New Brazilian measure on interaction between IFRS and corporate tax may increase bills

December 11 2013

Taxpayers should be aware that the period of tax neutrality related to the adoption of International Financial Reporting Standards (IFRS) in Brazil ended with the enactment of Federal Government Provisional Measure 627 on November 11.

Brazil incorporated IFRS through Federal Law 11,638 on December 28 2007.

At the time of initial deployment of accounting standards issued by IFRS, it was determined tax neutrality, that is, the new accounting rules would have no impact on corporate income tax basis.

However, the adaptation period of international accounting standards ended, being enacted by the Federal Government Provisional Measure 627, November 11 2013.

Briefly, here are the main changes to the corporate income tax basis.

Dividends

Federal Tax Law 9,249, December 26 1995, allows the distribution of dividends without withholding tax (for payments to foreign shareholders). Dividends also do not compose the income tax basis (for natural person or legal entities tax domicile in Brazil).

Provisional Measure 627, of 2013, only allows income tax exemption on dividends if they represent the exact proportion of corporate income tax basis. Dividends paid based only on the annual balance sheet drawn up as of December 31 are not tax exempt.

Goodwill

Federal Law 9,532, December 10 1997, allows expenses deriving from amortisation of goodwill as deductible for corporate income tax basis. However, tax legislation fixed goodwill as the difference between the amount paid for acquisition and its book value.

IFRS standards measure goodwill as the difference between:

the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any non-controlling interest, and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree; and
the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3).

Provisional Measure 627, of 2013, incorporated those concepts for tax purposes, reducing the goodwill value amortisation for corporate income tax basis.

Present value adjustments

IFRS imply that assets and liabilities arising from long-term operations, or when there is a short-term effect relevant, should be adjusted to present value based on contractual rates or discount rates that reflect the best market assessments.

Provisional Measure 627, of 2013, fixed for non-current assets (adjusted to present value): inclusion in the determination of taxable income in the period on which the result of the operation is offered to taxation.

Provisional Measure 627, of 2013, fixed for non-current liabilities (adjusted to present value): inclusion in the determination of taxable income during the period of investigation in which:

the good is resold;
the good is used in production of other goods or to provide services;
the asset suffer depreciation, amortization, depletion, alienation;
the expense is incurred (term acquisition accounted as expense); and
the cost is incurred (term acquisition accounted as production cost).

Fair value measurement

IFRS 13 - Fair Value Measurements applies when another IFRS rule requires or permits fair value measurements to items of assets, liabilities or equity. Fair value to IFRS standards is a price that would be received from selling an asset or paying to transfer a liability in an orderly transaction between market participants at the measurement date.

Provisional Measure 627, of 2013, determines that profits from present value measurement (assets increase or liabilities reduction) or losses from present value measurement (assets reduction or liabilities increase) for corporate income tax basis purposes are deferred to the moment of asset realisation or liabilities liquidation.

Impairment test

IFRS (IAS 36 Impairment of Assets) seeks to ensure that an entity's assets are not carried at more than their recoverable amount (that is, the higher of fair value less costs of disposal and value in use).

Provisional Measure 627, of 2013, determines values accounted as assets decrease may be computed in the calculation of taxable income at the time of disposal or write-off of the corresponding asset.

Corporate income tax basis in brazil

In Brazil, the taxable income is to be determined pursuant to the prevailing law in the date the tax triggering event occurs, corresponding to the accrual period, based on two methods: taxable income or estimated profit.

Determination of profit by corporate entities taxed according to the Taxable Income Method (Lucro Real) is to be based on the annual balance sheet drawn up as of December 31 or on quarterly balance sheets.
The Estimated Profit Method (Lucro Presumido) is a simplified tax system for determining the basis for calculating corporate income tax. In this methodology income tax is due quarterly. Companies that elect the Estimated Profit Method must assess their taxable income through application of a percentage (estimated profit margins defined according to the company’s activity) to the gross revenues accrued in each quarter.

Fabricio Costa Resende de Campos (f.campos@rolimvlc.com), Rolim, Viotti & Leite Campos