The Tax Implications of Doing
Business in Brazil
Lionel Nobre
Director – Brazilian Business Advisory Portal
Dallas Bar Association – International Law Section
October 15, 2002
Topics to be covered
Tax Concerns for US companies investing in Brazil •
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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
– 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
• 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)
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
Tax Concerns for US Companies in Brazil
• 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
Tax Concerns for US Companies 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
Tax Concerns for US Companies in Brazil
• 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)
Tax Concerns for US Companies in Brazil
• 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 nonBrazilian taxpayers
Tax Concerns for US Companies in Brazil
Remittance
Non-Tax Haven
Royalties
15% + 10% Surtax
Dividends/Profit
0%
Interest
15%
Services Fees
25%
Other
15%
Tax Haven
25%
0%
25%
25%
25%
Tax Concerns for US Companies in Brazil
• 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)
Tax Concerns for US Companies in Brazil
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)
Tax Concerns for US Companies in Brazil
Transfer Pricing Control
• 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
Transfer Pricing Control
• 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)
Tax Concern for US Companies in Brazil
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
Tax Concern for US Companies in Brazil
• 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
Tax Concerns for US Companies in Brazil
• “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
Tax Concerns for US Companies in Brazil
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)
Tax Concerns for US Companies in Brazil
Remuneration of Capital through Interest
payments – TJLP rate index (approx. 11% per
annum)
• Treated as a dividend or
Profit distribution
• Deductible Interest
• Limited to net equity
• Withholding tax of 15%
Tax Concerns for US Companies in Brazil
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
Tax Concerns for US Companies in Brazil
M&A Transactions
BrasCo.
(Seller)
(1)
Buyer
ASSETS (drop down)
NewCo.
(Target)
Target Asset
BrasCo.
Buyer
(Seller)
(3)
(2)
NewCo.
Target Asset
Tax Concerns for US Companies in Brazil
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
Tax Concerns for US Companies in Brazil
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
mrajunov@gt.com)
•
2001 - Brazilian Business Advisory Portal (Miami)
2002 – European Business Advisory Portal
established in Dallas
Contact person: Manu Lutz, Director of European
Business Services (214-561-2334 or
manuel.lutz@gt.com)
Tax Concerns for US Companies in Brazil
Grant Thornton LLP – Miami
Brazilian Business Advisory Portal
777 Brickell Avenue
Suite 1100
Miami, FL, 33131, FL, USA
Lionel Nobre – Director
E-mail: lnobre@gt.com
Tel: 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 !!