INVOICES

We continue using the example of São Paulo. We emphasize that in Brazil is necessary to obtain authorization for the issuance of invoices, in accordance with the activity and guidance of local

tax authorities.

The company that acts in the area of industry and/or commerce can issue, in accordance with the activity area, one of the following kinds of invoices:

FISCAL BOOKS

There are also some bureaucracy obligations for the company, such as to keep certain fiscal books. Taking as example the Municipal Area of São Paulo, we have the following fiscal books for a trading company (in its simplest format):

FOREIGN INVESTMENT

The registration of foreign capital must be made with Central Bank of Brazil within thirty days counted upon the day of its origin (entrance in the country, conversion, etc.) or ninety days after customs clearance, in case they are made up of tangible assets.

Central Bank of Brazil provides the list of required information and procedures for the foreign capital registration in Circular Letter 2.997.


Investments that are not registered or to which registration is denied, are called “contaminated capital” and it will not be possible to obtain registration as reinvestment (capitalization), remittal of profits attributed to the foreign investor or repatriation.

On the other hand, the Brazilian Central Bank admits the “decontamination” of capital by means of an authorized administrative procedure.

In practice, such process is very straightforward and it could be performed through the internet (it is expected about 1 hour to complete the registration).

TAX LOSS CARRYFORWARD

As already mentioned, starting on January 1, 1996, the offsetting of fiscal losses (IRPJ) and social contribution negative base on income are regulated, respectively, by article 15 and 16 of Law 9.065/95. In both compensations, the calculation base of taxes is limited to 30% of profit in the period after
additions and exclusions to taxable income.

The legal entity that monthly pays the income tax through an estimated calculation, as per a suspension balance sheet or trial balance or as per the annual balance sheet as of December 31, is entitled
to fully offset the fiscal losses and CSLL negative base of certain months of the calendar year with profit of other months of the same year.

There is no concept of tax loss carryback in Brazil, even in case of special operations such as liquidation, merger, among others.

CORPORATE INCOME TAXES

When opting for one method for assessment of tax on income, a Brazilian company should consider all advantages and advantages of each assessment method. For a better understanding of the systems and

respective rates in effect in Brazil, we present the following guide:

For companies subject to Corporate Income Tax (IRPJ), there are three methods for assessing
taxes on income: Taxable Income, Assumed Income and Arbitrated Profit.

As from the calendar year 1996, regardless of their type of business organization and nature of activity performed, legal entities started to pay IRPJ at a rate of 15% (fifteen per cent), applicable on the calculation base assessed either through the taxable income, assumed income or arbitrated method.
On the portion of taxable, assumed or arbitrated profit exceeding the value resulting from the multiplication of R$ 20,000.00 (twenty thousand Reais) by the number of months of the respective assessment period, there is an additional that should be taxed at a rate of 10% (ten percent).

CSLL follows the same system used for assessment and payment of IRPJ and on the amount assessed it should be applied a rate of 9%.

Presumed Profit Method:
It it’s the mandatory method for companies with total revenue over R$ 48 million during the calendar year previous to the assessment, as well as entities that take part of the Brazilian Financial System and that have profits, yielding or capital gains coming from abroad.

Annual Taxable Income System (monthly payment):
In this method of taxation, IRJP and CSLL are monthly calculated, based on revenue. Percentages should be applied on the calculation base (defined in law, as per the activity performed by the
company). This should be added of other non-operating revenue and on that sum it is applied the IRJP rate. An adjust balance sheet has to be prepared in December to compare what was paid during the calendar year with assumed profit and actual result of the company. From that comparison, if it is verified that the amount paid as per the assumed profit (as anticipation) exceeds what was assessed in the adjustment balance sheet, the company should request the refund of what was overpaid or offset the amount with taxes payable of the same type or of a different nature, by means of a request to the Brazilian
Revenue and Customs Secretariat.

INTEREST ON NET EQUITY

Brazilian legislation (Law 9,249/05) states in addition to dividends, Brazilian companies may also pay shareholders with “interest on net equity" (in portuguese, "Juros sobre Capital Próprio").

The Interest on net equity election should result in  a deductible interest amount based on the entity’s net equity calculated from a Brazilian perspective. The interest on net equity represents a tax-deductible item for corporate tax purposes (income tax and social contribution tax on profits currently charged at a combined rate of 34%).

Interest on net equity is calculated by applying the long-term interest rate (TJLP) on the Brazilian entity’s adjusted equity, considering all equity variations occurred during the year (increases and reductions). The interest on equity deduction is limited to the larger of 50% of the payer’s retained earnings and 50% of the payer’s current profits, with some adjustments.

Interest on net equity is subject to 15% Brazilian income withholding tax on the date it is paid or credit to the recipient. Remittances will be also subject to IOF at 0%. The WHT can be reduced if the DTT provisions applies (e.g. Japan - 12.5% WHT).

The interest on equity amount can either be paid by the Brazilian entity to its owners or the amount can be capitalized by the Brazilian entity without the need to make an actual payment (the 15% Brazilian income tax withholding applies in any event and there are discussions whether a “symbolic” IOF would be charged).

The calculation of the interest on net income can be done in monthly, trimester, semester or anual basis. Moreover, the taxpayers can eventually make the election for this procedure till the maximum period of the submitance of the Income Tax Return to the tax authorities (June, 30 of the subsequent year).

The interest on equity deduction can be claimed on an annual basis. 

Retroactive Application.  This is support for taxpayers taking a position that interest on equity can be claimed retroactively in situations where the taxpayer could have benefited from the the election but failed to claim the deduction on its timely filed Brazilian income tax return. 

The statute of limitations in Brazil runs for five years from the filing due date of the income tax return.

Brazilian CADE publishes new merger rules

Following the promulgation of Brazil’s new antitrust law, the Council for Economic Defence (CADE) has published new rules outlining its updated merger control procedures.


CADE this week released the new form merging parties need to file to obtain clearance in Brazil, along with rules on fast-track merger control procedures and the authority’s new internal regulation.


CADE opened a public consultation on the rules, asking lawyers and interested parties to provide comments.
Olavo Chinaglia, CADE’s interim head: “There are several aspects which are yet to be discussed, such as transactions in the stock exchange market or involving private equity funds. Our objective is to finalise the three documents prior to 29 May, when the new antitrust law comes into force.”


Discussion among lawyers in Brazil focused on the changes introduced with the new merger notification form, which contributes to defining how CADE will implement the change from a post-merger to a pre-merger notification system introduced by the new competition law, approved in October and amended by President Dilma Roussef in December.
Under the new rules, the parties must sign a binding document formalising their merger before filing their notification. The merging companies must refrain from concluding their deal and maintain completely separate activities, preserving the reversibility of the merger. But they can apply for temporary exceptions.
Informal discussions between the companies and the authority’s superintendent-general before the filing will be regulated.


José Del Chiaro Ferreira da Rosa, at Advocacia José Del Chiaro in São Paulo, says the rules also provide for a deal to be cleared if CADE fails to review the transaction within a legal term, a point disputed when the law was first passed.


But several lawyers say the rules also give the authority too much power and increase the burden for merging companies to obtain clearance.


José Inácio Gonzaga Franceschini, at Franceschini e Miranda - Advogados in São Paulo, says the authority’s top officials will have too much say over whether to open merger control proceedings.
“The superintendent-general, who has already been awarded excessive authority under the new law, has been granted many more functions and authority than those listed in the new act, including the authority to decide whether an investigation or procedure will be initiated, at his sole and absolute discretion, and based on no specific standards.”


Sérgio Varella Bruna, at Lobo & de Rizzo Advogados in São Paulo, says the new notification form is very complex and CADE requires too much information from merging parties, including information that is unlikely to help in a merger review.


“The new draft form requires the parties to inform the turnover in the previous fiscal year of all companies of their economic groups in relation to all products and services sold by them, without limitation to Brazil, nor to the relevant markets, or to vertically related markets,” he says. “This is certainly too much and it is unlikely that this load of information will bring anything useful for the review of the transactions by CADE.”
Ana Paula Martinez, at Levy & Salomão Advogados in São Paulo, says the new merger form imposes a “significant burden” on the merging parties.


“One example is the list of supporting documentation required, even for cases that do not involve horizontal overlap or vertical integration,” she says. “They require the parties to present all market studies available that are related to all the parties to the transaction. The draft merger form also requires information on the parties' turnover and relevant market in the last five years, rather than in the last year, or the last three years. The draft rules failed to exclude the vendor turnover of the turnover threshold, based on the effects theory. Interpreting the turnover threshold as applicable to the seller's entire corporate family is not consistent with international best practices and CADE could have included this in the new set of rules.”

IOF - FOREIGN LOANS

BRAZILIAN GOVERNMENT INCREASES THE TERM OF LOANS SUBJECT TO IOF/EXCHANGE AT A 6 % RATE


On March 01, 2012, Brazilian federal government published the Decree nº 7,683, that extends the minimum average term from 720 days to 1080 days (3 years), for purposes of applying the 6% IOF/Exchange rate due on the inflow of funds in connection with foreign loan transactions, either contracted directly or by the issuance of bonds in the international markets.

Such increase of the term, which applies to exchange transactions contracted as from March 01, 2012 aims to restrain the excessive upward pressure on the Brazilian currency in view of the inflow of foreign funds into Brazil.

The exchange transaction related to the outflow of funds intended to liquidate this type of loan remains subject to the IOF/Exchange at the zero rate.

Foreign exchange transactions for inflow and outflow of resources related to foreign loans with a minimum average term superior to 1080 days also remain subject to IOF/Exchange at a zero rate.
In view of Decree nº 7,683, Brazilian Central Bank issued Circular No. 3,580, according to which, as of March 02, 2012, export prepayment agreements may be contracted with a maximum term of 360 days. In case such term is not observed, the exporter may convert the amount related to the prepayment in a direct investment or in a foreign loan. In the hypothesis of a loan, IOF/Exchange may be due at a 6% rate, depending on the minimum average term of the agreement.

Additionally, Circular No. 3,580 established that export prepayment agreements may be only contracted with the foreign importer. Before such rule, such transactions could be also agreed with any legal entity located abroad, including financial institutions.

EX-TARIFF - TAX INCENTIVE IMPORTATION

The Tax Exceptions system consists of an instrument through which it is permitted to single out a product or group of products from the customs tax table and give them a different tax percentage rate than that which is applicable in the tax category they originally belong to.

Historically, this mechanism has been used in order to reduce the costs of  investments for the foreign purchases of machines and equipment that are not nationally produced.

The current system contemplates the reduction on the percentage of the Import Tax to 4% for two years.

Once an Ex-Tariff is granted, any other Brazilian company importing the equipment specified on the Ex-Tariff resolution can use it. That means that you might find an Ex-Tariff that matches your product and the duties paid by a Brazilian buyer might be much lower.

How can I determine if my equipment is covered by an Ex-Tariff exemption?

A list of Ex-Tariff is available from the Brazilian government. Here you can download a list in English of the Ex-Tariffs for the most common NCM (HS) codes for packaging machinery, however please note the expiration date.

If you can’t find the HS code of your equipment on the list in English try the one in Portuguese, we will be glad to help you translate the descriptions of specific NCM codes.

How can I request for an Ex-Tariff?

Requests for an Ex-Tariff must be made by a Brazilian person or company. Normally, this procedure is handled by local associations (like ABIA, Brazilian Association of Food Processors).

The first six digits of the NCM codes are the same as the six digits of the HTS code.

What is an HTS code?

All of the import and export codes used by the United States are based on the Harmonized Tariff System (HTS). The HTS assigns 6-digit codes for general categories. Countries that use the HTS are allowed to define commodities at a more detailed level than 6-digits, but all definitions must be within that 6-digit
framework.

The U.S. defines products using 10-digit HTS codes. Export codes (which the U.S. calls Schedule B). Brazil defines their products using 8 digit NCM codes but the first six digits are always standardized.

How can I determine the HTS (also called HS) code for my equipment?

You can try to look it up yourself by using the search engine from the CENSUS BUREAU or by browsing through the Schedule B Book, but the best way to do it is by checking the export documents from a machine that you have already exported.

How can I determine the NCM code (Brazilian HTS code) of a product I’m exporting to Brazil?

By knowing the HTS code, you already know the first six digits of the NCM code. For the last two digits, if you have exported the same equipment to Brazil, you can check the import documents, otherwise you will need the help of a Brazilian customs agent .

TAX MANUALS - ENGLISH VERSION

Most of foreign investors notices that tax manuals provides by Brazilian IRS have only Portuguese version. We have translated into English all Manuals provided by Brazilian IRS.

If you need such manual in English, please e-mail us.

EMPLOYER CAN CONSULT PRIVATE INFORMATION

Under the Supreme Labor Court decision issued in February 23, Brazilian employers has the right to make consultations in the Service Protection Credit (SPC), police agencies and legal courts before hire employees. The lawsuit has been moved by Labor Public Ministry that understand such research were discriminatory.

In fact, most of the Brazilian employers make such consultation under an informal basis. Under this new decision, they may feel comfortable since it is a legal process now.

GOODWILL BENEFIT

Tax Treatment upon Goodwill generated on acquisition of participation of Brazilian Companies

This year was issued important administrative decisions (CARF), which cancelled Brazilian IRS's tax notifications associated with the non-deduction of goodwill amortization derived from certain acquisitions (e.g. Santander, VIVO, among others).

These precedentes brought a certain comfort for companies that have the intention to utilize the goodwill benefit. However, there are several fundamentals related to the accounting recognition of the goodwill and its tax treatment.

The "goodwill" issue is also relevant in terms of commercial perspective, since in case of partial acquisition of companies participation, usually the buyers mention the potential benefit of goodwill and force to input such benefit into the negotiation of the prices.

Under the Law 9.532/97 (articles 7 and 8) and Decree-Law 1,598/77 (article 20), in some situations this tax deduction is possible and represents an economy of 34% upon the amount of the goodwill paid (tax rate of Corporate Income Tax and Social Contribution on Net Profit), deduction that could be granted only in some specific hypothesis, but in gradual form and in future periods.

For the sellers, this may result in capital gains. For individuals selles, the Income Tax of 15% is levied upon the amount of the shares registered at the Income Tax Return. For Corporate sellers, the capital gain is taxed  by Corporate Income Tax and Social Contribution, being the joint-rate achieves the 34%.

The goodwill is the difference between the amount paid by the shares and the amount of net equity of the acquired company. For example: in case of selling of 80% of shares of the company; if the price paid is BRL 1 million and the net equity is BRL 500 thousand, then the goodwill is BRL 600 thousand (BRL 1 Million - (BRL 500 thousand x 80%). However, the price paid could derived from several reasons, such as:

a) fair value of the assets acquired;
b) a perspective of future profitability of the business combination;
c) value of potential intangible assets.

But the tax legislation does not permit the investment aquirer to choose freely which reason of the goodwill is used for tax perspective. The classification of the goodwill into several economic reasons should be fixed by a appraisal report preapred exclusively for the acquisition of the company participation.

The appraisal, signed by a expert and by acquirer's administrator, should inform, among the three economic reasons above (letter a, b and c), what is considered to justify the amount of the goodwill. This selection should not be aleatory. It should be well supported, arguable, specificaly before Brazilian IRS, since the tax treatment may differ depends on the reason selected.

Besides that, during the period that the investment is not realized, there is no tax implication for the buyer, meaning that, they cannot deduct the goodwill amortization for tax purposes. The realization occurs when the alienation of the investment (through selling) or by means of corporate reorganization - merger or consolidation.

With effect, if further the acquisition of company participation, the buyer merger the company acquired, the tax implication for acquirer side is the following, depends on the economic reason adopted:

a) fair value of the assets: goodwill inputted into the cost of assets when the merger occurs would be deductible upon the registration of depreciation or amortization of the assets;
b) expectation of future profitability: the goowill may be deducted in the Corporate Income Tax and Social Contribution, within a period of 5 years. Brazilian IRS has notified companies that defines this option as the economic reason of the goodwill, when the appraisal report does not clearly justify the goodwill.
c) Amount of intangible assets: eg. trademarks. The goodwill paid could not be deducted under such option.

At last, due to the potential tax risk involved, in case of the goodwill is not duly justified under the Brazilian IRS view, it is important to include into the instruments of acquisition, a clause which the sellers and the company acquired have no responsability regressive (civil law) in case of the goodwill amortization is challenged by Brazilian IRS.

BRAZILIAN CFC RULES

Administrative Court refrains from deciding on taxation of profits derived from CFCs

On 25 January 2012, the Federal Administrative Court (Conselho Administrativo de Recursos Fiscais – CARF) rendered yet another decision on the possibility of application of the provisions of article 74 of Provisional Measure 2,158-35/01 (PM 2,158), which introduced the so-called "automatic" taxation in Brazil of profits earned by foreign controlled and affiliated companies of Brazilian legal entities, vis-à-vis the provisions of article 7 of tax treaties signed by Brazil.

The Court's decision was rendered within the case records of an Administrative proceeding involving the Brazilian company Companhia Vale do Rio Doce S/A.

The decision rendered by the CARF was based on a previous decision of the Federal Court of the 2nd Region (second level of the judicial courts), which had already analysed this matter within the case records of Appeal 003.51.01.002937-0, also involving Companhia Vale do Rio Doce S/A (for details, see Brazil-1, News 9 December 2011) (below).

Unlike the Judicial Court case, the members of the CARF have not analysed the merits of the discussion under the argument that the same matter was being discussed within a Judicial Court. Their position was based on the fact that according to internal tax regulations, when the same matter is being discussed by the same taxpayer in both the Administrative and Judicial Courts, the Administrative proceedings must be terminated and only the Judicial Court is competent for the judgment of the merit.

FEDERAL REVENUE FURTHER REGULATES TAXATION OVER FINANCIAL AND CAPITAL MARKETS

Normative Ruling 1,236 (NR 1,236), published in the Official Gazette of 30 January 2012 and in force as of that date, introduced amendments to Normative Ruling 1,022 (NR 1,022), which regulates the levy of income tax over income and gains earned within the financial and capital markets.

The main innovations brought by NR 1,236 are as follows:

–	modification of the methodology for classification of a fund as long or short–term, and determination that the portfolios held in real estate investment funds shall be excluded from the consideration of whether or not the fund is medium-term;
–	determination that the re-classification of an investment fund's term (i.e. from short- to long-term), resulting from alterations to its portfolio, may only be carried out once a year;
–	establishment of new requirements for the enjoyment of income tax exemption granted to investment funds;
–	amendments to the regulations pertaining to the taxation of activities carried out by Infrastructure Private Equity Funds, and introduction of regulations regarding the taxation of activities carried out by Research, Development and Innovation Private Equity Funds;
–	exclusion of the application of withholding income tax upon earnings resulting from investments held by Real Estate Funds in certain specified bonds related to the agri-business sector;
–	introduction of regulations pertaining to the taxation of Investment Funds whose portfolios are composed of debentures;
–	clarification that the transformation of an investment club into an investment fund of the same nature does not imply any alteration of its applicable tax regime;
–	determination that costs and expenses incurred in all transactions carried out in 1 day within the stock exchange market can be attributed to each transaction proportionally to the financial values involved;
–	determination that capital reduction transactions that result in a monetary restitution of the investment made in legal entities to the shareholders are considered as a deduction of the acquisition cost of the shares for transactions undertaken within the cash spot market (mercado à vista); and
–	for shares acquired up to 31 December 1999 whose cost cannot be proven for the purpose of determination of the income tax taxable base, determination that the cost may be determined by: –     the average price of the share, pursuant to negotiations carried out with the share within the stock exchange market in December 1999; or –     in case no negotiations carried out within that month, in the closest previous month in which the share was negotiated.