Brazilian Tax Highlights An overview for foreign investors 20 - - PowerPoint PPT Presentation

Brazilian Tax Highlights

An overview for foreign investors

www.pwc.com

20 April 2017

Contents

Tax transparency Cash repatriation Q&A Appendices

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Tax transparency and efficiency in Brazil

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CbCR and MCAA

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Simplification

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Tax audits in Brazil

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Exchange of information on tax rulings Identification of beneficial owners

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CbCR and MCAA

Tax transparency and efficiency in Brazil

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The 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

• n 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.

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The 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.

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What is Action Plan 13?

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3 Detailed transfer pricing information of transactions taking place between the 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 global allocation of income, taxes paid and due for each entity of the group. Overview of the global business of the multinational enterprise, transfer pricing policies and allocation of income and activities.

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Master File Local File Country-by-Country Report

Normative Instruction 1,681/2016

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Normative 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).

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*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.

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Normative Instruction 1,681/2016

Who is obliged to prepare the CbCR in Brazil  Ultimate controlling entity

• f the group, resident for tax

purposes in Brazil;  Substitute reporting entity;

• r

 Subrogate entity resident for tax purposes in Brazil (under certain situations, such as systemic failures). Where and When the CbCR needs to be filed  To be filed with the Brazilian Income Tax Return: ECF – Electronic Tax Bookkeeping;  First filing deadline will be on 31/07/2017, regarding tax year beginning on 1 January, 2016. Penalties  Entities failing to file, filing late: fines ranging from BRL 500/ month; and  3% on any amount that has not been declared or that was inaccurately / incompletely reported.

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Normative Instruction 1,681/2016

Relevant aspects to be considered

Increasing substance, transparency and consistency! Joint Venture investments should be reported in the CbCR by one

• f its shareholders (the investors should define who will perform

this obligation).

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Financial information should be disclosed with the full amount registered in the financial statements (i.e.: 100%) of each entity, regardless of the participation interest of the ultimate controlling entity in those investments. Information should be reported using the currency of the group’s ultimate controlling entity.

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Multilateral 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.

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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).

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CbCR 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.

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Tax transparency and efficiency in Brazil

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Exchange of information on tax rulings

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Exchange 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.

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Tax transparency and efficiency in Brazil

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Identification of beneficial owners

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Identification 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).

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Tax transparency and efficiency in Brazil

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Simplification

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Time spent to comply with tax obligations (in hours per year)

Source: Paying Taxes 2017 : the global pictures

(www.pwc.com/payingtaxes)

Simplification of tax compliance burden

• 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).

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Tax transparency and efficiency in Brazil

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Tax audits in Brazil

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Focus 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
• fficials to analyse and select taxpayers for tax inspections. Relevant information typically relates to
• wnership 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.

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“Life Cycle” of an Administrative Federal Tax Dispute in Brazil

Tax assessment

May 01st, 2017 May 31st, 2017

Defense by Taxpayer within 30 days from the date of receipt of the tax assessment Decision of the FTA (“DRJ”). The FTA may drop, confirm or partly modify its assessment without any time limit

Automatic Appeal, in case of a dropping or partly modification of the tax assessment (only mandatory for

• ver BRL 2,5

Voluntary Appeal by the taxpayer in case of a confirmation or partly modification of the tax assessment (30 days)

OR/ AND January 15th, 2021.

Tax audits in Brazil – tentative timeline

22 November 3oth, 2018 December 3oth, 2018

Decision of the Administrative Tax Appeals Council (“CARF”). CARF may confirm or modify the decision of DRJ without any time limit (the

December 3oth, 2020

Divergence Special Appeal* by the taxpayer

• r the National Treasury

Attorney’s Office (“PGFN”) in case of rejection or success, respectively, of the Voluntary Appeal (15 days). *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.

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Divergence Appeal by the taxpayer in case of a success of the Automatic Appeal) (15 days). In case the Automatic Appeal is rejected, the tax dispute is over in benefit of the taxpayer. Decision of the Administrative Tax Appeals Council (“CARF”). CARF may confirm or modify the decision of DRJ without any time limit (the

“Life Cycle” of an Administrative Federal Tax Dispute in Brazil

July 15th, 2022 August 15th, 2022

Tax audits in Brazil – tentative timeline

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Final decision of the Higher Chamber of the Administrative Tax Appeals Council (“CSRF”). CSRF may definitely decide in favour of the taxpayer (tax assessment is cancelled) or the PGFN (taxpayer must pay the tax debts), without any time limit (the response may

Payment of tax debts (including interest and penalties) within 30 days from the notification of the final decision of CSRF. 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.

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Cash repatriation

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WHT on service fees

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Cost-sharing agreement

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Overview on other cash repatriation fllows

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Cash repatriation

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WHT on service fees

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Withholding 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”)

• f 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.

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Withholding income tax on cross border remittances related to service fees – treaty application

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Service Provider Abroad Br Co

* Or treaty jurisdictions that art. 7 does not

apply to service fees. In any case, FTC possibility should be considered Service fee (-) WHT Net fee Non treaty country* Service Provider Abroad Br Co Service fee Treaty country * *

** Examples of treaty jurisdictions that art. 7

applies to service fees: Japan, France, Austria, Finland, Sweden Treaty country

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Withholding income tax on cross border remittances related to service fees – key considerations

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Main advantages No Brazilian WHT on remittances of service fees Important remarks 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) Special procedures should be taken to guarantee the remittance without the levy of the WHT Possibility to recover WHT unduly paid in the past, limited to 5 years (i.e. WHT paid as from April 2012)

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Cash repatriation

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Cost-sharing agreement

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Cost-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.

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Cost sharing Vs. Service charge

Company A Company B

Cost Sharing

Cost sharing IOF 0,38% Company A Company B

Service fee

Service tax burden 41%/43%

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Cost-sharing agreement - key considerations

Substantial reduction of transaction taxes on a cost sharing 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 remarks Main advantage

Conflicting jurisprudence and administrative guidance on the issue. May lead to tax assessments Attention to the implementation in order to guarantee proper compliance with legislation and jurisprudence guideline

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Cash repatriation

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Overview on other cash repatriation fllows

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Dividends

• 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%

Foreign country

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In case of French parent company, tax costs on dividend: Between 0,3443% to 1,7% in FY17

(1%/5% x 34,43%)

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Interest on equity

• Deductible at the level of the distributing entity, no

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

between France and Brazil, the French company can 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. Interest

• n equity

deductible taxable

WHT 15%

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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)

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Capital reductions

• Provided that the total amount of the capital reduction

is registered with the Brazilian Central Bank, it will

• nly be subject to IOF at 0,38%.
• No WHT.

Capital reduction  IOF (0,38%)

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Capital 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.

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Q&A

Cost-sharing agreement

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Appendices – key aspects of the brazilian tax system

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Key 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.

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Key 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

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Key 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.

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Key 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%

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Gabriel 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