Brazil: Provisional Measure No. 627 repeals the Transitional Tax Regime and brings significant changes to Brazilian tax legislation
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Brazil: Provisional Measure No. 627 repeals the Transitional Tax Regime and brings significant changes to Brazilian tax legislation

jeffrey.jpg

carmona.jpg

Philippe Jeffrey


Gustavo Carmona

On November 12 2013, the Brazilian government published Provisional Measure (MP) No 627 which profoundly changes many aspects of the Brazilian tax system, including, as reported in last month's issue, the taxation of profits earned by foreign controlled and affiliated companies. In this issue, we present below other main points of attention for investors. Please note that these rules will enter into effect from January 1 2015, although taxpayers may opt to adhere to the new rules from January 1 2014.

Goodwill assessment and amortisation

Current legislation provides that upon a share acquisition, if the cost of the investment is higher than the net equity value of the acquired company, the difference must be booked as goodwill (supported by an appraisal report) which is typically allocated to future profitability and amortised over a period not less than five years.

MP 627 establishes new rules for the determination of the goodwill amount for Brazilian income tax purposes. In this regard, and in line with IFRS principles, the share purchase price must be allocated to: (i) the net equity of the acquired company; (ii) the fair market value of the net assets (by means of an appraisal report); and (iii) the goodwill attributable to future profitability, which is determined based on the difference between the purchase price and the sum of items (i) and (ii). As under current law, the goodwill amount may be amortised for Brazilian income tax purposes over a five-year period, but it is expected that, under the new rules, the goodwill amount shall be significantly lower than under current rules. Amortisation is conditioned to the compliance with certain conditions, such as: transaction between non-related parties, preparation of an independent appraisal report which will need to be filed with the Revenue Services and with the Register of Deeds and Documents. Note that certain grandfathering rules apply.

Taxation of dividends and INE payments

Normative Instruction No. 1,397 of 2013 issued by the Federal tax authorities before publication of the MP, stated that for the purpose of assessment of tax exempt distributable dividends and deductible Interest on Net Equity (INE) expenses, the equity balances to be considered are the ones based in the accounting practices in force up to December 31 2007. Any amounts distributed based on new accounting rules, in excess of such balances, should be subject to taxation. This generated substantial debate among scholars and taxpayers. To bring legal certainty to the matter, MP 627 establishes that excess amounts will not be subject to taxation, but only if the taxpayer opts to adhere to the MP's provisions from January 1 2014, and if the amounts have effectively been paid up to November 11 2013.

Please note that, whether or not the option is made for 2014, taxpayers are required to comply with different ancillary tax obligations. However, to date, no specific regulations have been issued in this regard and it remains unclear how taxpayers are to comply with these requirements. In this sense, further regulation is expected to be issued shortly.

Philippe Jeffrey (philippe.jeffrey@br.pwc.com) and Gustavo Carmona (gustavo.carmona@br.pwc.com)

PwC

Tel: +55 11 3674 2271

Website: www.pwc.com

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article