Brazil: BRAZILIAN TAX REVIEW – October 2017

ICMS Tax War May be Coming to an End

The Brazilian Congress has passed Supplementary Law 160/17, the main goal of which is to end the so-called "ICMS Tax War" among the Brazilian states. This tax war consists of states granting ICMS tax breaks without following constitutional procedures, leading states to disregard each other's tax breaks when they levy taxes.

The Supplementary Law authorizes states to validate all the unconstitutional tax breaks and cancel the assessments involving the issue. However, the law itself does not established any automatically effective provisions because all of its terms depend on the states approving an agreement listing its specific terms, including the disclosure of all the unconstitutional tax breaks they have granted in the past.

The states must approve the agreement by February 2018, otherwise Supplementary Law 160/17 will become ineffective.

Tax Reform Under Discussion

Once again, the Brazilian Government is discussing a broad tax reform. The reform bill proposes combining all indirect taxes into a single VAT that would be divided into two types according to the kind of goods taxed – one general and the other applicable to specific products, such as energy, fuel, communications, cigarettes, spirits, vehicles, tires and auto parts. There is also a provision to combine the Social Contribution on Net Profits and the Corporate Income Tax into a single Income Tax.

The government's proposal is not intended to reduce the Brazilian tax burden, but solely to bring some rationality to it by simplifying tax routines, calculation and ancillary obligations.

Reintegra Benefit Reduced to 2% in 2018

REINTEGRA is a program that aims to refund the residual costs of taxes paid throughout the exportation chain to taxpayers, in order to make them more competitive on international markets.

Originally, the refund rate was to be 2% in 2017 and 3% in 2018. However, the Brazilian Government has decided to maintain the REINTEGRA rate at 2% in 2018, which will directly impact Brazilian exporters.

Brazil and Japan Sign a Mutual Cooperation Agreement

Brazilian and Japanese authorities have entered into an agreement aiming at increasing their cooperation regarding trading and customs regulations, as well as preventing fraud and violations of regulations in these fields. The terms of the agreement will benefit companies that are already part of the Authorized Economic Operator ("AEO") program, the main objective of which is to reduce customs barriers by certifying traders that have historically been in compliance with local and international rules on this matter.

The legislative authorities of both countries still need to confirm the agreement so that it can become fully effective.

Brazilian Government to Charge The Revoked Additional 1% of Cofins on Imports

Even though revoked by a Provisional Measure (PM) enacted by the President, the 1% additional COFINS rate on Imports is deemed in effect by the Brazilian Internal Revenue Service, due to the fact that the National Congress rejected the PM that revoked the tax.

Based on that, the Brazilian IRS has stated that the additional 1% rate has become valid again and that taxpayers must pay it on customs clearance. This position, however, is being criticized by taxpayers who argue that a new law is necessary to reestablish the additional 1% rate.

Federal Revenue Office Regulates the Tax Aspects of Investments in Start-Ups By Angel Investors

Normative Ruling 1,719/2017, issued by the Brazilian Federal Revenue Office, states that angel investments in start-ups will be similar to financial investments for tax purposes.

Therefore, the profits distributed by the start-ups, as well as the gain derived from the investment refund or from the sale of the rights of conversion into capital, must be considered financial income and are subject to Withholding Income Tax ("WHT").

The tax rate is determined by a specific tax table, according to the elapsed time between the investment's pay-in and the income payment, as follows: (i) 22.50% for income earned before 180 days; (ii) 20.00% for income earned after 181 days and before 360 days; (iii) 17.50% for income earned after 361 days and before 720 days; and (iv) 15.00% for income earned after 720 days.

Superior Court of Justice Holds That Cide-Royalties Applied to Software Imports With no Transfer of Technology From 2000 to 2006

The Superior Court of Justice has held that the import of software licenses and the right to commercialize and distribute software were subject to CIDE-Royalties from 2000 to 2006, even if there was no transfer of technology.

Law 10,168/2000 created this tax in 2000, establishing the payment of royalties to non-residents as the triggering event. A few years later, Law 11,452/2007 stated that CIDE-Royalties does not apply to the import of software with no transfer of technology (i.e., when the source code is not provided to the beneficiary).

The discussion that took place is whether Law 11,452/2007 was interpretative in nature and, therefore, should be retroactive, or whether it established a tax exemption and, thus, applied only to the future transactions.

The Superior Court of Justice held that Law 11,452/2007 established a tax exemption and, therefore, CIDE-Royalties must apply to software imports with no transfer of technology for the periods before its enactment.

Reimbursement of Expatriates' Wages From Brazilian Companies to Their Head Offices Abroad are Not Subject to Taxation

The Federal Revenue Office has issued Private Letter Rulings 378/2017 and 440/2017, stating that the amounts paid by a Brazilian company to its head office located abroad, as a reimbursement for the wages of the expatriate employees working in Brazil, is not subject to taxation.

Since the wages received abroad by the expatriates are subject to the individual income tax on a universal basis in Brazil, the reimbursements from the Brazilian company to its head office should not be subject to any taxation, in order to avoid a double taxation.

New Amendments in the Double Taxation Convention Between Brazil and Argentina

Brazil and Argentina have signed an amending protocol to their double taxation convention, which introduced several modifications related to: (i) measures to prevent BEPS; (ii) incorporation of changes in the OECD and United Nations model conventions; and (iii) amendments that reflect the countries' specific tax treaty policies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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