11.1. Local taxation – introduction
Historically, Brazilian tax legislation is complex. Despite of the government’s efforts to reduce and simplify the Brazilian tax system there still exists a large number of taxes and pulverized rules currently in force. This chapter briefly addresses the main taxes that are levied in the businesses conducted with Brazil, as well as the most important aspects related to the taxation of the individual’s income in Brazil, which also affects non-residents and, more particularly, the expatriates.
11.2. Individual Income Tax (“IRPF”)
Brazilian law distinguishes resident from non-resident individuals. Generally, a resident in Brazil is the individual who resides in Brazil permanently or an individual who enters the country with permanent or temporary visa (to work in Brazil with employment tie or after 184 days of stay). As regards foreign individuals, however, specific rules are applied, as quoted below.
11.2.1. Payments to Non-Resident Individuals
As a general rule, remuneration paid by a Brazilian source for services supplied by non-resident individuals are subject to withholding income tax at the rate of 25%.
As of January 1st, 1999 individuals that hold temporary visas are considered residents for tax purposes upon their entry in Brazil to work pursuant to a labor agreement. Thus, they are required to file an annual income tax report, also stating their foreign income. The payments are subject to progressive income tax at the rate of 0%, 7.5%, 15%, 22.5% or 27.5% (maximum tax rate).
Further, individuals that hold temporary visas who enter Brazil for any other reason other than to work under a labor agreement are considered residents for tax purposes after a permanence of 183 days in a 12-month period as of the date of entry.
Expatriates treated as non-residents are subject to Brazilian income tax only in regard to the income earned from Brazilian sources, whether individuals or companies.
The Brazilian source of income pursuing from salaries and remuneration is subject to a standard withholding income tax of 25% while capital gains are subject to a 15% withholding income tax. This taxation may be reduced in cases where a treaty to prevent dual taxation applicable to the case exists. As of January 1st, 2017, the taxation of the Income Tax over the capital gain earned as a result of the disposal of assets and rights of any nature will be subject to the following progressive rates: 15% over gains that do not exceed R$ 5,000,000.00; 17.5% over gains that exceed R$ 5,000,000 but do not exceed R$ 10,000,000.00; 20% over gains that exceed R$ 10,000,000.00 but do not exceed R$ 30,000,00.00; and 22.5% over gains that exceed R$ 30,000,000.00.
The tax is usually based on gross income, net of any deductions, being due upon the crediting, availability or use of the resources on behalf of the non-resident or remittance thereof to the non-resident, whichever occurs first.
11.2.4. Individual who becomes a non-resident
Individuals residing in Brazil who retire permanently from Brazil in the course of the calendar year must file the following documents in order to formalize such condition: (i) the Definitive Country Exiting Statement, relative to the period in which he/she remained as resident in Brazil during the calendar year of exit, until the last working day of April of the calendar year following the departure; (ii) the income tax returns relating to previous calendar years, in case of tax due; and (iii) the Definitive Country Exiting.
In case income tax is due, amounts related to specific contributions and expenses can be deducted.
If the individual leaves permanently from Brazil without filing the Definitive Country Exiting Statement and the Definitive Country Exiting, the income earned by the individual will be taxed by income tax at the progressive rates applicable to residents of Brazil (7.5% to 27.5%) during the first 12 (twelve) months from the date of exit, and, as from the 13th (thirteenth) month, by the income tax at the rates of 0%, 15% or 25% depending on the nature of the income.
11.2.5. “IRPF” – progressive tax rates
Brazilian residents are subject to the payment of income tax on their global income with progressive tax rates, which vary according to the specific class in which the taxpayer is classified, based on the overall taxable net profit earned. The current tax rates are as follows: (i) 0% for monthly income whose value does not exceed R$ 1,903.98; (ii) 7,5% for monthly income from R$ 1,903.99 to R$ 2.826,65 (iii) 15% for monthly income from R$ 2,826.66 to R$ 3,751.05; (iv) 22,5% for monthly income from R$ 3,751.06 to R$ 4,664.68 and; (v) 27.5% for monthly earnings over the figure of R$ 4,664.68.
11.3. Corporate Income Tax (“IRPJ”)
Brazilian companies are subject to Corporate Income Tax (“IRPJ”) which is levied over the adjusted net profit at the rate of 15%, and in the event the net profit exceeds R$ 240,000.00 per annum it shall be subject to an additional 10%. The calculation basis for IRPJ may be subject to calculation upon definition of the taxable income, the “actual profit method”, to the “presumed profit method” (upon application of the percentage that varies pursuant to the activity performed, being percentage applicable on the gross revenue obtained by the legal person), or the “arbitrated profit method”, as per the criteria defined by the taxpayer.
According to Law No. 9,430 of December 30, 1996 the taxpayer may elect to calculate the IRPJ on the taxable income from an annual or quarterly basis. If the IRPJ is calculated quarterly, it may also be paid on a quarterly basis. Over the profit ascertained in the quarter applies a 15% tax rate, plus an additional rate of 10% over the net profit that exceeds R$ 60,000.00 per quarter. If the IRPJ is calculated on an annual basis, the taxpayer advances the monthly payments of the IRPJ, calculated based on a presumed profit (or by means of the profit obtained by the analysis of monthly balance sheets). To a large number of companies the monthly presumed profit corresponds to 8% of the total monthly gross revenues plus capital gains and other income and positive results obtained by the company, whose percentage may vary between 8% and 32% according to the field of business in which the taxpayer is engaged. A tax rate of 15% applies over this tax basis, plus an additional 10% over the presumed profit that exceeds R$ 20,000.00 per month.
In the case of electing the actual profit method and making advance monthly payments, at the end of the period the company must pay the amount due or apply for the return of the difference between the entire of the amount paid monthly and the amount calculated based on the annual taxable income.
For taxpayers that have adopted the actual profit method, the tax loss created in a given period may be cleared through the taxable income related to the subsequent period, provided that such loss is restricted to 30% of the taxable income (e.g. for each R$ 1.00 of profit, R$ 0.70 are susceptible to taxation, irrespectively of the figure representing the existing tax loss). The tax loss may be maintained during an indefinite period of time, i.e., without legal restriction. It shall be noticed that non-operating accrued tax loss may only be cleared through non-operating profits.
Another method that is adopted to calculate income tax consists in the method of the presumed profit, in which the income tax is calculated quarterly and, for most of the business, the calculation basis is 8% of the gross revenues, (however, the quoted percentage for calculation of the presumed profit varies between 8% and 32% depending on the activities carried out by the company). The following tax rates of income tax apply over the presumed profit: 15% income tax plus an additional 10% over the amount that exceeds R$ 60,000.00 per quarter. If the method of presumed profit is adopted to calculate the income tax the taxpayer is not subject to adjustment of the annual income tax that is asserted.
However, the possibility of adopting the presumed profit method is subject to the fulfillment of certain conditions, such as:
• incomes asserted in the preceding year cannot exceed R$ 78,000,000.00;
• the profit, capital gains or other gains cannot have a foreign origin;
• financial institutions or similar organizations, as determined in Brazilian law, cannot adopt the presumed profit method for income tax purposes;
• companies cannot be beneficiaries of tax incentives granted under Brazilian law (e.g. tax exemption or reduction of income tax);
• companies cannot have paid income tax calculated based on a monthly estimate;
• factoring companies cannot adopt the presumed profit method; and
• companies created as specific purpose companies (“SPE”), etc.
11.4. Social contribution on net profit (“CSLL”)
In addition to Corporate Income Tax (IRPJ) the Brazilian companies are subject to the payment of the social contribution on the net profit (“CSLL”). The current tax rate is 9%, with the exception of financial institutions that, due to Law No. 13,169/2015, in force as of September 1st, 2015, are subject to a CSLL rate of 20%.
CSLL is levied separately form the IRPJ given that the CSLL is paid to the Social Security and not to the Brazilian Federal Revenue, which collects the IRPJ.
The tax basis of the CSLL is the net profit specifically calculated for the CSLL payment purposes. The calculation basis for CSLL is subject to calculation upon the definition of the taxable income or presumed profit (upon application of the percentage that varies pursuant to the activity performed, being such percentage applicable on the gross revenue obtained by the legal entity), as per the criteria defined by the taxpayer.
Similar to IRPJ, the taxpayers that have adopted the taxable income may calculate the CSLL on an annual or a quarterly basis. In the event the calculation of the CSLL is performed on an annual basis, the payments must be made based on an estimate. The same rules applicable to IRPJ applies in this case. In other words, in case the CSLL is due on an annual basis, the monthly payments and the accrual upon the ending of the calendar-year are mandatory, in such a way that it is possible to offset an eventual negative balance with other federal taxes or even to request a tax refund before the Federal tax authorities.
The legislation establishes that the CSLL can no longer be deducted from the net profit for the purposes of calculating IRPJ.
The negative tax basis of the CSLL (tax loss for CSLL purposes) may be used to offset the taxable profit in the subsequent periods, limited to 30% of the taxable profit in each calculation period. Similar to what occurs in regard to the tax loss for IRPJ purposes, the negative tax basis of the CSLL may be used by taxpayers that have adopted the taxable income to offset a future taxable income, without a transient limit for the expiration for usage of these amounts.
For the taxpayers that have adopted the presumed profit, the calculation of CSLL shall be performed on a quarterly basis, constituting the calculation basis of 12% over the gross income (however, such percentage for calculation of the presumed profit varies between 12% and 32%, depending on the specific activities carried out by the company). The rate of 9% is applicable to the presumed profit.
11.5. Transfer pricing
The Rules dealing with Transfer Pricing in Brazil were introduced by Law No. 9,430 of December 27, 1996, with application since January 1st, 1997. Such rules set forth the system for calculation of the maximum amounts to be deducted as expenditures and the minimum amounts to be considered as taxable income of Brazilian legal entities that perform transactions with related parties established abroad or other transactions subject to standards on transfer pricing under the Brazilian law.
The standards on transfer pricing rules also apply to foreign transactions executed by individuals or legal entities, regardless of the parties being deemed as “related”, in case of parties (i) resident or domiciled in a country which taxes the legal entity’s profit at a nominal tax rate lower than 20%1 ; (ii) resident or domiciled in country whose legislation does not allow the disclosure related to the corporate organization; (iii) or subject to the so-called “privileged tax regime”.
1 The Ministry of Finance reduced the percentage to 17% for the countries, dependencies and regimes that are aligned with the international standards of fiscal transparency, in the terms to be defined by the Brazilian Federal Revenue Department, notwithstanding the observance of the other conditions provided by Articles 24 and 24-A of Law 9,430/96.
11.5.1 Concept of related parties
Normative Ruling No 1,312/12, issued by the Brazilian Federal Revenue, provides that the following parties are deemed as related of the Brazilian legal entities (or individuals) for transfer pricing purposes:
• The main office thereof, when domiciled abroad;
• Its branch, when domiciled abroad;
• The individual or the legal entity, resident or domiciled abroad, whose corporate interest in its capital stock characterizes the latter as its controller or affiliated company, according to the provisions set forth by the Corporate Law;
• The legal entity domiciled abroad which is characterized as its controlled or affiliated company, according to the provisions set forth by the Corporate Law;
• The legal entity domiciled abroad, when the latter and the company domiciled in Brazil are under common corporate or administrative control, or when at least ten percent of the capital stock of each one of them belongs to the same individual or legal entity;
• The individual or legal entity, whether resident or domiciled abroad, which, jointly with the legal entity domiciled in Brazil, have corporate interest in the capital stock of a third legal entity, whose sum characterizes them as controllers or affiliated companies, according to the provisions set forth by the Corporate Law;
• The individual or legal entity, resident or domiciled abroad, which is its associated, under the form of consortium or condominium, as set forth in the Brazilian legislation, in case of any business;
• The individual resident abroad that is a relative, third kinsman or kinswoman, spouse or companion of any of its directors or its partner or controlling shareholder through direct or indirect interest;
• The individual or legal entity, resident or domiciled abroad, which enjoys exclusivity, as its representative, distributor or concessionaire, for purposes of sale of goods, services or rights; and
• The individual or legal entity, resident or domiciled abroad, in relation to which the legal entity domiciled in Brazil enjoys exclusivity, as representative, distributor or concessionaire, for purposes of sale of goods, services or rights.
The rules on transfer pricing apply to transactions executed by the legal entity domiciled in Brazil, by means of intervention of person who is not characterized as a related-party, which used to perform activities together with another company located abroad, which is characterized as a related-party of the Brazilian company.
Finally, according to Normative Ruling No. 1.312/12, the existence of relationship with individuals or legal entities abroad shall be reported by the Brazilian legal entities upon the filling of the Tax Accounting Bookkeeping (ECF).
11.5.2. Methods for calculation of the transfer pricing
The Brazilian legislation related to transfer pricing adopts four methods in order to define the maximum deductible amount that applies to the expenditures, costs and charges incurred upon the importation of goods, services and rights from the related party. The methods are the following:
1. Comparable Uncontrolled Price Method – CUP
2. Resale Price Less Profits Method – RPM
3. Production Cost Plus Taxes and Profits Method – CPM
4. Exchange Import Price – PCI
In case of exports, the legal entity will be subject to arbitration whenever the average sale price in such transactions is inferior to 90% in relation of the average price adopted in the transactions performed with non-related parties in the domestic market during the same period, through similar conditions of payment. Should the average price among the parties be inferior to 90% of the average price executed in the Brazilian market, the income of export will be adjusted based on the methods appointed below:
1. Average Export Sales Price – CUP
2. Wholesale Price in Country of Destination Less Profits – PVA
3. Retail Price in Country of Destination Less Profits – RPM
4. Purchasing or Production Cost Plus Taxes and Profits – CPM
5. Exchange Export Price – PECEX
Methods Applicable to Import of Goods, Services and Rights
Comparable Uncontrolled Price – CUP
This method is defined as the weighted arithmetic average of the prices of goods, services or rights, whether identical or similar ones, adopted in the Brazilian market or in other countries, in sale transactions, through similar conditions of payment. In other words, the legal entity shall compare the costs, expenditures and charges related to the goods, services or rights proceeding from related parties, during a given time, with the quoted weighted arithmetic average.
As clarified by the Brazilian Federal Revenue in the Normative Ruling No. 1,870/19, the parameter prices shall be determined exclusively in the calendar year in which the goods, services or rights are imported.
For identical goods, services or rights, Normative Ruling No. 1,312/12 allows adjustments related to:
1. Payment terms;
2. Quantities negotiated;
3. Obligations related to warranty for the good, service or right
4. Obligations related to promotion of the good, service or right by means of marketing and advertising
5. Obligations for quality control, standard of services and health conditions
6. The costs of intermediation in sales transactions executed by non-related companies, only considered for purposes of comparison of prices;
8. Freight and insurance; and
9. Costs of landing at the port, of internal transport, of storage and of customs clearance including the import taxes and duties, all in the destination country of the good.
In addition to the adjustments listed above, the legislation deals with adjustments due to differences as to the physical and content-related nature of goods, services or rights exclusively present in those parts corresponding to the differences among the models that are under comparison. In addition, for purposes of transfer pricing regulations, two or more goods will be considered in similar conditions of use when, simultaneously, they: (i) have the same nature and function; (ii) are mutually replaceable; and (iii) have equivalent specifications.
Further as regards the arithmetic average, only the transactions executed between non-related purchasers and sellers will be considered for purposes of calculation of the same arithmetic average. Furthermore, it is worth mentioning that Law No. 9,430/96 and the Normative Ruling No. 1,312/12 do not elect a preferential jurisdiction, whether if it is local, state or foreign, in which the prices of the transactions among the non-related parties will be used as basis.
Thus, the legal entity may consider, for purposes of calculation of the arithmetic average of the prices for goods, services or rights, the prices of the transactions performed together with non-related parties (which are not subject to rules of transfer pricing) assessed in the Brazilian market or in markets of other nations, import/export transactions as well as transactions performed outside the Brazilian territory.
Normative Ruling No. 1,312/12 provides that, as of January 1st, 2013, the transactions used for calculating the CUP method must: (i) represent at least 5% of the value of the imports subject to transfer pricing control carried out by the Brazilian legal entity during the calculation period related to the type of good, right or service imported, in the event that the data used for the calculation is related to its own transactions; and (ii) correspond to uncontrolled prices of the same calendar-year of the respective import transactions subject to transfer pricing control.
In case the transactions of the calculation period do not represent 5% of the value of the imports subject to transfer pricing control, as mentioned in item “i” above, or in the event there is no uncontrolled prices related to the same calendar-year of the import transactions, as mentioned in item “ii” above, it is possible to complement the percentage with the imports performed in the immediately preceding calendar-year or prices related to transaction carried out during the immediately preceding calendar-year. For this purpose, Normative Ruling No. 1,312/12 provides for the formula to calculate the exchange rate adjustment of the period.
Resale Price Less Profit Method – RPM
The Resale Price Less Profit Method can be utilized in two scenarios: (i) when the imported goods, rights or services are consumed in further manufacturing or production process; or (ii) when the imported goods, rights or services are re-sold exactly as imported.
As clarified by the Brazilian Federal Revenue in the Normative Ruling No. 1,870/19, the arithmetical average of resale prices shall be determined by the purchases carried out during the calculation period, the existing inventory balance (at the beginning of the calculation period), less the amounts and quantities remaining in the inventory upon its closing.
The resale price less profit method (“RPM”) is defined as the arithmetical average of resale prices of goods (in Brazil) less:
1. Unconditional discounts granted;
2. Taxes and contributions imposed on sales;
3. Commissions and brokerage fees paid; and
4. A profit margin based on the economic sector of the legal entity subject to transfer pricing control, calculated over the sale price after deducting the three items above and determined according to a proportional calculation. The margins are as follows:
I. 40 % to the sectors of:
a) pharmaceutical and pharmaceutical chemical products;
b) tobacco products;
c) optical, photographic and cinematographic equipment and instrument;
d) machinery, apparatus and equipment for dental medical and hospital use;
e) extraction of oil and natural gas;
f) products derived from petroleum;
II. 30 % to the sectors of:
a) chemical products;
b) glass and glass products;
c) cellulose, paper and paper products;
III. 20 % to other sectors.
When establishing this method, Normative Ruling No. 1,312/12 not only defines the calculation of “parameter price” (preço parâmetro), but also determines that this price should be calculated considering the percentage of the imported goods, services or rights in relation to the total cost of the manufactured product, the so-called proportional calculation.
The resale price to be considered for purposes of this method is the price adopted by the taxpayer in the wholesale or the retail markets with unrelated purchasers, either individuals or legal entities. Differences in payment conditions can be adjusted according to the interest rate adopted by the taxpayer in its regular sales. If no interest rate applies consistently, the adjustments in payment conditions must be made according to interest rates provided for in the regulations.
For purposes of calculating the proportional percentage of the imported products for calculating the parameter price under the RPM it shall not be included in the weighted average cost of the imported good, right or service: (i) the value of the freight and insurance incurred by the importer and paid to non-related parties (or parties located in regular jurisdiction); (ii) the taxes levied upon importation; (iii) and the expenses with customs clearance. On the other hand, such amounts must be considered for the calculation of the total weighted average cost of the same product, which may result in a lower parameter price.
However, according to the understanding of the Brazilian Federal Revenue in the Request for Ruling No. 17/2018, these amounts will be included in the cost of the imported good if they are included in the International Commercial Terms – Incoterm. Thus, in the case of transactions contracted with Incoterms, where freight and insurance are the responsibility of the exporter, these amounts must be computed in the cost of the imported good, service or right for purposes of calculating the parameter price under the PRL method.
Production Cost Plus Profit Method – CPM
This method may be defined as the average manufacturing cost of goods, services or rights, either identical or similar, in the country where they have been originally manufactured, plus the export taxes charged by the quoted exporter country and a 20% profit margin, calculated over the production cost. The items below may be included in the manufacturing cost for purposes of this method:
1. The cost for acquisition of raw-materials, intermediary products and packing materials used in the manufacturing process of the good, service or right;
2. The cost with any other goods, services or rights applied or consumed in the manufacturing process;
3. The cost of the personnel used in the production of the good, service or right, including those associated with direct supervision of the manufacturing process or production, maintenance and security of production facilities and corresponding social charges required or admitted according to the regulations of the country where the goods (services or rights) are produced;
4. Costs of rents, leases, maintenance and repair, and depreciation and amortization charges of the goods, services or rights used in the production of the relevant good, service or right and;
5. Reasonable losses in the production process admitted by the tax legislation of the foreign country.
Exchange Import Price Method – PCI
TThe Exchange Import Price Method may be defined as the prices of goods or rights subject to quotation in future and exchange markets internationally recognized, adjusted upwards or downwards of the average market premium, at the transaction date or at the date of registration of the import declaration, if this date is not identified.
This method must necessarily be applied on imports of commodities subject to quotation in future and exchange markets internationally recognized, performed as of January 1st, 2013. It shall be considered as commodities for purposes of the PCI:
• the products listed in Annex I and that, cumulatively, are subject to public prices in exchanges markets listed in Annex II, all Annexes of Normative Instruction No. 1,312/12; or
• the products listed in Annex I and that, cumulatively, are subject to public prices in internationally recognized sectorial research institutions listed in Annex III, all Annexes of Normative Instruction No. 1,312/12.
Besides the premium, it shall be considered the variations in the quality, characteristic and substance content of the goods sold.
Moreover, the commodity value may suffer adjustments related to the differences of the value supported by the seller and the specifications of the template agreement established by the exchange market or sectorial research institutions, taking into account the specific business conditions, sales conditions (Incoterm), conditions of content and nature, and adjustments corresponding to the variables that are considered in the commodity’s specific quotation:
1. payment term,
2. negotiated quantities,
3. climatic influences in the imported good characteristics,
4. intermediation costs in the purchase and sale transactions carried out by non-related companies,
6. insurance and freight,
7. costs of landing at the port, of internal transport, of storage and of customs clearance including the import taxes and duties, all in the destination country of the commodity.
Methods Applicable to the Export of Goods, Services and Rights
For application of any of the methods described below, the price of export in a transaction among related parties shall be inferior to 90% of the average price performed in sales among non-related parties in the Brazilian market (if any). In other words, in case the price of export for the related party do not reach such percentage, the company will have to prove that it complies with the rules of transfer pricing according to the amount defined through one of the five methods provided in the legislation for purposes of export.
Export Sales Price Method -CUP
The Export Sales Price Method may be defined as the weighted arithmetic average of the sale price in exports performed by the company itself for non-related parties or by other domestic exporters of goods, services or rights, whether identical or similar ones, during the same period of survey for calculation basis of the corporate income tax and through similar terms of payment . The same adjustments described for the PIC Method (in case of import) apply in this case.
Retail Price in Country of Destination Less Profit Method – RPM
The said method is defined as the weighted arithmetic average for the sale prices of goods (identical or similar prices) which are performed in the wholesale market of the origin country, through similar terms of payment , being such prices deducted from:
1. The taxes included in the price which are charged in the quoted country; and
2. The profit margin of thirty percent (30%) on the sale price performed in the retail business.
Wholesale Price in Country of Destination Less Profit Method – RPM
The said method is defined as the weighted arithmetic average for the sale prices of goods (identical or similar prices) which are performed in the wholesale market of the origin country, through similar terms of payment, being such prices deducted from:
1. The taxes included in the price which are charged in the quoted country; and
2. The profit margin of fifteen percent (15%) on the sale price performed in the wholesale business.
Purchasing or Production Cost Plus Taxes and Profit Method – CPM
This method is defined as the weighted arithmetic average for the costs of purchasing of imported goods, services or rights plus taxes and contributions charged in Brazil and a profit margin of fifteen percent (15%) on the amount of the costs plus taxes and contributions.
Exchange Export Price – PECEX
The Exchange Export Price Method may be defined as the prices of goods or rights subject to quotation in future and exchange markets internationally recognized, adjusted upwards or downwards of the average market premium, at the transaction date or at the date of the shipping of the good on the exportation, if this date is not identified.
This method must necessarily be applied on exports of commodities subject to quotation in future and exchange markets internationally recognized performed as of January 1st, 2013.
It shall be considered as commodities for purposes of the PECEX:
• the products listed in Annex I and that, cumulatively, are subject to public prices in exchanges markets listed in Annex II, all Annexes of Normative Instruction No. 1,312/12; or
• the products listed in Annex I and that, cumulatively, are subject to public prices in internationally recognized sectorial research institutions listed in Annex III, all Annexes of Normative Instruction No. 1,312/12.
Besides the premium, it shall be considered the variations in the quality, characteristic and substance content of the goods sold.
Moreover, the commodity value may suffer adjustments related to the differences of the value supported by the seller and the specifications of the template agreement established by the exchange market or sectorial research institutions, considering the specific business conditions, sales conditions (Incoterm), conditions of content and nature, and adjustments corresponding to the variables that are considered in the commodity’s specific quotation: (i) payment term, (ii) negotiated quantities, (iii) climatic influences in the imported good characteristics, (iv) intermediation costs in the purchase and sale transactions carried out by non-related companies, (v) packaging, (vi) insurance and freight, (vii) costs of landing at the port, of internal transport, of storage and of customs clearance including the import taxes and duties, all in the destination country of the commodity.
Safe Harbors in exports
The “Safe Harbors” provided in the Brazilian Transfer Pricing Rules cannot be characterized as perfect “safe harbors”, particularly because the tax authorities have the power to not accept the amount of revenues recognized by the taxpayer in accordance with those “safe harbors”.
Besides the methods described below, the legislation in respect of the transfer pricings foreseen some situations in case of export, which are referred to as Safe Harbors usually. However, such Safe Harbors can not be considered as perfect Safe Harbors, once the authorities may accept or not the amount of the income acknowledged by the legal entity in conformance with such Safe Harbors.
Normative Ruling No. 1,312/12 provides as follows:
(i) The legal entity in charge of verifying the net profit (before the provision for the tax income and for social contribution on the profit) proceeding from sale incomes in the exports for related parties through amount equivalent to at least ten percent (10%) of the total of such incomes may prove the suitability of the prices performed in such exports, exclusively by means of the documents related to the transaction itself. The percentage of 10% on the net profit shall be considered by using the annual average of the calendar year itself and the two precedent years. The referred “safe harbor” only applies in case that the net revenues of exports to related parties is not higher than 20% of the total export net revenues. For the assessment of the net profit corresponding to such exports, the common costs and expenditures related to sales will be prorated respecting the respective net profit. The calculation of this Safe Harbor can not include the sales of rights, goods or services whose profit margin has been amended through Consultation before the Finance Minister;
(ii) The legal entity whose net profit of the exports, in the calendar year, does not exceed 5% of the total of the net profit in the same period may also prove the suitability of the prices performed in such exports, exclusively by means of the documents related to the transaction itself.
As previously mentioned, these Safe Harbors can not be considered as perfect, once they only reveal the burden of proof for the tax authorities in charge of providing evidence that the prices performed are not in compliance with the market prices. Such Safe Harbors are not applied to exports of goods, rights or services in case of exporters domiciled in countries with a privileged tax regime or countries whose legislation does not allow the disclosure related to the corporate organization.
11.5.3. “Additional factor” applicable to export transactions
In order to reduce the potential negative impact of the pertinent BRL appreciation in comparison to other foreign currencies in the last years, mainly in relation to the USD currency, the Brazilian taxpayers subject to transfer pricing rules are allowed to adjust at 35%, 29%, 28%, 20%, 9% and 11% the export incomes with related parties, which were assessed in 2005, 2006, 2007, 2008, 2010 and 2011 respectively. For the years of 2009 and from 2012 to 2018 , there was no additional factor stipulated.
For instance: considering that the original amount of the exports for the related parties during the year of 2008 has been equivalent to R$ 100.00, the taxpayer is entitled to use the amount of R$ 120.00 as the “effective” amount of those exports, for purposes of application of the rules regarding transfer prices in the year of 2008.
The possibility of usage of the “additional factor” applies only to the following cases: (i) comparison with the local independent transactions in order to conclude on the possibility for application of the minimum amount of ninety percent (90%) of the price with non-related parties; (ii) comparison with the price being used as parameter, in case the taxpayer has elected the usage of the Purchasing or Production Cost Plus Taxes and Profit Method (CAP), and (iii) calculation of the net profit in 2005, 2006,2007, 2008, 2010 and/or 2011, for purposes of application of the Safe Harbor concerning the minimum margin of net profit.
Furthermore, in respect to the Safe Harbor referring to the minimum margin of net profit, the taxpayer is allowed to consider only the calendar year under analysis (2005, 2006, 2007, 2008, 2009, 2010, 2011 and 2012) in order to define the net profit on the export income to related parties, to be increased by the percentage of 35%, 29%, 28%, 20%, 0%, 9%, 11% or 0%, depending on the year under analysis. It is worth mentioning that the taxpayer is not obliged to include the income accrued in the two precedent years.
11.5.4. Transfer pricings – supplementary rules
AAmendment to margin
It is possible to amend the fixed margins imposed by the transfer pricing rules in respect to the methods applicable to export and import transactions.
Therefore, the legal entity (or trade association that represents of the economic sector) shall submit an application before the Treasury Department in conjunction with other documents. After the submission of the petition, the said Treasury Department will verify the application, the term during which it is intended to apply the amended margin as well as the remaining documents submitted.
Ordinance No. 222/08 provides detailed directives for the filing of a request to amend the statutory profit margins including, for each method, the documents and data that must be presented to the competent authorities.
Conquest of new markets
Prior to the enactment of Normative Ruling No. 1,312/12, transfer pricing rules provided for a special treatment to a Brazilian exporter intending to conquest new markets abroad. In this case, the rules made feasible to an exporter to adopt prices inferior to 90% of the average prices performed in the domestic market, provided that certain legal conditions were met, such as the approval of an “exportation plan” presented to the Ministry of Finance.
However, the provisions mentioned above were excluded from the transfer pricing rules upon the enactment of Normative Ruling No. 1,312/12. Therefore, such provisions no longer apply since January 1st, 2013.
Financial loans and transactions among related parties
For agreements executed until 2012, the interest paid or credited to related companies or under the other transactions subject to the transfer pricing rules should be deductible based on the interest rates registered before the Brazilian Central Bank. If such agreements were not registered, the interest should be deductible up to the amount not exceeding the value calculated based on the London Interbank Offered Rate (“LIBOR”), for deposits made in Dollars from the United States of America for a 6-month term, plus a 3% annual spread.
For agreements executed as of 2013, interest paid or credited to related companies or under the other transactions subject to the transfer pricing rules is only deductible up to the amount not exceeding the following interest rates, increased by a spread based on the market average to be defined by the Minister of Finance:
a) In case of transactions performed in United States of America Dollars with a prefixed rate: the sovereign bonds of the Federal Republic of Brazil issued in the foreign market in dollars from the United States of America;
b) In case of transactions performed abroad in Brazilian Reais with a prefixed rate: the sovereign bonds of the Federal Republic of Brazil issued in the foreign market in Brazilian Reais; and
c) For the remaining transactions: the LIBOR during a six-month term.
With respect to interest expenses, Ordinance No. 427 established a maximum 3.5% spread to be added to the interest rates set forth above.
Regarding the minimum amount of taxable income, Ordinance No. 427 sets a 2.5% minimum spread to be added to the interest rates mentioned above. In this case, in relation to the transactions occurred between January 1, 2013 and August 2, 2013, the Brazilian taxpayer may consider a 0% spread in order to determine the minimum taxable income.
Book Adjustments in case of imports (Law No. 10,637/02)
In case the acquisition cost exceeds the highest deductible amount determined according to the methods provided for in Law No. 9,430/96, Article 45 of Law No. 10,637/02 established methods for the adjustment of the acquisition cost of goods, rights and services imported from related companies. Accordingly, the exceeding amount shall be debited from the accumulated profits account (“conta de resultados acumulados”) and credited to (i) the asset account in which the acquisition of the goods, services or rights was registered or (ii) the cost or expense account of the accrual period, which registers the amount of the goods, services or rights, in case the referred assets have been already realized.
Upon the calculation of the tax basis for income tax purposes, if the legal entity elects to register the exceeding amount calculated in each accrual period only at the moment of the sale of the goods, services or rights, the total exceeding amount should be excluded from the company’s net equity, for purposes of determining the tax basis for the calculation of the interest on equity.
In Brazil, the taxpayer has the burden to demonstrate compliance with transfer pricing rules; otherwise, the tax authorities may issue a tax assessment against the taxpayer. The costs and average prices provided by Law No. 9,430 shall be based on either official information and reports from the importing or exporting country, or research conducted by companies or institutions with renowned technical expertise.
Currently there is no specific transfer pricing return that needs to be filled before the Brazilian IRS. Taxpayers need to inform in their annual tax return (ECF) the transactions with related individuals or legal entities domiciled abroad.
Place and Date of Filing
Taxpayers in Brazil must file their annual income tax return and, consequently, their information related to transfer pricing according to the periods established every year by the Federal Revenue Services regulations. The term established to individuals is generally up to the last business day of April and to legal entities under the actual profit method is generally up to the last business day of June.
Transfer Pricing Adjustments
For goods, services and rights imported from a related party, the taxpayer must prove that the corresponding costs, expenses and charges do not exceed the maximum deductible expenses under at least one of the four methods set forth by transfer pricing regulations (the PCI method is applicable only to importation of commodities). Otherwise, the tax authorities may challenge the exceeding deduction.
The exceeding amount shall be added back as taxable income and will thus be subject to corporate income tax at the rate of 15% plus a surtax of 10%. The 9% CSLL on adjusted income also applies on the exceeding amount.
If the taxpayer decides to pay within 30 days as from the tax assessment, there is a 50% discount on the 75% penalty. If the taxpayer decides to pay within 30 days as from the administrative decision, there is a 30% discount on the penalty.
11.5.5 Thin Capitalization Rules
Federal government enacted on December 15, 2009 Provisional Measure No. 472 which, among other changes, establishes limitations regarding the deductibility of accrued interest in case of loans executed with foreign related parties and/or with lenders domiciled in low-tax jurisdictions or subject to privileged tax regimes.
This Provisional Measure was converted into Law No. 12,249, dated June 11, 2010. The new rules of thin capitalization are divided in two kinds: (i) rules applicable to transactions with related parties, except for transactions with parties subject to a privileged tax regime or domiciled in low tax jurisdictions; and (ii) rules applicable to transactions under a privileged tax regime or carried out with parties domiciled in low-tax jurisdictions.
Rules applicable to transactions with related parties, except for transactions with parties subject to privileged tax regimes or domiciled in low-tax jurisdictions.
Debt equity ratio: 2:1
Notwithstanding the rules limiting the deductibility of interest expenses foreseen in the Brazilian transfer pricing legislation, the interest paid or credited by a Brazilian source to a related legal entity or individual, resident or domiciled abroad, will be deductible within the fiscal year for purposes of calculating the corporate income taxes if they cumulatively meet the following requirements:
• In case of the debt funding extended by a related entity abroad with corporate interest in the Brazilian company, the sum of the debt funding, verified on the date of the accrual of the interest, shall not exceed two times the amount of equity participation of the related foreign party in the net equity of the Brazilian company;
• In case of the debt funding extended by a related entity abroad with no corporate interest in Brazilian company, the sum of the debt funding, verified on the date of the accrual of the interest, shall not exceed two times the amount of the net equity of the Brazilian company.
For purposes of the calculation of the total debt funding, every form and term of financing shall be considered by the Brazilian company, regardless of the registry of the contract with the Brazilian Central Bank.
This rule also applies to debt funding transactions raised by Brazilian entities whereby the guarantor, legal representative or any intervening party is a related party abroad.
In case any excess is verified in what concerns the limits set in items I and II above, the exceeding interest will be considered an unnecessary and non-deductible expense in the calculation of the corporate income taxes.
Additionally, the new requirements for the tax deduction of the interest expenses do not exclude the existing deductibility requirement prior to the new rules, according to which the expenses and costs will only be tax deductible if they are necessary, usual and normal to the taxpayer’s activities.
Rules applicable to transactions under a privileged tax regime or carried out with parties domiciled in low-tax jurisdictions
Debt equity ratio: 0.3:1
Similar to the rules mentioned above, whenever the interest is credited or paid by a Brazilian source to any individual or legal entity resident, domiciled or organized in a low-tax jurisdiction or subject to a privileged tax regime according to Articles 24 and 24-A of Law 9,430/96, the amount of the debt funding meeting such specifications will have to observe a limit of 30% of the net equity of the Brazilian party, regardless of any effective equity participation held by the foreign party in the Brazilian entity.
In case any excess is verified in what concerns the limits of this case, the exceeding interest will be considered an unnecessary and non-deductible expense in the calculation of the corporate income taxes.
11.6. Interest on Equity
Law No. 9,249/95 determines that a Brazilian company subject to the actual profit regime may pay or credit interest on equity to its partners/shareholders and consider the corresponding expenses as deductible from the taxable basis of the IRPJ and CSLL, provided that the legal requirements are met.
The IOE to be paid or credited and deducted as an operational expense cannot exceed the following limits: 1) the amounts resulting from the application of the TJLP, pro rata die, over the company’s net equity accounts indicated in the legislation and 2) 50% of the net profits or 50% of the retained earnings, whichever is higher.
The IOE paid or credit is subject to the Withholding Income Tax (IRRF) at a rate of 15% (or 25% if the beneficiary is located in a low tax jurisdiction).
11.7. Withhold Income Tax (“IRRF”) in foreign payments – (services, royalties, interests)
The incomes, gains derived from capital and other revenues paid, credited, delivered, applied or sent, through resource placed in the Brazil, to the individual or to the legal entity domiciled abroad are subject to levy at withholding income tax (“IRRF”).
The quoted tax levies on the rates of:
(i) 15% on transactions not taxed according to the specific manner provided for in Law as well as on (a) the gains derived from capital concerning investments performed via foreign currency; ; (b) alimony and reserve funds; and (c) the awards obtained through competitive examination or competitions. Please refer to item 11.2.3 – Non-residents for the taxation applicable over the gains derived from capital assessed upon assignment of goods and rights.
(ii) 25%: (a) on the revenues proceeding from any transaction under which the beneficiary is resident or domiciled in country where the taxation system is subsidized and; (b) on the labor revenues, with or without employment relationship, or on the revenues regarding rendering of services.
It shall be noted that the services taxed by CIDE [Contribution for Intervening on Economic Domain], whose applicable rate is of 10%, are entitled to a reduction of the IRRF to 15%, unless the beneficiary of the remittances is located in a low-tax jurisdiction. In this case, IRRF will be levied at a 25% rate plus the CIDE at a 10% rate.
11.8. Social Contributions on Revenues (“PIS” and “COFINS”)
The Contribution for the Financing of Social Security (“COFINS”) and the Social Integration Program (“PIS”) shall be levied over the revenues received by the Brazilian legal entities, with the exception of few cases.
Laws Nos. 10,637/02 and 10,833/03 introduced the system for verification of PIS/COFINS [Social Integration Program/Contribution for Social Security], which applies to the major of the companies. The intent of the new legislation is to prevent the accumulation of this contribution by way of grant of tax credits. Nowadays, with few exceptions, PIS/COFINS levy on a combined rate of 9.25% (COFINS – 7.6% and PIS – 1.65%).
Under the non-cumulative system of calculation of PIS and COFINS, the taxpayer is entitled to the record the tax credit related to the contribution pursuing from the transactions of:
1. goods acquired for purposes of resale, excepting for those goods expressly referred to;
2. goods and services used as input for the rendering of services and for the production or manufacturing of goods or products addressed to sale, including fuels and lubricants;
3. electrical and heat powers, including steam Power, consumed in the legal entity’s establishments;
4. payment of leases of buildings, machines and equipment to companies for the use thereof in the company’s transactions;
5. amount of the considerations of commercial lease transactions of legal entity;
6. machines, equipment and other goods incorporated to the fixed assets acquired or manufactured to be leased to third parties or used in the manufacturing of goods intended for sale or in the rendering of services;
7. buildings and betterments in own real property or real property pertaining to third parties used in the corporate activities;
8. goods received in return;
9. storage of good and freight in the sale transaction, for cases (i) and (ii), when the burden is supported by the seller;
10. meal coupons, transportation and uniforms provided to employees by a company which explores activities of cleaning, conservation and maintenance services; and
11. goods incorporated to the intangible assets, acquired for the utilization in the production of goods destined to sale or in the rendering of services.
The credits may be used to reduce the PIS/COFINS that levy on the revenues of the company. This form does not apply to the cooperative organizations, immune or exempt companies, companies taxed by income tax based on the assumed or arbitrated profit, legal entities that have adopted the SIMPLES [Unified Tax Collection System], to the revenues arising out of rendering of telecommunication services, arising out of services of call center, telemarketing, phone collecting and phone services companies in general, to revenues arising out of software related services, among others.
The financial revenues, which were subject to a zero rate of PIS/COFINS as long as the taxpayer was under the non-cumulative system, begin to be subject to the 4.65% combined rate as from July 1st, 2015, as per Decree No. 8,426/15.
Law No. 10,865/04 introduced the taxation of PIS and COFINS on imported products and services. This law determines that PIS and COFINS are due in the entry of foreign goods in Brazil and in the payment, crediting, delivery, the use or remittance of amounts to foreign residents or domiciled abroad as payment for the services supplied.
The taxpayers thereof are all the importers and companies or individuals that contract the services of individuals or companies domiciled abroad. The general tax rates of the PIS and COFINS – Import contributions for imports of goods is 11.75% and the tax basis shall be the customs value of the imported goods. In the import of services, the applicable tax rate is 9.25% and the tax basis is the value paid, credited, delivered, employed or remitted abroad, before the deduction of the withholding income tax, plus the Municipal Services Tax (ISS) and the PIS and COFINS contributions.
11.9. Contribution for Intervention in Economic Domain (“CIDE”)
The Brazilian companies that hold licenses to exploit rights, purchasers of know how or parties to contracts that imply in the transfer of technology executed with non-residents and domiciled abroad are subject to CIDE taxation.
As of January 1, 2002 the CIDE contribution is also paid by companies that supply technical services, administrative assistance and other similar services, as well as by the legal entities that pay, credit, deliver, use or remit royalties, of any type, to beneficiaries resident or domiciled abroad.
The CIDE contribution is due over the amounts paid, credited, delivered, used or remitted, on a monthly basis, to non-resident beneficiaries, such as remuneration of the transactions above mentioned.
The payments for use license and rights for commercialization of software, in cases which do not involve technology transfer are not subject to CIDE.
The CIDE tax rate is of 10% and the taxpayer is the Brazilian legal entity. CIDE shall be collected on the last business day of the fortnight subsequent to the month in which the taxable event takes place.
11.10. Contribution for intervention in the economic domain (“CIDE”) over combustion fuels
This contribution is due over the import and sale of certain types of combustion fuels (petrol, diesel oil, aircraft kerosene and other types of kerosene, gasoline, liquefied petrol gas, including the by-products of natural gas, methanol and naphtha) in a fixed amount in Reais [Brazilian currency] pursuant to the measure unit adopted for each of the products susceptible to contribution.
The CIDE contribution is payable by the producer, mixer or importer of combustion fuels. In the domestic market, the taxpayer may deduct the amount of CIDE, paid in the export or commercialization, from the amounts of contribution for PIS/COFINS due in the commercialization, in the domestic market. The CIDE contribution is not due over the revenue that results from the exports of the aforesaid products.
11.11. Contribution for the Development of the Brazilian Cinematographic Industry (“CONDECINE”)
This contribution is due over the exhibition, production, licensing and distribution of movies and photography work in video with profit purposes, per market segment, and it is calculated based on the period of work on predetermined basis.
The contribution is also levied on the provision of services that might distribute, effectively or potentially, conditioned audiovisual contents and on the placement or distribution of advertising audiovisual material that is included in international programming and in which there is direct participation of a national advertising agency.
CONDECINE is also due at the tax rate of 11% on the amounts paid, credited, remitted, delivered or used by local agents to foreign producers resulting from the exploitation of audiovisual work in Brazil.
11.12. Export Tax (“IE”)
The export tax is due upon export transactions. The IE ad valorem tax rate is applied according to a limited product list and varies according to the type of product that is being exported.
11.13. Import Tax (“II”)
The import tax is due upon the clearance by customs of the imported products, according to an ad valorem tax rate. The tax rate varies according to the tariff classification of the imported product. Imports of products are also subject to IPI (Federal Excise Tax), ICMS (Sales Tax) (further addressed below) and PIS/COFINS-Import. These taxes, jointly with the import tax, are calculated as follows: the import tax is applied over the CIF price of the imported product; the IPI tax applies over the CIF price plus import tax; the ICMS tax applies over the CIF price, plus import tax, IPI tax, the PIS/COFINS-Import and the ICMS tax and the PIS/COFINS-Import applies over the CIF price.
11.14. Tax on the Circulation of Products and Services (“ICMS”)
The ICMS tax is a State tax that is due over the importation and circulation of goods and, also, the supply of interstate and intermunicipal transport and communication services.
The ICMS tax rates and tax benefits vary from State to State and depend on the type of transaction (e.g., intrastate or interstate sale of goods, communication or transportation services, etc.). In the State of São Paulo the most common tax rates currently are (i) 12% over transportation services; (ii) 18% over importation and circulation, within the State, of goods; and (iii) 25% over communication services.
The ICMS is due over imports by companies and individuals, even when not considered taxpayers for the purposes of ICMS payment, at a tax rate of 18%. The other tax rates may be applied depending on the product/service. The tax rates may also vary in interstate transactions (usually 7% or 12% depending on the state of destination of products and services, or 4% in case of imported goods or goods with imported content higher than 40%).
The ICMS system allows the taxpayer to offset the ICMS paid upon the purchase of products and services with the tax amount due in subsequent taxable transactions (e.g., sale of goods and services subject to ICMS tax). The difference amount such amounts shall consist of the amount due to the State.
As of 1 November 1996, importers/purchasers may be credited by the ICMS paid over imports and local purchases of fixed assets (which was prohibited up to 1 November 1996). Nevertheless, Supplementary Law No. 102/00 introduced a new system for the use of ICMS credits upon the purchase of fixed assets, according to which the taxpayer may record the aforesaid credits at a 1/48 monthly rate.
In regard to taxpayers that have excess of ICMS tax credit, some state laws establish alternatives that allow the taxpayer to transfer its credits. In the State of São Paulo, for example, the state law offers three options for the taxpayer that has an excess of ICMS tax credit to use the tax already paid (instead of offsetting same with ICMS debt), namely: (i) transfer of ICMS credits to any of its affiliates or offices established in the state of São Paulo, (ii) transfer the credits to an inter-dependent company, as defined by the law, or (iii) use the credits to pay suppliers of raw materials and/or certain fixed assets. Other state laws may establish other options for the use of ICMS credits.
11.15. Federal Excise Tax (“IPI”)
The IPI is a federal tax that is due over manufactured products upon the outflow from the establishment where they were manufactured. The IPI tax is also due over the import of manufactured products in the case of import of a product used as an input and its subsequent sale by the importer. The IPI tax rates vary according to the product’s essentiality.
The IPI is due in each stage of the manufacturing process of the industrialized products, and also in the import thereof. This tax is paid upon the purchase or import of raw materials and products, parts, intermediary components and packaging materials and may be offset in subsequent transactions.
11.16. Municipal Services Tax (“ISS”)
ISS is a municipal tax levied on the supply of any type of services, as defined in federal Supplementary Law (LC). This tax is currently governed by Supplementary Law (LC) No. 116/03. The rate of ISS varies between 2% and 5%.
ISS is due generally for the Municipality where the establishment rendering services is located. The following exceptions are determined in LC No. 116/03: civil construction, services acquired abroad, sweeping and collection of garbage services, treatment of effluents, environmental sewage, forestation, parking security, storage and amusement services.
As of January 2004 the ISS tax is due over the purchase of foreign services, the Brazilian beneficiary thereof being liable for the payment of the tax, in addition to its levy over exports of services when the results occur in Brazil (despite that the payment is made by a foreign resident).
11.17. Tax on Financial Transactions (“IOF”)
Decree No. 6,306/07 regulates the IOF and since its enactment suffered successive amendments in order to institute new tax rates.
With respect to IOF-credit, which applies to in case of credit transactions of any nature, the tax is due at the delivery moment of the value which shall constitute the obligation object, or at the moment it is made available for the interested party. Concerning the credit transactions with term and values determined, the IOF applies over the main loan at a tax of 0.0041% per day, in case of legal entity borrower, or of 0.0082% in case of an individual borrower, followed by a supplement of 0.38 %, totalizing maximum amount of, respectively, 1.88% and 3.33%.
For payments with undetermined terms, it also applies the tax rate of, respectively, 0.0041% and 0.0082% per day, for the legal entity borrower and individual borrower, followed by a supplement of 0.38 %, but there is a specific methodology of calculation to benefit the amount of the due tax.
The tax on the financial transactions is levied also on determined exchange transactions (“IOF-exchange”). Recently, for the majority of transactions in which the IOF-exchange is due, a tax rate of 0.38% applies.
Notwithstanding, the IOF-exchange falls upon the tax of 6% on loans assigned for non-resident to Brazilian companies which the date of settlement is less than 181 days and 6.38% in relation to exchange transactions carried out by credit card administrators to cover debts carried out by their clients in a foreign country. For income arising from export to due IOF-exchange rate is of 0%. In addition, a 0% rate applies to the inflow of funds to be invested in the Brazilian financial and capital market by non-residents.
In addition to the levy of IOF over credit and exchange transactions, this tax also is due over financial transactions related to insurances (mostly the tax is levied at a 7.38% rate), title deeds and real estate (with taxes that in the majority of transactions oscillate between 0% and 1.5%) and upon transactions with gold, financial assets, or exchange instrument, under the rate of 1%.
11.18. Provisional Contribution on Financial Activities (“CPMF”) – (dismissed since 2008)
Law No. 9,331, of October 24, 1996, created the CPMF, a tax that apply over all the banking transferences and currency withdrawals to obtain temporary term at a rate of 0.38%. Although, the term of this contribution was repeatedly extended, as it was predicted through the Constitutional Amendment No. 42/2003 the possibility of collection of this contribution up to December 31, 2007. The new constitutional amendment that afforded on the extension of CPMF from 2008 was not approved, being this dismissed from January, 2008.
11.19. Tax on Urban Buildings and Property (“IPTU”)
IPTU is a Municipal tax that is levied on an annual basis, which tax rates are normally progressive, based on the use and appraised value of the real estate property.
11.20. Tax on the Transmission of Real Estate Property (“ITBI”)
ITBI is a Municipal tax levied over the transfer of real estate property. The tax rates may vary according to the real value of the transaction or the appraised value of the real estate, whichever is higher. Note that, in the Municipality of São Paulo, the tax authorities are allowed to update the appraised value of the real estate through market researches. In addition, in the Municipality of São Paulo, ITBI has a fixed tax rate of 3%. The ITBI tax is not due in the transfer of real estate property in the events of merger of companies or contributions for the paying up of the capital stock in cases where the taxpayer’s corporate objective is not related to the real state activity.
11.21. Tax on Transmission of Property Causa Mortis and Donations (“ITCMD”)
The ITCMD is a state tax levied on the transmission of chattels or real estate property by way of donation or death (inheritance). Currently, in the State of São Paulo, the ITCMD tax rate is 4% of the appraised value of the chattels or real estate or the transmission of rights.
(1) Article 258 of the Income Tax Regulations:Taxable Income is the net profit of the period of assessment adjusted by the additions, exclusions or compensations prescribed or authorized by RIR [Income Tax Regulations].
(2) The Brazilian Federal Revenue Department (“RFB”) has listed, for purposes of Brazilian taxation system, the jurisdictions considered as low-tax jurisdictions – the so-called “tax havens” – (Normative Instruction of SRF No. 1,037/10). Such countries include American Samoa, American Virgin Islands, Andorra, Anguilla, Antigua and Barbuda, Aruba, Ascension Island, Bahamas, Bahrain, Barbados, Belize, Bermuda Islands, British Virgin Islands, Brunei, Campione D’Italia, Cayman Islands, Cook Islands, Channel Islands (Alderney, Guernsey, Jersey, and Sark), Dominica, Curacao, Cyprus, Djibouti, Federation of Saint Christopher and Neveis, French Polynesia, , Gibraltar, Grenada, Hong Kong, Ireland, Isle of Man, Kiribati, Labuan, Lebanon, Liberia, Liechtenstein, Macao, Maldives, Malta, Mauritius Islands, Marshall Islands, Monaco, Monserrat Islands, Nauru, , Niue Islands, Norfolk Island, Occidental Samoa, Oman, Panama, Pitcairns Islands, Qeshm Islands, Santa Lucia, Saint Helena Islands, Saint Martin, Saint Pierre et Miquelon Islands, Saint Vincent & Grenadines, San Marino, Seychelles, Solomon Islands, Swaziland, Tonga, Tristan da Cunha, Turks & Caicos Islands, United Arab Emirates and Vanuatu. In addition, according to article 2 of the Normative Ruling No. 1.312/12, new regimes were classified as “privileged fiscal regimes” by the Brazilian Federal Revenue, such as certain regimes of the following jurisdictions: Austria, Costa Rica, Portugal and Singapore.
(3) Normative Instruction No. 1,312/12 defines “similar property” as that containing, concomitantly: (i) the same nature and the same function as well; (ii) as the property susceptible to mutual compensation so as to hold the function whereto it has been planned; and (iii) equivalent specifications.
Authors: Alessandra S. Machado, Clarissa G. Machado, Juliana P. Assis, Thiago Del Bel and Steffania Scomparin
Trench, Rossi e Watanabe Advogados