Brazil: Government raises ceiling for presumed profit method
Nélio B Weiss
On May 17 2013, the Brazilian government published Federal Law No. 12.814 which raised the ceiling for the presumed profit method (lucro presumido) of computing corporate income tax (IRPJ) and social contribution on net income (CSLL) from BRL 48 million ($22.5 million) to BRL 78 million. Accordingly, as from January 1 2014, qualifying legal entities with a gross annual revenue not exceeding BRL 78 million, or proportionally to the number of months the company is operational in a given calendar year (if less than 12 months), will be able to opt for computing income taxes in this manner.
Under the presumed profit method, taxable income is calculated on a quarterly basis and corresponds to a deemed profit margin applied over gross revenue, adjusted as determined by tax law.
Generally speaking, for IRPJ purposes, the statutory profit margin is defined as 8% of gross revenue for most commercial and manufacturing activities, over which the regular 25% IRPJ rate is applied (15% plus a surcharge of 10% on annual taxable income in excess of BRL 240,000).
For CSLL purposes, the presumed profit margin is defined as 12% for the same activities, over which the 9% rate is levied. For most services, the profit margin is set at 32% for both IRPJ and CSLL, although exceptions do apply.
The benefit of this method lies in its simplicity, as it disregards expenses and costs and also requires no transfer pricing adjustments for import transactions with related parties. It is usually advantageous for qualifying companies whose actual profit margins are higher than the statutory presumed profit margins.
Some companies, such as financial institutions, are prevented from using the presumed profit method and must compute taxable income under the actual profit method (lucro real).
In contrast, under the actual profit method, computed on either an annual (calendar year) or quarterly basis, taxable income is calculated over book results, adjusted by certain additions and exclusions, as determined by Brazilian legislation. Tax losses generated can be carried forward indefinitely, however, taxpayers may only compensate up to 30% of the taxable profit generated in a given year with accumulated losses.
The choice between the two tax regimes is largely left to the taxpayer, provided that the necessary legal requirements are met, and will depend on what is more advantageous for the company, considering all relevant aspects.
Changes to IOF rate over inflow of funds for certain investments
By means of Federal Decree No. 8.023/2013, published on June 5, the Brazilian government has reduced the rate of IOF (tax on financial transactions) from 6% to zero in cases of foreign exchange transactions for the inflow of funds into Brazil for investment in the financial and capital markets, which includes fixed-income investments as well as the purchase of government bonds.
Further, the reduction also applies to the inflow of funds for the purposes of constituting margins, as required by stock, commodities and futures exchanges.
In relation to variable income investments, the applicable IOF rate for inflow of funds into Brazil had already been reduced to zero as from December 1 2011.
These new provisions are effective immediately.
Nélio B Weiss (firstname.lastname@example.org) and Philippe Jeffrey (email@example.com)
Tel: +55 11 3674 2271