Silvania Tognetti, Brazil, Pereira Neto, Galdino, Macedo Advogados ...

Silvania Tognetti, Brazil, Pereira Neto, Galdino, Macedo Advogados ...

Silvania Tognetti

November, 2011


In 2010, the country’s economy grew 7.5%, making it the

seventh-largest in the world, according to the World


In 2011, Brazil’s GDP is expected to grow 4.5%, lower

than in 2010, but still a good result.

In the next years with 2014 World Cup and 2016 Olympic

Games that will attract huge investments in urban


According to the United Nations Conference on Trade

and Development, Brazil ranked fifth among all countries

in foreign direct investment inflows in 2010

Challenges in Brazil

an incomprehensive and expensive tax system

a highly complex labor environment

burdensome bureaucracy

High interest rate in credits transactions

troublesome corruption in all areas and levels

deep social imbalances with violence as result


...your company or your client will

do business with or in Brazil,

sooner or later!

Then, you should know three things about

to invest in Brazil:

It costs three times more

It takes three times longer

It makes three times more PROFIT!

And you would better know that...

Brazilian Interpretation for Article 7 of OECD Model

Convention doesn’t include on it income for services

rendered to Brazilians residents.

Tax on Financial Transaction in a “fictional outflow and

inflow of funds”

CFC rules in Brazil applies for all controlled or associated

foreign company.

Transfer Pricing rules in Brazil adopt fixed margins for all

different types of business.

And you would better also know


Thin capitalization in Brazil may turn expenses with

interests non deductible.

In order to calculate corporate taxes, the new Brazilian

GAP is not applicable, but the old Brazilian GAP.

There is a war among Brazilian States: ICMS!

The no cumulative system for payment of PIS and Cofins

(Social Contributions on gross revenues) is a puzzle for


Article 7 OECD Model Convention: Services

Payments made by Brazilian residents to foreign services

providers are subject to withholding income tax at 15% or


Taxes authorities interpret that Article 7 of Double

Taxation Treaties doesn’t apply.

Court decisions recognize application of Article 7.

Brazil has no Double Taxation Treaty with Germany due to

this type of special interpretation.

French tax authorities deny tax credit calculated on

income tax paid in Brazil.

Turning Debt into Equity

In Brazil, inflow and outflow of funds are controlled by

Brazilian Central Bank.

Tax on financial transactions (IOF) applies in exchange of


In order to attend exchange control rules, if a foreign

lender decides to turn its credit into debtor equity,

registration of outflow and inflow of funds is necessary,

and a exchange agreement will be needed.

Tax on financial transactions apply in this transaction.

Recent thin capitalization rules X IOF

CFC Rules

Article 74 of Provisional Measure 2,158-35/ 2001 provided

that the income generated by a foreign controlled or

associated company will be deemed available to the Brazilian

controlling or associated company as of the date of the

balance sheet in which such amounts are reflected, for the

purposes of calculating the bases for the Income Tax (IR) and

the Social Contribution on Net Profit (CSLL).

Note that it applies for all controlled or associated company.

Constitutionality of Article 74 is under review by Supreme


Superior Court of Justice recognizes the legality of article 74,

but there is recent decision in the sense that profit is not the

equity value of controlled or associated company.

Margins in Transfer Pricing

Unique in the world: aims to achieve the arm´s length

standard by making use of a series of safe harbors and

fixed formula.

Taxpayer is faced with a tough practical reality: he would

need to apply one price in order to fit into the Brazilian

transfer pricing standards, and another different price, in

order to attend the OECD transfer pricing regulation.

Certainty of Brazilian system: development of an

objective methodology to reduce risk of assessment.

Safe harbors in exportation limit the number of taxpayers

that must demonstrate Transfer Pricing accomplishment.

Margins in Transfer Pricing

Transfer pricing adjustments in imports of assets, goods,

services or rights: (i) Comparable Independent Prices (PIC); (ii)

Resale Price less 20% Profit (PRL 20 - for goods imported and

resold without undergoing any industrial process in Brazil); (iii)

Resale Price Less 60% Profit (PRL 60 - for imported goods

which undergo further industrialization in Brazil); (iv)

Production Cost Plus Profit (CPL).

If the taxpayer does not benefit from any safe harbor, any one

of the following four methods can be used to calculate the

benchmark for exports: (i) Export Sales Price (PVEX); (ii)

Wholesale Price in Country of Destination Less Profit (PVA)

15% profit margin; (iii) Retail Price in Country of Destination

Less Profit (PVV) 30% retail margin; and (iv) Purchasing or

Production Cost Plus Taxes and Profit (CAP) (15% margin).

Thin Capitalization

Limits for deduction of interests from income tax basis (and also

social contribution on profit). It is not a prohibition of thin


Applicable for related party loans from abroad (debt-equity ratio

of 2 to 1) and for loans from companies located in tax haven

jurisdictions or considered as privileged tax regimes (a

debt/equity ratio of 0.3 to 1).

The limitation still applies if the loan is taken from a non

resident bank and the guarantor is related to the Brazilian


Beneficiaries located in tax havens or considered as privileged

tax regimes: Interest payments made to beneficiaries in such

circumstances are deductible only if the Brazilian debtor is able

to demonstrate some sort of substance evidences of the foreign


Brazilian GAP: IFRS and Pre-IFRS

Provisional measures established the RTT (Transitory Tax

Regime) in 2009 in order to neutralize the impact of new

IFRS accounting methods

Pre-IFRS tax rules still apply to calculate main federal taxes

on the basis of accounting rules in force until December

2007 (when the transition from the former Brazil GAAP to

IFRS began).

It will continue until a new tax law that considers the

current Brazil GAAP effects is issued.

“Fcont” registers the differences between the two Brazilian


States War: ICMS

26 States have the power to enact their own ICMS law,

collect it, interpret it and judge the taxpayers defenses on

tax assessments.

Tax incentive on ICMS depends on approval of all States


When the tax incentive is unilaterally enacted by a certain

State, the Supreme Court must review the constitutionality

of the State Law.

States decided to disregard tax credits on acquisition of

goods from a company that is entitled to a tax incentive in

one State that was not regularly approved by all States.

PIS and Cofins

Pis and Cofins are social contributions on gross revenues.

There are two regimes for PIS and Cofins: cumulative and

non cumulative.

There are also PIS and Cofins on importation of goods and


In non cumulative regime, the taxpayer is allowed to offset

credits of Pis and Cofins that were paid by its providers.

However, definition of which goods or services allow the

tax credit is very difficult.

By a computer system, tax authorities aim to end disputes

with taxpayers regarding these credits.


Silvania Tognetti

SP +55 11 3638-7013

RJ +55 11 3077-3912

Rua Olimpíadas 100 – 6º. andar

São Paulo | SP | Brasil | CEP 04551-000

Fax +55 11 3638-7040 / 7050

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