Brazilian Tax Highlights - An overview for foreign investors
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Brazilian Tax
Highlights
An overview for foreign
20 April 2017 investors
Contents
Tax transparency
Cash repatriation
Q&A
Appendices
PwC 2
Tax transparency and efficiency in Brazil
1 CbCR and MCAA
2 Exchange of information on tax
rulings
3 Identification of beneficial owners
4 Simplification
5 Tax audits in Brazil
PwC 3
Tax transparency and efficiency in Brazil
1 CbCR and MCAA
PwC 4The BEPS initiative
Due to recent cases of abusive tax planning implemented by multinational enterprises, and political
pressures for organizations to pay their fair share of taxes, the Organization for Economic Cooperation and
Development (OECD), together with the G20 countries, has been exploring alternatives to combat abusive
practices since 2013. The Base Erosion and Profit Shifting (BEPS) initiative was then created to help
closing the gaps in international taxation. In October, 2015, the OECD issued the final recommendations
on the 15 Action Items of the BEPS. These measures range from new minimum standards to revision of
existing standards, and countries are committed to this comprehensive package and to its consistent
implementation.
PwC 5The BEPS initiative & Brazil
• July, 2013 - Brazilian IRS first manifested the intention to participate in the BEPS initiative.
• 18 June, 2014 - National Congress authorized the Country’s formal participation (Law #12.995).
• Brazilian IRS understands that recent changes to Brazilian legislation already comply with other
Actions proposed under the BEPS initiative, such as: Transfer Pricing (new deductibility rules for
interest payments, new fixed profit margins and calculation methodologies); stricter CFC rules
(very efficient to prevent base erosion and profit shifting); thin capitalization rules; and
adjustments to the tax havens’ list, plus stricter rules for remittances to these countries.
• Actions 5 and 13 were partially adopted by the Brazilian IRS, by means of certain normative
instructions which focused on minimum standards agreed in these actions, for purposes of
demonstrating transparency and substance of the companies’ activities.
PwC 6What is Action Plan 13?
1 2 3
Overview of the global business of the
multinational enterprise, transfer pricing
Master File policies and allocation of income and
activities.
Detailed transfer pricing information of
transactions taking place between the
Local File entities of the jurisdiction with related
parties and financial information of those
transactions.
Wide information and indicators related
to the business of the group including
Country-by-Country Report global allocation of income, taxes paid
and due for each entity of the group.
Normative Instruction 1,681/2016
PwC 7Normative Instruction
1,681/2016
Normative Instruction* 1,681/2016, issued on 29 December, 2016,
establishes the framework under which multinational enterprise groups
would be obliged to disclose information in Brazil regarding the Country-
by-Country Report (CbCR)
The ultimate parent company may be obliged
to file an annual CbCR in Brazil if the group’s
annual consolidated revenues exceed either
BRL 2.26 billion or EUR 750 million
(depending on whether the ultimate controller
is a Brazilian resident or not).
*The Normative Instructions issued by the Brazilian Federal Revenue Service constitute ancillary normative acts to the laws, treaties,
international conventions and president decrees, which serve to regulate the taxes and the taxpayers activities. As complementary
standards, their validity and effectiveness depend on compliance with the above mentioned primary normative acts.
PwC 8Normative Instruction
1,681/2016
Who is obliged to Where and When the CbCR Penalties
prepare the CbCR in Brazil needs to be filed
Ultimate controlling entity To be filed with the Entities failing to file,
of the group, resident for tax Brazilian Income Tax filing late: fines ranging
purposes in Brazil; Return: ECF – Electronic from BRL 500/ month;
Substitute reporting entity; Tax Bookkeeping; and
or First filing deadline will 3% on any amount that
Subrogate entity resident for be on 31/07/2017, has not been declared or
tax purposes in Brazil regarding tax year that was inaccurately /
(under certain situations, beginning on 1 January, incompletely reported.
such as systemic failures). 2016.
PwC 9Normative Instruction
1,681/2016
Increasing substance,
Relevant aspects to be considered transparency and consistency!
1 Joint Venture investments should be reported in the CbCR by one
of its shareholders (the investors should define who will perform
this obligation).
Financial information should be disclosed with the full amount
2 registered in the financial statements (i.e.: 100%) of each entity,
regardless of the participation interest of the ultimate controlling
entity in those investments.
3 Information should be reported using the currency of the group’s
ultimate controlling entity.
PwC 10Multilateral Competent Authority Agreement (MCAA) The Amended Convention on Mutual Administrative Assistance in Tax Matters signed by Brazil in 2011 entried into force in 01 October 2016. On 21 October 2016, Brazil joined the Multilateral Competent Authority Agreement for the automatic exchange of CbCR, which is based on article 6 of the Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol. On the same day, Brazil signed the CRS Multilateral Competent Authority Agreement, re-confirming its commitment to implementing the automatic exchange of financial account information pursuant to the OECD/G20 Common Reporting Standard (CRS) in time to commence exchanges in 2018. PwC 11
CbCR in practice if the group fails into CbCR scope…
• From a French standpoint, the French subsidiary of a Brazilian group, on its tax form 2065 (2017
printout to be filed with FY16 tax return), has to :
• Tick a box where the French affiliate of a foreign group is responsible for filing the CbCR; or
• Mention the name, address and country of the company (located in France or in a country subject to
the CbCR requirement such as Brazil) which is responsible for filing the CbCR (provided MCAA has
been signed).
PwC 12CbCR in practice if the group fails into CbCR scope…
• From a Brazilian point of view, the Brazilian subsidiary of a foreign group:
1. Has to indicate in Brazil basically which is the ultimate controlling entity of the group and fill the form
with all the details of this entity, such as its fiscal jurisdiction and tax identification number (TIN),
provided that the ultimate controlling entity of the group (or another entity indicated by the group as
the substitute one) complies with the following conditions:
i. Is located in a jurisdiction where the filing of the CbCR is already in force with the same
content required in Brazil;
ii. Has already signed the MCAA for the automatic exchange of the CbCR;
iii. Files the CbCR in a period no longer than 12 months from the last day of the fiscal year
reported (specifically required only for the substitute entity);
iv. Is not located in a jurisdiction that have already notified the Brazilian tax authorities or been
notified by them in relation to the occurrence of systemic failure in exchanging the CbCR;
OR
2. Must also file the CbCR in Brazil, as the surrogate entity, in case the Brazilian subsidiary is held by a
group established in a country which fails to comply with any of the above mentioned conditions.
PwC 13Tax transparency and efficiency in Brazil
2 Exchange of information on tax
rulings
PwC 14Exchange of information on tax rulings
• Normative Instruction 1,689/2017, in force as from 21 February 2016, regulates the exchange of
information on tax rulings within the framework of improving transparency relating to rulings under
Action 5 of the BEPS Action Plan.
• Under this instruction, any private rulings (solução de consulta) or divergence rulings (solução de
divergência) on the following topics may be object of exchange of information:
transfer pricing;
tax incentive related to PADIS; and
permanent establishments.
• Taxpayers requesting rulings on those topics must state in their requests:
identification of the direct or final controller of the legal entity requesting the ruling, as well as its country of
residence (if it is located abroad); and
the country of residence of:
– all related parties with whom the taxpayer carries on transactions relating to the topic under consultation; and
– the head office and the permanent establishment, when the ruling request is related to permanent
establishments.
• A summary of these tax rulings will be submitted to the tax authorities of the jurisdictions included in
the scope of the consultation with whom Brazil has a signed agreement for exchange of information*.
*Brazil has not yet signed any specific agreement for exchange of information related to rulings, such as the MCAA for the automatic
exchange of the CbCR. The provision of administrative assistance in DTTs, like article 26 of the France-Brazil Treaty may be not sufficient.
The Brazilian tax authorities have not yet formally issued any further clarification on this matter.
PwC 15Tax transparency and efficiency in Brazil
3 Identification of beneficial owners
PwC 16Identification of beneficial owners
• On 09 May 2016 the Brazilian tax authorities issued NI 1.634 establishing the obligation to disclose
information related to final beneficiaries (and the foreign holding chain) of Brazilian companies in the
national registry of legal entities (“CNPJ”).
• According to NI 1.634, the term “final beneficiaries” refers to (i) an individual who ultimately, either
directly or indirectly, holds, controls or significantly influences an entity; or (ii) an individual on whose
behalf a transaction is undertaken. A shareholder is deemed to have significant influence if (i) owns more
than direct or indirect 25% of the entity’s capital stock or (ii) has the ability to influence the decision-making
and elect or appoint members of the entity’s management.
• Note that, among others, legal entities set up as listed companies in Brazil, or in jurisdictions which impose
the public disclosure of information of relevant shareholders (e.g. European countries), as well as non-profit
entities, were not required to comply with this obligation unless the entities were located in tax havens or
subject to privileged tax regimes under the Brazilian tax legislation.
• For these entities, on the other hand, NI 1.634 establish the obligation to inform in the “QSA” of the CNPJ
the individuals who legally represent them, their direct controllers (in some cases), executive managers and
directors, as well as any individuals or legal entities for which those entities were incorporated.
• Although the disclosure of the final beneficiaries was initially set to start on January 1, 2017, NI 1,684/2016
has postponed the general starting date to July 1, 2017. As an exception, companies registered in Brazil
before July 1, 2017 will have time until December 31, 2018 to comply with the disclosure obligation
(however, if a Brazilian company updates its CNPJ before December 31, 2018 for any other reason, the
disclosure obligation will arise at the date of such change).
PwC 17Tax transparency and efficiency in Brazil
4 Simplification
PwC 18Simplification of tax compliance burden
Time spent to comply with tax obligations (in hours per year)
Source:
Paying Taxes 2017 : the global
pictures
(www.pwc.com/payingtaxes)
• On 2 February 2017, the government announced that a proposal for the simplification of the
calculation and payment of taxes is under development.
• The proposal intends to reduce the time taxpayers spend on calculating and paying taxes from the
current 2038 hours a year to 600 hours a year (details of this proposal are still to be announced by
the Ministry of Finance).
PwC 19Tax transparency and efficiency in Brazil
5 Tax audits in Brazil
PwC 20Focus of tax authorities in 2017:
On 2 March 2017, the tax authorities announced the targeting plan for tax inspections in 2017, such as:
tax planning related to corporate reorganization resulting in generation of depreciable assets and also
involving equity investment funds;
taxation of foreign controlled and affilliated companies for Brazilian CFC purposes;
tax evasion:
–through the use of the exemption on distribution of dividends, where the dividends are
distributed in an amount higher than the taxed one under the presumed profit method; and
–in the fuel, cigarette and beverage industries; and
non-payment of individual income tax by independent professionals.
• The tax authorities recently announced that information available on social media is used by tax
officials to analyse and select taxpayers for tax inspections. Relevant information typically relates to
ownership of goods and the existence of interposed persons. The information available is also used as an
extra element to confirm or contradict information provided by official sources such as financial
institutions, notaries and withholding agents.
PwC 21Tax audits in Brazil – tentative timeline
“Life Cycle” of an Administrative Federal Tax Dispute in Brazil
May 01st, May 31st, November 3oth, December 3oth, December 3oth, January 15th,
2017 2017 2018 2018 2020 2021.
Divergence Special
Tax Defense by Decision of the Appeal* by the taxpayer
Decision of the FTA Voluntary Appeal
assessment Taxpayer Administrative Tax or the National Treasury
(“DRJ”). The FTA may by the taxpayer in
(usually within 30 Appeals Council Attorney’s Office
drop, confirm or partly case of a
preceded by
days from the (“CARF”). CARF may (“PGFN”) in case of
notification of modify its assessment confirmation or
date of confirm or modify the rejection or success,
the taxpayer to without any time limit partly
receipt of the decision of DRJ without respectively, of the
present (the response may last modification of
tax any time limit (the Voluntary Appeal (15
documents/ about 1,5 year, based on the tax assessment
response may last about 2
clarifications) assessment statistics) (30 days) days).
years, based on statistics)
OR/ AND
Decision of the Divergence Appeal by
Automatic Appeal,
Administrative Tax the taxpayer in case of a
in case of a
Appeals Council success of the
dropping or partly
(“CARF”). CARF may Automatic Appeal) (15
modification of
confirm or modify the days).
the tax assessment
decision of DRJ without In case the Automatic
(only mandatory for
cancelled tax debts any time limit (the Appeal is rejected, the
over BRL 2,5 response may last about 2 tax dispute is over in
million). years, based on statistics) benefit of the taxpayer.
*This Appeal is primarily subject to the verification of its admissibility through evidence of a divergent decision on the same subject previously issued by CARF.
PwC 22Tax audits in Brazil – tentative timeline
“Life Cycle” of an Administrative Federal Tax Dispute in Brazil
July August
15th, 15th,
2022 2022
Final decision of the Higher Chamber of
the Administrative Tax Appeals Council Payment of tax debts
(“CSRF”). CSRF may definitely decide (including interest and
in favour of the taxpayer (tax penalties) within 30
assessment is cancelled) or the PGFN days from the
(taxpayer must pay the tax debts), notification of the final
without any time limit (the response may decision of CSRF.
last about 1,5 year, based on statistics)
1) There are other types of appeal that may be presented by the taxpayer or the PGFN which, for simplification purposes, were not mentioned in this timeline, such as interlocutory appeal
and embargoes.
2) If, as a result of the administrative tax dispute, the taxpayer must pay the tax debts, it is possible to take the discussion to the courts. But, in this case, the pay to litigate principle
applies.
PwC 23Cash repatriation
1 WHT on service fees
2 Cost-sharing agreement
3 Overview on other cash
repatriation fllows
PwC 24Cash repatriation
1 WHT on service fees
PwC 25Withholding income tax on cross border remittances related
to service fees - background
• The importation of services (both technical and management / administrative) is heavily taxed in Brazil.
The total tax burden of the transaction (considering all the transactional and WHT) may reach 41% to
43%. In addition, whenever the transaction is among related parties, TP rules must be considered in
regarding the deductibility of the services fee.
• Nevertheless, on 6 December 2013, the National Treasury’s Attorney General’s Office (PGFN) published
Opinion No. 2363/2013, through which it formalized the understanding that art. 7 (“Business Profits”)
of the DTT signed by Brazil could potentially avoid the WHT on cross border remittances related to
service fees.
• The general WHT rate is of 15% (a 25% rate may apply depending on the nature of the remittance).
• It is important to note that many DTT signed by Brazil (such as the one signed with Netherlands)
classifies services fees under article 12 (“Royalties”), and therefore for such treaties no relief should be
possible for the WHT.
PwC 26Withholding income tax on cross border remittances related
to service fees – treaty application
Non treaty country * Treaty country * *
Service Service
Provider Provider Treaty country
Abroad Abroad
Service fee (-) WHT Service fee
Net fee
Br Co Br Co
* Or treaty jurisdictions that art. 7 does not ** Examples of treaty jurisdictions that art. 7
apply to service fees. In any case, FTC applies to service fees: Japan, France, Austria,
possibility should be considered Finland, Sweden
PwC 27Withholding income tax on cross border remittances related
to service fees – key considerations
No Brazilian WHT on remittances of service fees
Main advantages
Possibility to recover WHT unduly paid in the past, limited to 5 years (i.e.
WHT paid as from April 2012)
Analysis of the nature of the fees and the DTT must be made to assure the
possibility of avoiding WHT on remittance (art. 7 X art. 12)
Important remarks
Special procedures should be taken to guarantee the remittance without the
levy of the WHT
PwC 28Cash repatriation
2 Cost-sharing agreement
PwC 29Cost-sharing agreement - background
Historically, arguments that remittances made under cost sharing agreements should be treated as
reimbursements were not well received by the Brazilian tax authorities and were characterized as service
remittances instead. With the publication of favorable tax rulings and the list of criteria to be observed, the
scenario has improved.
• No mark-up should be considered in the structure;
• Only back office costs are allowed;
• Third party costs (services contracted from third parties) should not be considered as cost sharing;
• The cost should not relate to the entity’s core business;
• Apportionment criteria should be objective and reasonable;
• An identifiable benefit should be obtained by the Brazilian company in relation to the cost being charged;
• Proper supporting documentation is mandatory.
PwC 30Cost sharing Vs. Service charge
Cost Sharing Service fee
Company A Company A
Cost sharing Service tax
IOF 0,38% burden
41%/43%
Company B Company B
PwC 31Cost-sharing agreement - key considerations
Substantial reduction of transaction taxes on a cost sharing
Main advantage
agreement (limited to taxation of financial operations
(IOF) of 0.38%)
Compliance requirements give high scrutiny to the
transaction. i.e: Integrated System of Foreign Service
Trade (“SISCOSERV”) registration
Important Conflicting jurisprudence and administrative guidance on
remarks
the issue. May lead to tax assessments
Attention to the implementation in order to guarantee
proper compliance with legislation and jurisprudence
guideline
PwC 32Cash repatriation
3 Overview on other cash
repatriation fllows
PwC 33Dividends
Foreign country
• Up to now, 0% withholding tax on dividends when
remitted to (Brazilian and non-resident) shareholders.
• Dividend remittances to a foreign beneficiary are
subject to IOF at 0%.
dividends
WHT 0%
IOF 0%
In case of French parent company, tax costs on dividend:
Between 0,3443% to 1,7% in FY17
(1%/5% x 34,43%)
PwC 34Interest on equity
• Deductible at the level of the distributing entity, no
taxable
IOF applies (O%), but subject to 15% withholding
tax (or 25% if the beneficiary is located in a tax haven
jurisdiction).
• In application of the double tax treaty concluded Interest
between France and Brazil, the French company can on equity
WHT 15%
be granted a tax credit of 20%, provided the
taxpayer can demonstrate that a tax has been paid in
Brazil.
• Fully taxable in France at the level of the receiving
company in application of the anti-hybrid rules. deductible
In case of French parent company, tax saving on INE:
4,57% in FY17
(In Brazil: tax saving 34% less WHT expense of 15%
In France: 34,43% less 20% tax credit)
PwC 35Capital reductions
• Provided that the total amount of the capital reduction
is registered with the Brazilian Central Bank, it will
only be subject to IOF at 0,38%.
• No WHT.
Capital
reduction
IOF (0,38%)
PwC 36Capital gains – new tax rate for residents individuals and
non-resident corporate and individual investors
• On 16 March 2016, the Provisional Measure 692/2015 was converted into Law 13.259/2016.
• Pursuant to Law 13.259/2016, capital gains earned by individuals arising on the alienation of Brazilian assets
and rights of any nature are subject to income tax at the rates below (before PM 692/2015, a flat rate of 15%
applied regardless of the amount of the capital gain):
• 15% on the portion of the gain not exceeding BRL 5 million;
• 17.5% on the portion of the gain exceeding BRL 5 million and not passing BRL 10 million;
• 20% on the portion of the gain exceeding BRL 10 million and not passing BRL 30 million; and
• 22.5% on the portion of the gain exceeding BRL 30 million.
• Entities under the actual, presumed and arbitrary profit regimes are not subject to these rules (being the key
methods of calculating income tax for Brazilian entities).
• Currently, the Brazilian tax legislation provides that non-residents should be subject to the same rules
as Brazilian individuals. Note that a 25% tax rate still applies if the gains are derived by a resident of a tax
haven.
• The Brazilian Federal Revenue Authorities (RFB) published the Interpretative Declaratory Act 3/ 2016
providing their position that these progressive rates are applicable as from 1 January 2017.
PwC 37Q&A
Cost-sharing agreement
PwC 38Appendices – key aspects of the
brazilian tax system
PwC 39Key aspects of the Brazilian tax system
Income tax
Headline tax rate: 34%
•25% income tax (15% CIT + 10% surcharge for income over BRL 240,000)
•9% social contribution tax
Standard income tax calculation method (“Lucro Real” ) :
•General income tax: gross income less applicable deductions
•Deductibility standards/restrictions:
- Ordinary and necessary deductions
- Royalties limited to 1% (trademarks) or 5% (technical assistance / other types of IP) of net
sales revenues.
•The concept of tax grouping is not applicable for income tax purposes
•Losses can be carried forward indefinitely but only 30% of yearly profits can be offset against
previous losses.
PwC 40Key aspects of the Brazilian tax system
Income tax
• Thin capitalization rules: 2:1 debt-to-equity ratio (general) or 0,3:1 debt-to-equity ratio (tax
haven or beneficial tax regime).
• Tax on financial operations (IOF) 0f 0,38% in contributions of capital from and into the
country.
• Transfer pricing regulation does not follow OECD rules.
Specific income tax mechanism – Presumed profit method (“Lucro Presumido”) :
• Revenues under BRL 78 millions (EUR ~25 millions)
• Tax effective rate varies from ~ 3% to 11% and the basis of calculation is the gross revenue of
the company.
Services Products
(production/retail)
Gross revenues 100 100
Presumed profit margin % 32% 9,06% (average IR + CS)
Presumed taxable income 32 9,06
Brazilian income tax rate 34% 34%
Brazilian income tax 10,88 3,08
PwC 41Key aspects of the Brazilian tax system
Cross border payments
• Income tax withholding on cross-border payments (royalties, services, capital gains, interest):
- 15% for most payment types.
- 25% for payments to blacklisted tax havens.
- Reduction of the 15% national rate in application of the France-Brazil double tax treaty when
payments are made to France for:
• Licensing fees for the use of intellectual property rights and softwares (10%) and
• Service fees (0%) - special procedures should be taken to guarantee the remittance
without the levy of the WHT.
• Tax haven rules: Blacklist (65 jurisdictions) v. gray list (8 types of entities).
• Significant indirect taxes on cross-border royalty / technical assistance payments, which can
generate a 25% extra tax cost on such transactions.
• In case of general payments abroad, the currency conversion of Brazilian Real into USD or EUR is
subject to IOF at a 1,1% rate (0,38% previously).
• At the time being, dividends are subject to 0% withholding tax when remitted to shareholders.
PwC 42Key aspects of the Brazilian tax system
Transaction taxes
Taxes charged at three different levels – Federal, State and Municipal
Transaction taxes Jurisdictions Rates
ICMS State 18%
PIS/COFINS Federal 9,25%
IPI Federal Average of 10%
ISS Municipal 5%
Import tax Federal Average of 10%
PwC 43Gabriel Oliva Buratto PwC | Senior Tax Manager on Secondment - ITS - Brazilian Tax Desk Tel: +31 88 792 6344 | Mobile: +31 6 1055 8716 gabriel.oliva.buratto@nl.pwc.com PricewaterhouseCoopers Belastingadviseurs N.V. (KvK 34180284) Fascinatio Boulevard 350 | 3065 WB | P.O. Box 8800 | 3009 AV | Rotterdam, the Netherlands Alice de Massiac Brazilian Tax Desk Associée - Partner Avocat, Barreau des Hauts-de-Seine PwC Société d’Avocats Crystal Park – 61, rue de Villiers – 92208 Neuilly- sur-Seine Cedex – France T : +33 (0) 1 56 57 41 15 | P : +33 (0) 6 89 33 10 71 alice.de.massiac@pwcavocats.com www.pwcavocats.com PwC 44
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