All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Brazilian ruling means taxpayers must prepare specific balance sheet for tax purposes

The Brazilian Normative Ruling No 1,397/13 means taxpayers must propare a specific balance sheet for tax purposes. Antonio Carlos Marchetti Guzman, of Mattos Filho, explains why the tax authorities are now rowing against the tide with this measure.

In 2008, an entirely new set of rules was introduced in Brazil to govern accounting practices, principles, and procedures. The purpose of these changes was to eliminate the huge gap between Brazilian GAAP and International Financial Reporting Standards (IFRS).

Historically, Brazilian GAAP was not consistent with IFRS, because it was based upon certain practices and parameters that were often only loosely related to economic reality.

With the 2008 changes to the Brazilian accounting rules, substance over form prevailed for the first time in Brazil – new global reporting standards have improved the comparability, transparency, and credibility of financial statements, leading to greater economic efficiencies.

The new accounting rules in Brazil have a significant impact, from a tax perspective, for Brazilian legal entities and corporations with respect to a variety of items and so a transitory tax regime (RTT) was created in 2009 to neutralise the adverse impact. Based upon the RTT, corporate income tax is calculated based upon the accounting methods and criteria in force before the introduction of the IFRS in Brazil (on December 31, 2007).

In line with the introduction of IFRS rules, along with RTT, Brazilian tax and accounting procedures have definitely gone in different directions.

In acknowledgement of this, the Brazilian tax authorities recently issued Normative Ruling No 1,397 of September 13 2013 (NR No 1,397), which requires preparation of a specific balance sheet for tax purposes based upon the accounting rules in force on December 31 2007 (Tax Bookkeeping or ECF). ECF will be in force as of January 1 2014.

In practical terms, following the provisions of NR 1,397, Brazilian legal entities must prepare two different balance sheets: (i) one for accounting/corporate purposes based upon the IFRS, which will serve to disclose information to shareholders; and (ii) the other for tax purposes based upon the accounting rules in force on December 31 2007, which will serve to neutralise the IFRS effects and to calculate corporate income tax.

NR 1,397 has been very controversial, resulting in heated discussions between taxpayers and the Federal Revenue Secretariat to the extent that the obligation to prepare ECF necessarily creates additional operational costs. An additional element that will likely stoke the fire is the fact that the Brazilian government will enact a Provisional Measure to revoke RTT, by regulating the tax treatment to be afforded to accounting registers that relied upon the IFRS rules.

Once RTT comes to an end, one may conclude that tax and accounting methods may work in harmony, but with that, one important question remains: what is the need to maintain ECF? Unfortunately, it seems that the Brazilian tax authorities are indeed rowing against the tide.

Antonio Carlos Marchetti Guzman (guzman@mattosfilho.com.br) is a partner of Mattos Filho

more across site & bottom lb ros

More from across our site

The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.
An OECD report reveals multinationals have continued to shift profits to low-tax jurisdictions, reinforcing the case for strong multilateral action in response.
The UK government announced plans to increase taxes on oil and gas profits, while the Irish government considers its next move on tax reform.
War and COVID have highlighted companies’ unpreparedness to deal with sudden geo-political changes, say TP specialists.
A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.