lionel nobre director – brazilian business advisory portal dallas bar association –...

Lionel NobreDirector – Brazilian Business Advisory Portal

Dallas Bar Association – International Law SectionOctober 15, 2002

The Tax Implications of Doing Business in Brazil

Topics to be covered

Tax Concerns for US companies investing in Brazil -

• Domestic corporate taxation• Withholding taxes• Transfer pricing control• Taxation of transactions with low tax jurisdictions• Anti-Avoidance rules• Tax planning mechanisms

General tax principles

European-Continental - Portuguese system -

Current system under the 1988 Federal Constitution:• the Union; States, Federal District and

Municipalities can levy taxes; fees and contributions

• no hierarchy between the taxing powers• tax rules are found in the Federal

Constitution, Complementary Laws (ie. National Tax Code) and in Laws, Decrees and other lower norms

Treaties to Avoid Double Taxation

• Brazil does not have a Tax Treaty with the US nor with the UK

• Basically follows the OECD model with the exception of China (UN Model)

– Argentina, Austria, Belgium, Canada, Chile, China, Denmark, Ecuador, Germany, Korea, Spain, Philippines, Finland, France, Holland, Hungary, India, Italy, Japan, Luxembourg, Norway, Portugal, Check Republic, Slovak Republic and Sweden

Tax Concerns for US Companies in Brazil

Corporate Taxes • Corporations - legal entities under current Brazilian law

• US tax treatment of:– “Limitada” (Ltda.) - type companies – can check-the-box– Partnerships (“sociedade civis por responsabilidade

limitada”) – can check-the-box– “Sociedade Anônima” (SA)- type companies – cannot

check-the box


• Diverse tax burden on the company as a separate

legal entity from its partners, shareholders,

quotaholders - “corporate tax burden”

• No consolidation rules for same

group allowed in Brazil


Corporate Tax Rates & Methods• Income Tax on Net Profits (IRPJ)

– 15% on profits– 10% additional on values exceeding approx. US$ 66,000

per annum

• Social Contribution Tax on Net Profits (CSL)– 9% on profits

• Total Corporate Tax Burden = approx. 34%– Real Profit Method vs. Presumed Profit Method


• Revenue Based Taxes- Contribution to the Integration Program (PIS)

- COFINS (Contribution to Finance Social Security)

- Service Tax (ISS)

• Transaction Based Taxes- Import Tax (II)

- Manufacturing Tax (IPI)

- Good’s Circulation Tax (ICMS)

- Check Tax (CPMF)

- Financial Transaction Tax (IOF)


• Withholding Taxes (Imposto de Renda na Fonte – IRF)

– Taxation occurs at source

– Territoriality Principle - Mechanism for Taxing Non Tax Residents (foreign taxpayers) - without a Tax Registry/Roll Number (“CPF/MF or CNPJ/MF”)

– Imposed on profits, income and capital gains paid, credited, remitted, issued to foreigners or non- Brazilian taxpayers

Remittance Non-Tax Haven Tax Haven

Royalties 15% + 10% Surtax 25%

Dividends/Profit 0% 0%

Interest 15% 25%

Services Fees 25% 25%

Other 15% 25%



• Lack of definition of permanent establishment - adoption of definition found in Tax Treaties (23 Treaties)

• “Doing business in Brazil” - foreign company cannot be bound by individual or company in Brazil (mandate or agent)


Transfer Pricing Control

• Introduced for the 1997 calendar year by Law nr. 9.430/96 - similar rules were soon “exported” to Venezuela and Argentina

• Income Tax rule on deductibility of cost/expenses as well as recognition of revenue in overseas transactions with so-called “related” and “low tax jurisdictions”

• Rules applied to Imports, Exports of goods, services and assets as well as to financial transactions (ie. loans)



• Rules not applicable to international Royalty or Technology payments

• Does not follow OECD rules nor adopt the any known “arm’s length principle”

• Very broad definition of related party – “vinculated party” including entities in listed tax haven jurisdictions

Tax Concern for US Companies in Brazil


• Adopts fixed profit margins whenever Uncontrolled Prices cannot be used

• Can be argued unconstitutional for Brazilian tax purposes

• In cases where a Tax Treaty exists can elect to use the foreign country’s rules instead (i.e. Germany)


Taxation of Transactions with Low Tax Jurisdictions

• Introduced by Law nr. 9.430/96 - jurisdiction with no taxation or with a maximum tax burden of 20%; (analysis of local legislation as well as type of legal entity)

Low Tax Jurisdiction List :American Samoa; Andorra; Anguilla; Antígua; Dutch Antilles; Aruba; Bahamas; Bahrein; Barbados; Belize; Bermuda; Barbuda; British Virgin Islands; Campione D`Italia; Channel Islands (Alderney, Guernsey, Jersey and Sark); Cayman Island; Cypress; Cook Islands; Costa Rica; Djibouti; Dominica; United Arab Emirates; Gibraltar; Granada; Hong Kong; Lebuan; Lebannon; Liberia; Liechtenstein; Luxembourg (Holding company under Law 31 of july 1929) Macau; Madeira Island; Maldivas; Malta; Isle of Man; Marshall Islands; Mauritius; Monaco; Montserrat Islands; Nauru; Niue; Oman; Panama; Nevis and St. Christopher; West Samoa; San Marino; St. Vincent and Grenadine; St. Lucia; Seychelles; Singapore ;Tonga; Turks and Caicos; US Virgin Islands; Vanuatu


• Consequences- higher withholding tax rate - 25% on all payments

made from Brazil to low tax jurisdictions - exceptions: financial investments

- transactions subject to transfer pricing control mechanisms


• “General Tax Avoidance Rule” introduced by Complementary Law nr. 104/01 and recently regulated by MP 66/02:

– attempt to introduce a “Form over Substance Rule” – power granted to Tax Authorities to challenge transactions with

the exclusive objective of reducing taxes

• Constitutional right for taxpayers to save on taxes;– via judicial challenges/injunctions– via corporate reorganizations/legal acts

• Strict legal definition of taxable event and taxable amount – allows usage of many tax planning techniques


Some Tax Planning Ideas

Indirect Taxes – VAT taxes (ICMS and IPI) – review of import, purchase and sale flow

Municipal Service Taxes – locate activity in a favorable municipality (can bring down rate from 5% to 0.5%)

Corporate Reorganizations to offset losses carry forward with profitable activities (can reduce taxable profit to nearly zero)


Remuneration of Capital through Interest payments – TJLP rate index (approx. 11% per annum)

• Deductible Interest • Limited to net equity• Withholding tax of 15%

• Treated as a dividend orProfit distribution


M&A Transactions

– Usually advisable to use a holding company in Brazil as acquirer for tax purposes

– Payment of premium for investment – capital gain for seller

– Need to amortize premium for Brazilian tax purposes – deductibility for buyer

– Adoption of a tax structure which allows seller to not generate a taxable capital gain and at the same time allows the buyer to amortize premium paid on acquisition


M&A Transactions

BrasCo.(Seller)

NewCo.(Target)

ASSETS (drop down)

Buyer

Target Asset

BrasCo.(Seller)

NewCo.

Buyer

Target Asset

(1)(2)

(3)


Brazilian income tax legislation for the next coming years?

- Thin capitalization provisions – today there are no rules determining equity/loan make-up

- Secondary adjustments for transfer pricing control purposes today not allowed


Stricter control on Foreign Owned assets in Brazil

• No PE in Brazil, but rather just the necessary disclosure of foreign assets ownership to Tax Authorities (real estate, shares, vehicles, boats, airplanes, etc.)

• Capital gain taxation if buyer is a Brazilian resident: 15% on the taxable gain

• Mandatory enrollment of foreign investor’s with assets in Brazil with the federal taxpayer number (CPF/MF or CNPJ/MF) and appointment of a Brazilian resident as an attorney-in-fact

Grant Thornton’s approach

• Utilize a multi-lingual, multi-cultural and multi-disciplinary team approach with more than 30 years of experience in Latin American and European investment, accounting and tax matters;

• Maintain strong support and close working relationships with our Grant Thornton offices in Latin America and Europe (in more than 200 locations comprising more than 6,000 professionals) Services Offered

– Cross-border and International Tax Consulting

– Foreign Investment Structures (Inbound/Outbound)

– Cross Border and Domestic Tax Compliance

– Expatriate Taxation

– Corporate Management

– International Audit and Financial Statement Reviews

Focus on main European and Latin American markets

• 1998 - Mexican Business Advisory Portal established in Dallas

Contact person: Manuel Rajunov, Managing Partner, International Tax Services (214-561-2358 or [email protected])

• 2001 - Brazilian Business Advisory Portal (Miami)

2002 – European Business Advisory Portal

established in DallasContact person: Manu Lutz, Director of European Business Services (214-561-2334 or [email protected])

Grant Thornton LLP – MiamiBrazilian Business Advisory Portal 777 Brickell AvenueSuite 1100Miami, FL, 33131, FL, USA

Lionel Nobre – Director E-mail: [email protected]: 305-341-8045 Fax: 305-341-8099

Note that the information provided herein should not be relied upon as professional tax advice. Therefore, we encourage you to consult us directly with any issues or questions.


THANK YOU !!

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