Brazil: GSGA – Special Report – Brazilian Tax Review 03/2014 – April/May/June

Taxation of Profits of Controlled Foreign Companies (CFC): Double Taxation Conventions must prevail over domestic rules

The Superior Court of Justice (STJ) has recently decided a case involving the applicability of Brazilian CFC rules in cases in which the controlled company is located in a country with which Brazil has a Convention for Avoidance of Double Taxation (DTC).

Under the STJ decision, whenever there is a valid DTC, the profits calculated by a controlled company cannot be taxed in Brazil by the parent company since, in these cases, the DTC provisions must prevail over domestic legislation. Consequently, based on the application of DTC provisions, the STJ held that these profits will be taxed only in the residence of the controlled company.

However, it should be noted that, although this precedent is favorable to taxpayers, this issue is not yet settled in Brazilian courts. This is especially so since federal attorneys are still appealing these cases in order to bring this matter before the Supreme Court (STF).

Tax Effects of IFRS adjustments and Changes in CFC rules converted into Law 12,973.

On May 14, 2014, Provisional Measure 627/13 was converted into Law 12,973. As we have mentioned on other occasions, this Provisional Measure introduced a number of changes to Brazilian tax legislation in order to harmonize the calculation of Corporate Income Tax (“IRPJ”), Social Tax on Net Profit (“CSLL”), Social Integration Program Tax (“PIS”) and Social Security Financing Tax (“COFINS”) with IFRS criteria. Apart from these changes, the new rule also extinguished the Transitional Tax System (RTT) and introduced a new tax on controlled foreign companies (CFCs).

These changes in legislation will come into force in 2015. However, taxpayers may choose to apply these changes already for the 2014 tax year. According to Normative Ruling 1,469, taxpayers who choose to anticipate the effects of the new law for 2014 should formalize this option though their tax return (DCTF – Federal Tax Credits and Debits Statement) for taxes due in May, for which the deadline is July 21.

Swiss Entities that Are Considered Established under a Privileged Tax System)

On June 6, 2010, the Brazilian government issued a new blacklist under Normative Ruling (“Instrução Normativa”) 1,037/2010, which included Switzerland as a tax haven.

However, in response to a Swiss government request, Brazilian tax authorities immediately suspended Switzerland’s blacklisted status under Normative Ruling (“Ato Declaratório Executivo”) 11/2010, until a further review proceeding could be completed.

This review proceeding was concluded on June 20, 2014, and the Brazilian government issued Normative Ruling (“Instrução Normativa”) 1,474/2014, which repealed Switzerland’s blacklisted status. However, entities incorporated in Switzerland were included in a grey list (they are considered to be established under a Privileged Tax System) in the following cases:

When they are a holding company, domiciliary company, auxiliary company, mixed company or administrative company subject to a combined corporate income tax rate lower than 20% under federal, cantonal and municipal legislation; and

When they are other types of legal entities that are authorized by rulings issued by tax authorities and subject to a combined corporate income tax rate lower than 20%.

As a consequence, transactions between a Brazilian entity and a grey-listed Swiss entity are subject to transfer pricing rules. Also, the tax deductibility of interest expenses related to loan agreements with a grey-listed Swiss entity that are incurred by a Brazilian entity is subject to thin capitalization rules. In both cases, it does not matter whether the parties are related.

Additionally, the thin capitalization rules governing the tax deductibility limitations of the interest expenses related to loans agreements with grey-listed lenders are more severe than the limitations for loan agreements with related parties established in places or under systems not classified as black or grey listed.

Government Reduces the IOF Rate levied on Foreign Loans to Zero

On 3 June 2014, the Brazilian government enacted Decree 8,263, reducing the rate of the Tax on Financial Transactions (IOF/Foreign Exchange) levied on loans agreements with maturity of over 180 days to zero. Before this decree, the zero rate was applicable, as a general rule, to loans with maturity of over 360 days.

São Paulo Simplifies State Drawback Procedures

The São Paulo State Treasury Office issued Decree 60,393, to introduce changes to the procedures importers must comply with in order to be granted with ICMS exemption on imports under the drawback regime.

With these changes, it is no longer necessary to formally file the Import Declaration (DI), the Tax Invoices and the Drawback Grant Instrument with state authorities. However, importers must keep these documents for at least for five years.

Brazil launches International Trade Single Window

Brazilian authorities have recently launched the International Trade Single Window, which will be implemented to bring together all systems involved in import and export procedures in order to simplify these transactions and reduce import/export customs clearance time.

SECEX revokes regulation on legal representation in trade defense procedures

The Foreign Trade Secretariat (SECEX) has revoked SECEX Ordinance 02/2014, which regulates the legal representation of interested parties (domestic or foreign) in trade defense procedures regarding antidumping and compensatory measures.