Brazil: Brazil introduces several new tax measures
Brazil has recently issued a series of measures that intend to encourage greater taxpayer compliance and ensure domestic rules align with international tax initiatives. Legislation published applies the concept of significant economic activity to Austrian holding companies, amends the rules on the service tax regime, implements CbCR and CRS rules, and introduces a tax regularisation programme.
Brazil updates list of privileged tax regimes
Brazil has updated the list of privileged tax regimes to apply the concept of significant economic activities to Austrian holding regimes.
The Brazilian tax authorities (RFB) published Normative Instruction (NI) 1.683/2016 on December 30 2016, limiting the situations where the regime applicable to Austrian holding companies may be regarded as a privileged tax regime.
Earlier, on June 4 2010, the RFB issued NI 1,037/2010, updating the list of countries considered as tax havens (the black list) and added a list of regimes regarded as privileged tax regimes (the grey list).
The grey list, which has been subject to several changes over the past few years, had recently been updated to add the regime applicable to Austrian holding companies (NI 1,658/2016, dated September 14 2016).
NI 1.683/2016, which updates the grey list, establishes that the regime applicable to Austrian holding companies should be regarded as a privileged tax regime when no significant economic activities are carried out by the entity.
According to NI 1,658, a foreign holding company is deemed to carry out significant economic activities if it has, in its country of domicile, operating capacity to manage and make decisions regarding:
1) Activities with the purpose of generating income from its assets; or
2) Management of equity interests with the purpose of generating income in the form of profit distributions and capital gains.
Operating capacity would be measured by the existence of physical facilities and the number of qualified employees to manage and make decisions according to the complexity of the tasks to be performed.
This change, together with the application of the Brazilian controlled foreign corporation (CFC) rules, transfer pricing and thin capitalisation rules, among others, may have significant impacts on international structures involving Brazilian entities and Austrian holding companies. Multinationals are encouraged to analyse how this change will impact their specific structures.
Brazil issues rules on service tax
The Brazilian Congress published Complementary Law 157/2016 on December 30 2016, setting new rules in relation to service tax (ISS). It amends Complementary Law 116/2003 (LC 116/03), which sets the general rules for ISS taxation.
ISS is a service tax levied on the local rendering of services in Brazil. Although ISS is a municipal tax, the federal government has the power to issue general standards that must be followed by municipalities when creating local legislation.
Changes made by LC 157/2016 were mainly two-fold:
Including new services to the ISS services list; and
Introducing a de minimis effective ISS tax rate.
Considering that only services expressly listed in the LC 116/2003 can be taxed by municipalities, the taxation of digital solutions has been a controversial subject between taxpayers and municipal tax authorities (e.g. online streaming of digital content).
To address this issue, LC 157/2016 amended the list of services to expressly include:
Processing, storage or hosting of data, texts, images, videos, electronic pages, apps, information systems and similar services;
Software programming, including electronic games, for any platform, including tablets and smartphones; and
Online streaming of audio, video, image and text without definitive assignment through the internet (except for books, newspapers and journals, which are exempt).
Furthermore, Law 157/2016 also sets a minimum ISS effective tax rate of 2%, forbidding municipalities from granting any tax benefit that could in practice reduce this rate, except for specific activities, such as civil construction and the intra-municipal transportation of passengers.
Entities providing services listed by LC 157/2016 and/or benefitting from any reduction of the ISS effective tax rate should monitor developments in the ISS legislation of the corresponding municipalities.
Brazil's final regulations on CbCR published
The RFB issued on December 29 2016 the final regulations in relation to the implementation of country-by-country reporting (CbCR), establishing the framework under which multinational enterprises (MNEs) will be required to disclose information in Brazil related to their economic activities worldwide.
According to the final regulations, the information will be disclosed in a specific section of the Brazilian corporate income tax return (ECF). The ECF format has already been updated to incorporate this requirement.
Brazil launches tax regularisation programme
The Brazilian government released the Provisional Measure No. 766/2017 (MP 766/2017) on January 5 2017, introducing the tax regularisation programme (Programa de Regularização Tributária (PRT)).
The scheme allows individuals and legal entities to regularise both tax and non-tax indebtedness administered by the RFB and by the National Treasury's Attorney General's Office (PGFN). The initiative applies to tax or debt that was due by November 30 2016.
Those opting into the scheme must enrol within 120 days of the enactment of the regulation, which is due to be issued by the RFB and the PGFN. Taxpayers may settle their debts through one of the different settlement schemes provided by the MP 766/2017. Taxpayers should also forfeit any lawsuit or administrative procedure initiated to challenge the debts.
Under certain schemes that allow payment by instalments, taxpayers may use either their own net operating losses (NOLs), or the NOLs from other companies of the same economic group (local companies), to pay off their debts. This is available if the NOLs are both accrued by December 31 2015 and declared by June 30 2016. Furthermore, taxpayers may also use federal tax credits to settle their debts.
It is important to emphasise that the MP 766/2017 does not provide any reduction/relief on potential interest and/or penalties included in the outstanding balances.
A Provisional Measure is a temporary law issued by the Executive Branch of the Brazilian government that has the authority of law until it is passed by the Brazilian Congress within a prescribed 60-day period. If Congress does not act within this initial period, then it expires unless it is extended for an additional 60-day period.
Companies that are indebted with the federal government should analyse whether they are eligible and if they could benefit from enrolling in the tax regularisation programme.
Common reporting standard
The RFB issued on December 29 2016 the final regulations in relation to the implementation of the common reporting standard (CRS) in Brazil.
The regulations define the relevant information that should be exchanged, including information on financial assets, as well as the specific procedures that should be followed by the financial institutions that will present the report.
Fernando Giacobbo (firstname.lastname@example.org) and Ruben Gottberg (email@example.com)