Tax News: Introduction of tax and expense cutting... | KPMG | BR

Tax News: Introduction of tax and expense cutting measures

Tax News: Introduction of tax and expense cutting...

The Brazilian Government and the Ministry of Finance have announced several measures for improving the state budget, including the increase or reinstatement of taxes (herein referred as the “Tax Package”).

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The Brazilian Government and the Ministry of Finance have announced several measures for improving the state budget, including the increase or reinstatement of taxes (herein referred as the “Tax Package”).

Some of these measures have already been formalized and are now subject to the approval, amendment or rejection by the National Congress. Others, on the other hand, are still being drafted / finalized and, as informed by the Ministry of Finance, will be presented and published in due course.

The proposed Tax Package aims at increasing the tax burden applicable to Brazilian resident or local operations, but a reflex for multinational companies with investments in Brazil can be expected as a side effect.

Below you may find a short summary of the main tax changes:

Temporary Contribution on Financial Operations (“CPMF”)

The CPMF was imposed in the past (from 1997 to 2007) on most of the withdrawals from bank accounts, usually at 0.38% rate.

At this moment, as one of the key element of the Tax Package, the Ministry of Finance has proposed to reinstate the CPMF, which should be in force for 4 (four) years (starting in 2016) and should apply at the rate of 0.20%. State Governors have been suggesting though that such rate should be 0.38%. The additional revenue with this higher rate would go for the state government treasuries.

In view of the above, a Proposal for Constitutional Amendment (“PEC 140/2015”) for the reinstatement of the CPMF has been already presented for the approval, amendment or rejection by the National Congress (i.e., House of Representatives and Federal Senate).

Note: with the reinstatement of the CPMF, the Brazilian Government is also studying the possibility of reducing the rates of the Tax on Financial Operations (“IOF”). Such reduction may be undertaken by the Brazilian Government by means of a Presidential Decree, which is enforceable immediately and does not need to pass through congressional approval.

Individuals’ Capital Gain Taxation

Currently, individuals are subject to a 15% tax on capital gains. However, a Provisional Measure (“MP 692/2015”) was published on September 22, 2015 by the Brazilian Government for purposes of creating new progressive rates on capital gains earned by individuals as of 2016.


MP 692/2015 sets forth the following new tax brackets for capital gains:

  • 15% WHT on the portion of gain which does not exceed BRL 1 million;
  • 20% WHT on the portion of gains which exceeds BRL 1 million and does not exceed BRL 5 million;
  • 25% WHT on the portion of gains which exceeds BRL 5M and does not exceed BRL 20 million; and
  • 30% WHT on the portion of gains exceeding BRL 20 million.

 

The above legislation makes clear reference to individual tax residents in Brazil. However, due to other very specific tax provisions, there have debates among tax experts as to whether the above rates would also apply to capital gains earned by foreign investors in case of sales of foreign direct investments (“FDI”) in entities in Brazil (which would not include investments in different areas / securities, such as stock exchange, government bonds, investment funds etc.).

In any case, this new legislation will be in force only as of January 1st, 2016 and it is expected that the National Congress will adjust its wording to clarify the above and hopefully clearly specify that such new rates should apply only over capital gains earned by individuals resident in Brazil. In fact, the National Congress has 120 days after its publication (i.e., initially to 60 days, which may be extended for an additional 60-day period) to approve, amend, or reject such Provisional Measure. Assuming the Provisional Measure is approved (and converted into Law) only in January 2016, it is our understanding that it should produce effects only in January 2017.

Temporary Reduction of the “REINTEGRA” - Exporters

Currently, companies that produce and export goods manufactured in Brazil are allowed to request a credit that varies from 0.1% to 3%, calculated on the revenue from the export of such goods.

Under the Tax Package, the tax refunds granted to export companies in Brazil under the Special Regime for the Reinstatement of Taxes for Exporters (“REINTEGRA”) may be adjusted as follows:

(i) 0.1% tax refund in 2016; (ii) 1.0% tax refund in 2017; (iii) 2.0% tax refund in 2018; and (iv) 3.0% tax refund in 2019.

Please remember that the information above is based on announcements from the Brazilian Government and from the Ministry of Finance. A Presidential Decree (which does not need to pass through congressional approval) still needs to be published to formalize such tax measure.

Reduction of the “REIQ” - Chemical Industry

As of now, the chemical industry in Brazil is benefiting from a reduction on the tax rates of the Gross Revenue Contributions (“PIS/COFINS”) applicable to the acquisition of raw material and certain investments (e.g., to 1% in some specific cases) under the Special Regime for the Chemical Industry (“REIQ”).

However, as part of the Tax Package, the Ministry of Finance has announced that the tax benefits of REIQ may be reduced by 50% in 2016 and completely eliminated in 2017.

Same as for the REINTEGRA temporary reduction, no formal proposal has been made by the Brazilian Government or by the Ministry of Finance so far to formalize such tax measure.

Amendment to the Interest on Net Equity (“INE”) Mechanism

According to Brazilian law, in addition to dividends, Brazilian subsidiaries may also pay INE to their shareholders.

From a Brazilian tax perspective, such remuneration mechanism has a hybrid nature, as it is a remuneration to shareholders (likening dividends) but it is treated as financial expenses for tax purposes, thereby deductible for corporate income tax purposes.

In general terms, INE is calculated by applying the daily pro rata variation of the government’s Long-term Interest Rate (“TJLP”) on the adjusted net equity of the Brazilian entity, considering all equity variations occurred during the year.

Interest on equity is subject to 15% Withholding Income Tax (“WHT”) on the date it is paid or credited to local individuals or non-residents not located in tax havens.

As announced by the Ministry of Finance, the Tax Package includes some changes to mechanism applicable to INE, as follows:

  • 1. Increase of the WHT rate from 15% to 18%; and
  • 2. Cap of the TJLP to 5% (which has been set at 7% for the fourth trimester of 2015).
Same as above, no formal proposal has been made by the Brazilian Government or by the Ministry of Finance so far to formalize such tax measure.

Marienne Coutinho
mmcoutinho@kpmg.com.br

Ericson Amaral
eamaral@kpmg.com.br

Murilo Mellomurilo
mello@kpmg.com.br

Roberto Haddad
robertohaddad@kpmg.com.br

Julio C. de Cepeda
jcepeda@kpmg.com.br

Valter Shimidu
vshimidu@kpmg.com.br

Carlos Eduardo
Toroctoro@kpmg.com.br

Renata Foz
rfoz@kpmg.com.br

Cecilio Schiguematu
cschiguematu@kpmg.com.br

Marcus Vinícius Gonçalves
vslemenian@kpmg.com.br

Marcus Oliveira
moliveira@kpmg.com.br

Adriano Ponciano
ajponciano@kpmg.com.br

Emerson Lopes
esantana@kpmg.com.br

Luis Wolf Trzcina
ltrzcina@kpmg.com.br

Henrique Kanashiro
hkanashiro@kpmg.com.br  

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