g., some technology related revenues, companies choosing the income taxation based on certain regimes, etc.), 4.65% (e.g., financial revenues) and 9.25% (regular regime).
e) IPI: Depend on the fiscal classification of the goods, but usually it varies from 0% to 25%.
f) ICMS: Rates may vary depending on several items and circumstances, but some traditional ones are: 0% (e.g., exemptions), 4% or 12% (e.g., interstate remittances), 17%-18% (e.g., internal remittances and imports) and 25% (e.g., telecom services, electricity, etc.).
g) ISS: Varying from 2%-5%.
g) IOF: Rates are very specific depending on some circumstances and nature of the transaction, and may be levied upon loans, gold resale, insurance, financial transactions, foreign remittances, etc. It´s worth mentioning that several remittances and investment made by foreign companies and individuals could be exempted from such tax.
h) II: Depend on the fiscal classification of the goods, but usually it varies from 0% to 35%.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
In 2010, Brazil adopted the IFRS accounting model. However, from a tax perspective there are several adjustments to be considered by the companies. Thus, some account records should be disregarded or at least be treated differently for tax purposes.
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?
Broadly speaking, the natural investment vehicle to carry out businesses in Brazil is a local subsidiary. For the incorporation of a subsidiary, the most common types of legal entities are: Limited Liability Company (“Ltda.”) and Corporation (“Sociedade Anônima – S.A.”).
The Ltda. is widely used by most of Brazilian entities, while S.A. is generally used by publicly traded companies and is a less flexible entity to manage in terms of corporate governance. From a tax perspective, both entities are subject to the same taxation regimes.
Brazilian companies are considered opaque and subject to taxation as a unified corporation. On the other hand, some atypical arrangements, as the consortium (which is not considered properly an entity) has a transparent nature for tax purposes.
Finally, the Brazilian legislation does not contemplate ‘trust’ structures.
Is liability to business taxation based upon a concept of fiscal residence or registration? If so what are the tests?
The Brazilian tax legislation is very formalistic in what concerns taxable presence. As a rule, only companies with physical presence such as subsidiaries and branches are subject to business taxation (i.e., local corporate income taxes).
Nevertheless, there are a few situations that might potentially generate a taxable presence in Brazil, as for example:
(i) De facto branch, i.e.; a foreign company that has an unregistered branch or office which could be identified by the existence of continuous foreign company's professionals in Brazil; local residents acting on behalf of the foreign company, use of a local address in Brazil; assets kept local;
(ii) Consignment agents engaged in the sales of goods supplied by a foreign entity; and;
(iii) An agent that performs sales in Brazil and has the power to legally bind the company to a contract.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Brazil has several incentives targeting specific industries (e.g., technology, automotive, oil, etc.), transactions (e.g., exports) or geographic zones (Manaus, SUDENE, etc.). Even though the extensive number of incentives add complexity to the Brazilian tax system, if well used could provide for companies some extraordinary conditions difficult to be matched in the most developed countries.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
There is no regime applicable to intellectual property. However, Brazilian tax legislation may offer tax incentives re. to the matter (e.g., deduction of expenses as well as some indirect tax reduction for companies that invest on technological research and development of technological innovation, R&D).
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?
Fiscal consolidation is not allowed by the Brazilian legislation. Each company must calculate and pay its own taxes. On the other hand, several companies try to offset losses in intragroup transactions, several of them challengeable from a legal and jurisprudential standpoint.
Are there any withholding taxes?
Yes, several taxes of the Brazilian tax system in certain occasions are subject to be withheld, especially the Income Tax (please refer to question 13).
Are there any recognised environmental taxes payable by businesses?
There is no green-tax or similar in Brazil, but some taxes are associated to be reverted to environmental initiatives, as CIDE, CFEM, etc.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not, how is it taxed?
Dividends have been exempted from taxes since 1995 for residents and non-residents, even for beneficiaries located in tax havens.
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?
If, on the one hand, Brazil has very challenging, complex and bureaucratic tax regulations, on the other hand, this vastness allows companies with efficient and broader analytic capabilities to count with much more efficient structures than in most parts of the world. Throughout these years in tax practice we have seen a great number of companies that know how to explore the tiny details, gaps, special regimes and benefits of tax legislation, choosing Brazil as a regional revenue peer and/or having a notorious tax advantage due to competitive final tax burden achieved. Therefore, if a company is able to explore all the possibilities offered by local legislation (with responsibility and being compliant with domestic guidelines, of course) combined with a holistic analysis of other fields such as finance, logistics, business goals, intangible assets, antitrust, etc. it can have a pleasant surprise with the results.