worldwide tax guide brazil

8/3/2019 Worldwide Tax Guide Brazil

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BrazilTax Guide

2011


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PKF Worldwide Tax Guide 2011 I

Foreword

foreword

For any business moving into new markets, a key deciding actor will be the targetcountrys tax regime. What is the corporate tax rate? Are there any incentives or

overseas businesses? Are there double tax treaties in place? How will oreign sourceincome be taxed?

Since 1994, the PKF network o independent member rms, administered by PKFInternational Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provideinternational businesses with the answers to these key tax questions. This handyreerence guide provides clients and proessional practitioners with comprehensivetax and business inormation or 100 countries throughout the world.

As you will appreciate, the production o the WWTG is a huge team eort and I would

like to thank all the member rms o the PKF network who gave up their time tocontribute the vital inormation on their countrys taxes that orms the heart o thispublication. I would also like thank Richard Jones, PKF (UK) LLP, Kevin Reilly, PKF WittMares, and Rachel Yeo, PKF Melbourne or co-ordinating and checking the entriesrom within their regions.

The WWTG continues to expand refecting both the growth o the PKF network andthe strength o the tax capability oered by member rms throughout the world.

I hope that you nd that the combination o reerence to the WWTG plus assistancerom your local PKF member rm will provide you with the advice you need to makethe right decisions or your international business.

Jon HillsPKF (UK) LLPChairman, International Tax Committee o the PKF International network


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PKF Worldwide Tax Guide 2011II

important disclaimer

This publication should not be regarded as oering a complete explanation o thetaxation matters that are contained within this publication.

This publication has been sold or distributed on the express terms and understandingthat the publishers and the authors are not responsible or the results o any actionswhich are undertaken on the basis o the inormation which is contained within thispublication, nor or any error in, or omission rom, this publication.

The publishers and the authors expressly disclaim all and any liability and responsibilityto any person, entity or corporation who acts or ails to act as a consequence o anyreliance upon the whole or any part o the contents o this publication.

Accordingly no person, entity or corporation should act or rely upon any matter orinormation as contained or implied within this publication without rst obtainingadvice rom an appropriately qualied proessional person or rm o advisors, andensuring that such advice specically relates to their particular circumstances.

PKF International is a network o legally independent member rms administered byPKF International Limited (PKFI). Neither PKFI nor the member rms o the networkgenerally accept any responsibility or liability or the actions or inactions on the parto any individual member rm or rms.

Disclaimer


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PKF Worldwide Tax Guide 2011 III

Preface

preface

The PKF Worldwide Tax Guide 2011 (WWTG) has been prepared to provide anoverview o the taxation and business regulation regimes o 100 o the worlds most

signicant trading countries. In compiling this publication, member rms o thePKF network have sought to base their summaries on inormation current as o 30September 2010, while also noting imminent changes where necessary.

On a country-by-country basis, each summary addresses the major taxes applicableto business; how taxable income is determined; sundry other related taxationand business issues; and the countrys personal tax regime. The nal section oeach country summary sets out the Double Tax Treaty and Non-Treaty rates o taxwithholding relating to the payment o dividends, interest, royalties and other relatedpayments.

While the WWTG should not to be regarded as oering a complete explanation othe taxation issues in each country, we hope readers will use the publication as theirrst point o reerence and then use the services o their local PKF member rm toprovide specic inormation and advice.

In addition to the printed version o the WWTG, individual country taxation guides areavailable in PDF ormat which can be downloaded rom the PKF website at www.pk.com

Finally, PKF International Limited gladly welcomes any comments or thoughts readersmay wish to make in order to improve this publication or their needs. Please contactKevin F Reilly, PKF Witt Mares, 10304 Eaton Place, Suite 440, Fairax, Virginia 22030,USA by email to [email protected]

PKF INTERNATIONAL LIMITEDMARCH 2011

PKF INTERNATIONAL LIMITEDALL RIGHTS RESERVEDUSE APPROVED WITH ATTRIBUTION


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PKF Worldwide Tax Guide 2011IV

about pKf international limited

PKF International Limited (PKFI) administers a network o legally independent rms.The PKF network is the 10th largest global accountancy network with over 245

legally independent member and correspondent rms which have a combinedannual turnover o $2.4 billion. Located in 125 countries, the member rms o thePKF network share a commitment to providing clients with high quality, partner-ledservices tailored to meet each clients own specic requirements.

The membership base o the PKF network has grown steadily since it was ormedin 1969. Added to the sustained growth in the number o PKF member rms, thissolidity has provided the oundations or the global sharing o expertise, experienceand skills and the development o services that meet the evolving needs o all typeso client, rom the individual to the multi-national corporation.

Services provided by member rms include:

Assurance & AdvisoryInsolvency Corporate & PersonalFinancial PlanningTaxationCorporate FinanceForensic Accounting

Management ConsultancyHotel ConsultancyIT Consultancy

PKF member rms are organised into ve geographical regions covering Arica; LatinAmerica; Asia Pacic; Europe, the Middle East & India (EMEI); and North America &the Caribbean. Each region elects representatives to the board o PKF InternationalLimited, which administers the network. While the member rms remain separate andindependent, international tax, corporate nance, proessional standards, audit, hotelconsultancy and business development committees also work together to improvequality standards, develop initiatives and share knowledge across the network.

Please visit .pkf.com or more inormation.

Introduction


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PKF Worldwide Tax Guide 2011 V

S

tructure

structure of country descriptions

a. taXes payable

FEDERAL TAXES AND LEVIESCOMPANY TAXCAPITAL GAINS TAXBRANCH PROFITS TAXSALES TAX/VALUE ADDED TAXFRINGE BENEFITS TAXLOCAL TAXESOTHER TAXES

b. determination of taXable income

CAPITAL ALLOWANCESDEPRECIATIONSTOCK/INVENTORYCAPITAL GAINS AND LOSSESDIVIDENDSINTEREST DEDUCTIONSLOSSESFOREIGN SOURCED INCOME

INCENTIVES

c. foreiGn taX relief

d. corporate Groups

e. related party transactions

f. witHHoldinG taX

G. eXcHanGe control

H. personal taX

i. treaty and non-treaty witHHoldinG taX rates


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PKF Worldwide Tax Guide 2011VI

AAlgeria . . . . . . . . . . . . . . . . . 12 noonAngola . . . . . . . . . . . . . . . . . . . .1 pmArgentina . . . . . . . . . . . . . . . . . . 9 amAustralia -

Melbourne . . . . . . . . . . . . . 10 pmSydney . . . . . . . . . . . . . . .10 pmAdelaide . . . . . . . . . . . . 9.30 pmPerth . . . . . . . . . . . . . . . . . .8 pm

Austria . . . . . . . . . . . . . . . . . . . .1 pm

BBahamas . . . . . . . . . . . . . . . . . . .7 amBahrain . . . . . . . . . . . . . . . . . . . .3 pmBelgium. . . . . . . . . . . . . . . . . . . .1 pmBelize . . . . . . . . . . . . . . . . . . . . .6 amBermuda . . . . . . . . . . . . . . . . . . .8 amBrazil. . . . . . . . . . . . . . . . . . . . . .7 am

British Virgin Islands . . . . . . . . . . .7 am

CCanada -

Toronto . . . . . . . . . . . . . . . .7 amWinnipeg . . . . . . . . . . . . . . . 6 amCalgary . . . . . . . . . . . . . . . .5 amVancouver . . . . . . . . . . . . . . 4 am

Cayman Islands . . . . . . . . . . . . . .7 amChile . . . . . . . . . . . . . . . . . . . . . .8 amChina - Beijing . . . . . . . . . . . . . .10 pmColombia . . . . . . . . . . . . . . . . . . .7 amCroatia . . . . . . . . . . . . . . . . . . . .1 pmCyprus . . . . . . . . . . . . . . . . . . . .2 pmCzech Republic . . . . . . . . . . . . . . 1 pm

DDenmark . . . . . . . . . . . . . . . . . . .1 pmDominican Republic . . . . . . . . . . .7 am

EEcuador . . . . . . . . . . . . . . . . . . . .7 amEgypt . . . . . . . . . . . . . . . . . . . . .2 pmEl Salvador . . . . . . . . . . . . . . . . . 6 amEstonia . . . . . . . . . . . . . . . . . . . .2 pm

FFiji . . . . . . . . . . . . . . . . .12 midnightFinland . . . . . . . . . . . . . . . . . . . .2 pmFrance. . . . . . . . . . . . . . . . . . . . .1 pm

GGambia (The) . . . . . . . . . . . . . 12 noonGermany . . . . . . . . . . . . . . . . . . .1 pmGhana . . . . . . . . . . . . . . . . . . 12 noonGreece . . . . . . . . . . . . . . . . . . . .2 pmGrenada . . . . . . . . . . . . . . . . . . .8 amGuatemala . . . . . . . . . . . . . . . . . . 6 am

Guernsey . . . . . . . . . . . . . . . . 12 noonGuyana . . . . . . . . . . . . . . . . . . . .8 am

HHong Kong . . . . . . . . . . . . . . . . .8 pmHungary . . . . . . . . . . . . . . . . . . .1 pm

IIndia . . . . . . . . . . . . . . . . . . . 5.30 pm

Indonesia. . . . . . . . . . . . . . . . . . .7 pmIreland . . . . . . . . . . . . . . . . . . 12 noon

Isle o Man . . . . . . . . . . . . . . 12 noonItaly . . . . . . . . . . . . . . . . . . . . . .1 pm

JJamaica . . . . . . . . . . . . . . . . . . .7 amJapan . . . . . . . . . . . . . . . . . . . . .9 pmJersey . . . . . . . . . . . . . . . . . . 12 noonJordan . . . . . . . . . . . . . . . . . . . .2 pm

KKazakhstan . . . . . . . . . . . . . . . . .5 pmKenya . . . . . . . . . . . . . . . . . . . . .3 pmKorea . . . . . . . . . . . . . . . . . . . . .9 pmKuwait . . . . . . . . . . . . . . . . . . . . .3 pm

LLatvia . . . . . . . . . . . . . . . . . . . . .2 pmLebanon . . . . . . . . . . . . . . . . . . .2 pm

Liberia . . . . . . . . . . . . . . . . . . 12 noonLibya . . . . . . . . . . . . . . . . . . . . . .2 pmLuxembourg . . . . . . . . . . . . . . . .1 pm

MMalaysia . . . . . . . . . . . . . . . . . . .8 pmMalta . . . . . . . . . . . . . . . . . . . . .1 pmMauritius . . . . . . . . . . . . . . . . . . .4 pmMexico . . . . . . . . . . . . . . . . . . . .6 amMorocco . . . . . . . . . . . . . . . . 12 noon

NNamibia. . . . . . . . . . . . . . . . . . . .2 pmNetherlands (The). . . . . . . . . . . . .1 pmNew Zealand . . . . . . . . . . .12 midnightNigeria . . . . . . . . . . . . . . . . . . . .1 pmNorway . . . . . . . . . . . . . . . . . . . .1 pm

O

Oman . . . . . . . . . . . . . . . . . . . . .4 pm

PPanama. . . . . . . . . . . . . . . . . . . .7 amPapua New Guinea. . . . . . . . . . .10 pmPhilippines . . . . . . . . . . . . . . . . . .8 pmPoland. . . . . . . . . . . . . . . . . . . . .1 pmPortugal . . . . . . . . . . . . . . . . . . .1 pmPuerto Rico . . . . . . . . . . . . . . . . . 8 am

QQatar. . . . . . . . . . . . . . . . . . . . . .8 am

RRomania . . . . . . . . . . . . . . . . . . .2 pmRussia -

Moscow/St Petersburg . . . . .3 pm

S

Serbia . . . . . . . . . . . . . . . . . . . . .1 pmSierra Leone . . . . . . . . . . . . . 12 noonSingapore . . . . . . . . . . . . . . . . . .7 pmSlovak Republic . . . . . . . . . . . . . .1 pmSlovenia . . . . . . . . . . . . . . . . . . .1 pmSouth Arica . . . . . . . . . . . . . . . . .2 pmSpain . . . . . . . . . . . . . . . . . . . . .1 pmSweden . . . . . . . . . . . . . . . . . . . .1 pmSwitzerland . . . . . . . . . . . . . . . . .1 pm

international time Zones

AT 12 NOON, GREENwICH MEAN TIME, THE STANDARD TIMEELSEwHERE IS:

TimeZones


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PKF Worldwide Tax Guide 2011 VII

TimeZones

TTaiwan . . . . . . . . . . . . . . . . . . . .8 pmThailand . . . . . . . . . . . . . . . . . . .7 pmTunisia . . . . . . . . . . . . . . . . . 12 noon

Turkey . . . . . . . . . . . . . . . . . . . . .2 pmTurks and Caicos Islands . . . . . . .7 am

UUganda . . . . . . . . . . . . . . . . . . . .2 pmUnited Arab Emirates . . . . . . . . . .4 pmUnited Kingdom . . . . . . .(GMT) 12 noonUnited States o America -

New York City . . . . . . . . . . . .7 amWashington, D.C. . . . . . . . . .7 am

Chicago . . . . . . . . . . . . . . . . 6 amHouston . . . . . . . . . . . . . . . . 6 amDenver . . . . . . . . . . . . . . . .5 amLos Angeles . . . . . . . . . . . . . 4 amSan Francisco . . . . . . . . . . .4 am

Uruguay . . . . . . . . . . . . . . . . . . .9 am

VVenezuela . . . . . . . . . . . . . . . . . . 8 am

Vietnam . . . . . . . . . . . . . . . . . . . .7 pm


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PKF Worldwide Tax Guide 2011 1

braZil

Currency: Reais Dial Code To: 55 Dial Code Out: 00(R$)

Member Firm:City: Name: Contact Inormation:Curitiba and Artemio Bertholini (11) 21416302Porto Alegre [email protected]

Recie Ernesto Rubens Gelbcke (11) [email protected]

Rio De Janeiro Luciana Endler (11) 21416300

[email protected]

So Paulo Marcelo Couceiro (11) [email protected]

a. taXes payable

FEDERAL TAxES AND LEVIESCOMPANy TAx

REAL PROFITIn general, taxable income must be recognised monthly ollowing the accrual basiscriteria and subject to Corporate Income Tax (CIT). The tax return must be ledannually. Corporate taxable income is taxed under a unitary system whereby a singletax rate is applied. This rate is 25%, being 15% plus 10% on prots pre tax over R$240 thousand annually. Corporate income tax is generally computed on a calendaryear basis. However, payments are made monthly on estimated advance taxes. SocialContribution on Net Prot is another ederal tax and is calculated on prots pre tax.The rate is 9% computed on an annual or quarterly basis. Calculations and paymentsare made monthly as estimated advance taxes. Both taxes on prots add up to 34%(25% plus 9%).

TRANSFER PRICINGBrazil established a transer pricing system or the importation with aliated companieso goods, services and rights acquired abroad. These prices are based on three methods:Comparative Independent Price (PIC), Resale Price Less Prot (PRL), or Production CostPlus Prot (CPL). The same system applies or exports to oreign related parties.

THIN CAPITALISATION

As o 1 January 2010 there is a new rule (MP n 472/09) converted into the Law12.249 which states a limitation or corporate income tax purposes related todeductible interest, accrued or paid, in avour o a oreigner not resident in a tax haven.

Under the rules, interest paid to related parties that are not located in a tax havenjurisdiction or that do not benet rom a preerential tax regime may be deducted onan accrual basis or corporate income tax purpose only: Iftheexpensesarenecessaryforthecompanysactivities,and Bothofthefollowingthresholdsaremet:

(a) The related party debt-to-equity ratio does not exceed 2:1 calculatedbased on the proportion o related party debt to direct equity investmentmade by related parties; and

(b) The overall debt-to-equity ratio does not exceed 2:1 based on theproportion o total debt to total direct investment made by related parties.

Interest paid to an entity or individual located in a tax haven or that benets roma preerential tax regime (regardless o whether the parties are related) may bededucted only i the expenses: Arenecessaryforthecompanysactivities,and

Bothofthefollowingthresholdsaremet: (a) TheamountoftheBrazilianentitysindebtednesstothetaxhavenresident

does not exceed 30% o the net equity o the Brazilian entity; and (b) TheBrazilianentitystotalindebtednesstoallentitieslocatedinatax

haven jurisdiction or beneting rom a preerential tax regime does notexceed 30% o the net equity o the Brazilian entity.

Any excess interest will be treated as a non-deductible expense or Corporate IncomeTax (CIT) and Contribution on Net Prot purpose. The Transer Pricing rules aecting

cross-border loans agreements registered with the central bank or Libor plus 3%spread remain in eect, as do the general requirements or deductibility.Presumed Prot Method

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PKF Worldwide Tax Guide 20112

Companies with prior year revenues o up to R$ 48 million can choose, under certaincircumstances, to pay income tax and social contributions by the Presumed ProtMethod which is calculated through a percentage o the quarterly gross revenue onthe cash basis.

There are some business activities and other circumstances which the law does notconsider eligible or this treatment. The applicable percentages range rom 1.6% to32%. In general, the most applicable rule or presumed prot margin is 8% on salesor resale and manuacturer companies. Income tax is charged at a rate o 15% onthe presumed prot with an additional 10% chargeable in excess o R$ 60,000 perquarter plus Social Contribution Tax, at the rate o 9%, on the presumed prot basedon gross revenue.

FRINGE BENEFITS TAxATION

Companies participate mandatorily in dierent orms o social security obligations toederal agencies. These either directly or indirectly benet pension programs, workingtime compensation, social work assistance and health programs, among others. Allcontributions are deductible or corporate income tax purposes.

COFINS SOCIAL SECURITy CONTRIBUTIONCOFINS are payable each month as a contribution to the health, social workassistance and social security program o the Federal Government.

In general, or companies that adopt the regular method or calculating the IncomeTax (taxable income Prot) the COFINS rate is 7.6% o the monthly gross revenue.Deductions are allowed in respect o services and material costs applied incompanies operating activities.

For companies that choose to be taxed under the Presumed Prot Method, theCOFINS rate is 3% o the monthly gross revenue, without such allowed deductionsabove mentioned.

The import o assets, goods and services also pays COFINS o 7.6% o import value.This value will be used as a credit to oset the COFINS o sales in a non-cumulativeway. Companies taxed under the Presumed Prot Method will not be eligible or thisoset.

PIS SOCIAL INTEGRATION PROGRAM CONTRIBUTIONThese contributions are payable each month as a und to employees. This iscalculated based on 1.65% o monthly gross revenue. As with COFINS, the PIS rate isgenerally 1.65% o the monthly sale, in a non-cumulative way. It means, deductionsare allowed in respect o services and material costs applied in companies operating

activities.

For the companies that choose to be taxed by Presumed Prot Method, PIS will be0.65% o the monthly sale in a cumulative way, without such allowed deductionsabove mentioned.

PAyROLL TAxThis is a monthly obligation or social security and other unds levied on payroll.

Ta Rate (%)Social Security (INSS) 20

Accident Insurance (SAT) 1 to 3

Employee Indemnity Guarantee Fund (FGTS) 8

Education Fund (SE) 2.5

Other 3.3

Employees contribute monthly to the social security system at rates rom 7.65% to 11%on a progressive-scale base salary considering a maximum base salary o R$ 3,689.

Federal law obliges companies to distribute part o their annual net income toemployees. Participation is negotiated by each company and disputes are settled byarbitration. Amounts distributed are deductible or corporate income tax purposes andnot subject to social security.

LOCAL TAxES

VALUE ADDED SALES AND SERVICES TAx (ICMS)This state tax is levied on the sale or physical movement o goods, reight,transportation, communications services and electric energy. Intrastate transactions

Brazil


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are taxed at 18%, interstate transactions are taxed at 7% or 12%, and most importsare taxed at a rate between 18% and 25%. The lower rates normally are charged ontransers to less developed states. Some states oer rate reductions or later paymentdates as a scal incentive or the installation o actories. Communication services

are taxed at a rate between 13% and 25%.

REAL ESTATE TAx (ITBI)A property transer tax is normally payable at a rate o up to 4% on inheritances anddonations o properties and rights.

SERVICE TAx TAx (ISS)A services tax is imposed on gross revenue generated rom companies who renderservices to many cities. Rates vary substantially between municipalities. Higher ratesare more common in larger cities. Hospitals, schools, colleges, construction, leasing,

tourist and other services pay ISS rom 2% to 5%. ISS must be paid on importationo services provided by non-residents.

OTHER TAxESExCISE TAx (IPI)This ederal value added tax is levied on nearly all sales (gross revenue) and transerso products manuactured in or imported into Brazil with a tax rate that variesaccording to the degree o necessity. Examples o rates or various products andgroups o products are as ollows:

Product Percentage

Food in general 0

Sot drinks 44

Alcoholic drinks 11 143

Plastic and rubber 0 20

Textile materials 0 15

Machinery and equipment 0 20

Precision instruments 0 15

Transport 13 35

Other 0 60

Most exports (exportation o manuactured products) are exempt rom IPI. Imports ogoods (raw material and products) are normally taxed at the same rate as Brazilian-

made products. Rates change requently. For all sales o manuactured products, theIPI must be paid monthly.

For imported goods or products, the IPI (and other taxes due) must be collected uponthe customs clearance o the goods or products.

IMPORT TAx (II)This tax is used to regulate oreign trade, to stabilise the balance o payments attimes o economic crisis, to protect and stimulate the growth o Brazilian industryand to encourage oreign investments. The rates vary according the type o productimported and are requently changed by the government by a decree, without theneed o submission to Congress.

The calculation basis o the Import Tax is the price at which the goods are oered orsale on the wholesale market o the exporting country, plus the cost o insurance andreight (CIF). It is charged upon the customs clearance o the goods.

In case there is no national product similar to the imported product or i its nationalproduction is not sucient or the demand o the internal market, reduction or

exemption o the Import Tax may be granted.

FINANCIAL OPERATIONS TAx (IOF)This tax is levied at various rates on nancial transactions such as loans and creditoperations, insurance policies, and oreign exchange operations or certain servicesrendered. Rates change requently.

As a general rule, oreign exchange transactions made in order to allow payments tonon-residents, considering royalties, technical services, technical, administrative and

any other assistance or any other revenue, including the reimbursement o any costs,are subject to IOF.

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CONTRIBUTION OF INTERVENTION DEVELOPMENT ANDECONOMIC (CIDE)The government introduced a special contribution in 2000. Brazilian legal entities thatlicense, purchase or otherwise acquire technological knowledge must pay a special

contribution o 10% on activities such as: trademark, technical services assistance,administrative services and any royalty payments. Based on the law in orce, CIDEmust even be paid on activities that do not involve the transer o technology.

TAx ON ROyALTIES (CIDE)This tax has the objective o stimulating technological development in Brazil througha ederal program o technological research at universities, research centres andproductive sectors.

Tax on royalties is 25% (15% as the withholding tax and 10% as CIDE payable by the

sender company).

TAx ON FUEL (CIDE)The CIDE will be paid monthly on the import and export o petroleum, derived andnatural gas, and uel alcohol. The rate will be based on the value in Reais o the cubicmeters or tons o uel.

RURAL REAL ESTATE TAx (ITR)The basic rate is annually calculated based on certain premises on assessed property

values and depending on the stage o utilisation and exploration o the property. Verysmall properties are exempt and the maximum rate applied corresponds to 20% othe land value, without any improvements.

b. determination of taXable income

To determine the income tax payable, items deductible rom gross income include theexpenses needed to obtain, maintain and preserve such income. The income tax lawcontains specic regulations or determining the cost o products, xed assets, realestate, or securities being disposed o, as well as or deducting uncollectible debtsand calculating depreciation / amortisation. Business income is determined on theaccrual basis.

IFRS INTERNATIONAL FINANCIAL REPORTING STANDARDSBrazil adopted the IASBs International Accounting Standards since 2008 on agradually basis and the ull IFRS since 2010. As a consequence, there are severalimportant changes to Brazilian accounting practices, the most important o whichis that these new accounting practices are required not only in consolidatednancial statements but also in the individual nancial statements (Law 11638/07).

These include the recognition o leasing transactions, depreciation treatment, therecognition o intangible assets, impairment concept etc.

The Brazilian authorities decided not to change the prevailing rules or tax purposebut created the RTT (Tax Transaction Temporary System) which ocuses on the entirereconciliation o corporate and scal records orced by Law 11.041/2009 thatguaranteed scal neutrality, i.e. no tax consequences should arise rom the adoptiono the new accounting criteria regarding the recognition o revenue, costs andexpenses used to determine net income.

The RTT was optional or the 2008 and 2009 calendar years (mandatory as o 2010)and shall remain in orce until a new tax law is enacted setting orth the tax eects.

DEPRECIATIONFixed assets shall be depreciated over their estimated useul lives or accountingpurposes (IFRS). For scal purposes, the straight-line method is usually adopted,using the ollowing annual rates: buildings 4%; machinery and equipment 10%;vehicles 20%; IT equipment 25% etc. Assets subject to depletion (mines, quarries,etc.) may be amortised proportionately to the units extracted in each period. In some

cases, such as or assets used in R&D activities, the taxpayer may opt or accelerateddepreciation.

STOCK/INVENTORyThe cost o goods sold or production is generally valued using the weighted averagecost method, although the FIFO (rst in, rst out) basis may be elected. The methodadopted determines the basis or the valuation o closing inventory.

DIVIDENDS

Brazil ollows a dividend exemption system. Amounts distributed to shareholdersresident in Brazil or abroad (since the investment is registered at Brazilian CentralBank (BCB)) are not subject to withholding tax.

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INTEREST DEDUCTIONSThere is a limitation o interest expenses to be deductible: i) loan rom oreignercompanies (thin capitalisation), and ii) loan rom abroad must be registered at CentralBank o Brazil (transer pricing).

Interest due must be at air market value and necessary to business activities and willbe subject to withholding tax (WHT), ollowing the accrual basis.

The calculation o interest on a partners or shareholders capital (JCP) is allowed,however, or remittances i it is considered as dividends (it means the BrazilianCo needs to be protable). The interest is deductible or income tax and socialcontribution up to the limit o the ocial long-term interest rate (TJLP). Prots or thecurrent period or previous periods must be at least double the value o the interest tobe distributed. Interest is subject to a 15% withholding tax at source. Interest may be

paid or capitalised.

TAx LOSSES CARRIED FORwARDTax losses can be carried orward to oset against uture prots up to 30% othe real prots arising in each period (year). Losses that are oset may be carriedorward indenitely. There are restrictions on losses transerred as a result o acompany merger or where there is a change in the control and activity o the lossgenerating company.

INCENTIVESBrazil oers incentives through the reduction o domestic taxes or exemption romwithholding tax in the orwarding o royalties or commissions on internationalnancing. In addition to incentives or exports, there are incentives or theimplementation o industrial units in specic regional areas. There are also someprograms linked to research activities or technological and cultural activities.

The most important o these are: specialbasisoftaxationfortheexportoftechnologicalinformationservices specialtaxincentivesforexportingcompaniesintheacquisitionofxedassets

and equipment specialtaxincentivesforcomputermanufacturingcompaniesinvestinginnew

technology scalincentivesfornewprojectsinBrazilNorthandNorthEast scalincentivesforDevelopmentandnewTechnologies scalincentivesfornewprojectsinBrazil(Petroleum-Repenec,Aviation

Retaero).

ROyALTIES AND TECHNICAL ASSISTANCE ExPENDITURES

Royalties are deductible expenses but are restricted to between 1% and 5% osales revenues or companies that make cross-border trademark and patent royaltypayments. Expenditure incurred in the creation o patents and manuacturingormulas and processes are considered capital intangible assets and are amortisedover the lie o the asset. This is also true or trademarks, whereas copyright,sotware, and ranchising are generally deductible rom operational results i they arerelated to the activities o the company.

Technical, scientic and administrative expenditures and royalties paid to oreigncompanies which have direct or indirect control o the Brazilian company aredeductible i the contracts are duly registered with the Brazilian Institute o IndustrialProperty (INPI) and with the Brazilian Central Bank (BCB). There are no restrictionsor the remittance o these monies abroad. However, some remittances o unds toabroad are subject to 15% WHT and 10% o CIDE or only 25% WHT.

c. foreiGn taX relief

Prots and gains rom oreign sources are taxable in Brazil. Tax credits are availableto relieve double taxation subject to a maximum o the Brazilian tax payable on the

income.

d. corporate Groups

For tax purposes, consolidation o aliated companies is not allowed. Losses canonly be oset against prots o the same company.

e. related party transactions

Charges rom oreign aliates or head oces are only allowable or specic itemsrelating to the activity o the local company or branch. The pro-rata allocation o aoreign entitys expenses is generally not acceptable or tax purposes.

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Brazil generally ollows transer pricing guidelines but sets xed margins or certainsituations, regardless o the specic situation o the taxpayer or peculiarities o theindustry.

f. witHHoldinG taX

Almost all remittances (except dividends) to companies or persons domiciled abroadare subject to income tax at source. The remittance o capital gains or returns ocapital is not subject to withholding tax. The overall withholding tax rate is 15% (25%in special situations).

All personal income in general is subject to withholding tax at progressive rates rom15% to 27.5%. Payments are made monthly and a personal income tax return isled annually. Capital gains that do not arise rom nancial investments are subject to

income tax at 15%.

G. eXcHanGe controls

The Central Bank allows the ocial exchange rate to foat reely within periodicallyestablished bands but participation is restricted to authorised dealers. The bankintervenes when there are signs o speculative operations. There is an ocial touristrate that ranges normally close to the commercial rate.

H. personal taX

Brazilian resident individuals are taxable on their worldwide earnings, as well as gainson the disposal o worldwide assets and rights.

An individual is resident in Brazil i he or she: hasahabitualresidenceinBrazil worksforaBraziliangovernmentdepartmentoragencyoutsideBrazil entersBrazilunderapermanentvisa entersBrazilunderatemporaryvisatoworkandremainsinBrazilformorethan

184 days within a 12-month period.

i. treaty and non-treaty witHHoldinG rates

The overall rate o withholding tax at source used in the remittance o interest androyalties is 15%, except or Japan with a rate o 12.5%. There is no tax on theremittance o dividends. Any remittances to tax haven countries (blacklist) are subjectto withholding tax at the rate o 25%.

Brazil has signed treaties to avoid double taxation with several countries including:

Argentina, Austria, Belgium, Canada, Chile, Peoples Republic o China, CzechRepublic, Denmark, Ecuador, Finland, France, Hungary, India, Italy, Israel, Japan,Korea, Luxembourg, Mexico, Netherlands, Norway, Peru, Philippines, Portugal,Slovakia, Spain, Sweden, South Arica and Ukraine.

In calendar year 2010, the Brazilian Federal Revenue stated the new blacklist orcedby Normative Instruction SRF No. 1,037/10, which contains the long-awaited taxblacklist o (1) low tax jurisdictions and (2) tax privileged regimes.

Non-resident entities that are incorporated in a jurisdiction that qualies as eithera low tax jurisdiction or a tax privileged jurisdiction are generally subject tounriendly Brazilian tax rules. The most punitive Brazilian tax rules, however, generallyapply only to non-resident entities located in low tax jurisdictions .

Prior to June 2008, the Brazilian tax authorities had only considered only the concepto the low tax jurisdiction which was generally dened as a jurisdiction that taxedits residents at a tax rate o less than 20%. Non-resident entities ormed in low tax

jurisdictions were subject to additional taxes when doing business with Braziliancompanies. For example: theincreaseinwithholdingtaxfrom15%to25%oninterest,royalties,and

charter payments theincreaseinwithholdingtaxfrom15%to25%oncapitalgains(non-publicly

traded companies) enhancedtransferpricingscrutiny(includingscrutinyoftransactionswith

unrelated parties).

The new normative instruction revealed to practitioners that the Brazilian Federalrevenue (IRS) would start to look beyond a country-by-country blacklist.

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Tax privilege regimes states by law include:I Holding Company set up under Luxembourg lawII SAFIS constituted under Uruguay law until December 2010III Holding Company set up under Denmark law that has no substantive economic

activitiesIV Holding company set up under law applicable to corporate in United Kingdomwith no substantive economic activities

V International Trading Company ITC set up under law o IcelandVI Oshore KFT Company set up under law applicable to corporate in HungaryVII United States Limited Liability Company (US LLC) as a tax privileged regime

when the membership of the US LLC is composed of non-residents, not subjectto federal income taxation.The US LLC was not listed as a low tax entity. TheUnited States corporation avoided both blacklists.

VIII E.T.V.Es Entidad de Tenencia de Valores Extranjeroscompany set up under

Law applicable to corporate in SpainIX International Trading Company ITC and International Holding Company IHC

set up under Law applicable to corporates in Malta.

Aside rom shiting transer pricing issues into the new category o tax privilegedregimes, all o the other limitations and additional taxes that historically applied toentities ormed in low tax jurisdictionsremained the same.

Ater the new concept o the tax privileged regime was created in calendar year

2008, the concept was expanded in late 2009 to place tougher Brazilian thincapitalisation restrictions on parent companies lending money to their Braziliansubsidiaries.

In summary, tax impacts orced by the new blacklist represent two main limitationsthat now apply to entities that are ormed under tax privileged regimes: Enhancedtransferpricingscrutiny;and Stricterthincapitalizationstandards.

Brazil is a member o the Organization or Economic Co-Operation and Development(OECD), Latin American Integration Association (LAIA) and is a signatory to theWorld Trade Organization (WTO), ormerly the General Agreement on Taris andTrade (GATT). Until now, membership in LAIA has not aected the size o the marketavailable to local industry and the oreign investor.

Brazil, Argentina, Paraguay and Uruguay are the signatory members o Mercosul(South Cone Market), which was ocially ratied on 1 January 1995 ater aphasing-in period. Under the treaty agreement, most taris have been reduced tozero. Movement o labour, goods and services is unrestricted, capital investment

encouraged, macroeconomic policies co-ordinated, and oreign trade policies andtaris or non-member countries harmonised.

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