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

Silvania Tognetti
November, 2011

GREAT MOMENT FOR BUSINESS
In 2010, the country’s economy grew 7.5%, making it the
seventh-largest in the world, according to the World
Bank.
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
infrastructure.
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

But...
...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
that...
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
everybody.

Article 7 OECD Model Convention: Services
Payments made by Brazilian residents to foreign services
providers are subject to withholding income tax at 15% or
25%.
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
currency.
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
Court.
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
capitalization.
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
debtor.
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
lender

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
GAP.

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
(Confaz).
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
services.
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.

Obrigada!

Silvania Tognetti
SP +55 11 3638-7013
RJ +55 11 3077-3912
silvania.tognetti@bpgm.com.br
Rua Olimpíadas 100 – 6º. andar
São Paulo | SP | Brasil | CEP 04551-000
Fax +55 11 3638-7040 / 7050
http://www.bpgm.com.br