Brazil: Analysing R&D tax incentives
Cristiane Magalhaes and Manoela Nunes Dias, of Machado Associados, explore research and development (R&D) tax incentives in Brazil.
Brazil’s technological innovation investments benefit from a set of relevant incentives, including federal tax reductions, government subvention on remuneration of qualified researchers, specific financing and additional state level incentives.
The federal tax incentives are automatically granted to Brazilian legal entities carrying out technological R&D activities in view of ultimately increasing their competitiveness, as well as improving productivity and quality. The beneficiaries claim the applicable incentives in their income tax returns and have to file a report of their activities with the Ministry of Science and Technology annually. These benefits can only be enjoyed by companies that are subject to the Real Profit System of taxation (some companies may opt for a simpler system called Deemed Profit).
Tax incentives are provided as an indirect funding to encourage companies to assume the risk of R&D projects. The most relevant one in terms of tax savings comprises the entire deduction and additional exclusion from the corporate taxable basis of percentages varying from 60% to 100% of the expenses with technological innovation. This may lead to a double deduction of all R&D expenses for corporate income tax (IRPJ) and social contribution on net profit (CSLL) purposes, which are due at a combined rate of up to 34% (25% for IRPJ and 9% for CSLL).
The additional exclusion is limited to the taxable basis before its own computation, and the carry forward of benefits is usually not allowed, except for companies that are exclusively dedicated to R&D projects.
Qualifying expenses usually encompass labour costs, outsourced services, and so on. The deduction of R&D related payments made to universities, research institutions and independent inventors is also allowed, provided the paying company assumes the risks of the relevant project. Payments to entities legally qualified as small companies or individual inventors are also tax deductible for the paying company and not taxable for the beneficiary, even if the final project benefits them economically.
The cost of acquisition of new machinery, equipment and instruments to be used in R&D activities can be totally depreciated for IRPJ and CSLL purposes in the year of acquisition. This is a temporary incentive considering that the depreciation recorded gradually for accounting purposes is not deductible for corporate income tax. The depreciation cost cannot be used to calculate the additional exclusion mentioned above.
Similarly, though only applicable to the IRPJ, the acquisition cost of intangible assets strictly connected with R&D activities can be subject to an accelerated amortisation during the tax period in which it was acquired. The price paid is also not qualified for the additional exclusion.
Additionally, companies investing in R&D projects can also benefit from (i) 0% rate of withholding income tax on payments or credits to non-residents for the registration and maintenance of trademarks, patents and cultivars abroad; and (ii) 50% reduction of the excise tax (IPI) levied on the purchase of assets destined for technological R&D.
The relevant expenses shall be paid locally except for remittances related to the registration or maintenance of patents, trademarks and cultivars.
There are special incentives for companies that invest in R&D projects executed by scientific and technological institutions that are entities of public administration that develop R&D activities, or by non-profit scientific and technological private institutions, provided some requirements are met (including the previous approval of the project by a special committee). The incentive comprises additional exclusions on the corporate taxable basis (up to 2.5 times the transferred amount) and the involved parties have to share the gains deriving from the creation of intellectual and industrial property rights.
Despite the relatively simple set of rules and the government being keen to develop a more technology-oriented market, only a few companies enjoy the incentives, according to Brazilian innovation agency (FINEP): approximately 15% to 20% from potentially skilled entities. Brazil still needs to fortify its internal culture of technological innovation.