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Nélio Weiss |
Philippe Jeffrey |
Initially announced on November 23 2006, an economic tax package (Programa de Aceleração do Crescimento – PAC) was formally reintroduced on January 22 with Federal Decree No. 6,025.
The measures comprise some tax reductions aiming at stimulating public investments in key sectors of the economy, official credit lines and the creation of a fund to invest in infrastructure projects.
The main tax measures announced are as follows:
reduction of the required period to use Program for Social Integration (PIS) and Contribution for the Financing of Social Security (COFINS) credits on investments in buildings recorded as fixed assets;
suspension of PIS and COFINS on acquisitions of goods, construction materials and services related to infrastructure projects;
reduction of the federal excise tax (IPI) rate from 5% to 0% on some steel products used in public construction; and
extension through December 31 2008, of the use of social contribution on net income (CSLL) credits calculated over the depreciation of new machinery and equipment, and of the cumulative PIS and COFINS regime for public construction companies.
The economic tax package includes new measures, which will still require drafting and approvals of specific legislation, as well as other measures already in force or in the process of being implemented.
Income tax treaty between Brazil and Mexico
Following the publication of the Federal Decree 6000 on December 27 2006, the tax treaty for the avoidance of double taxation and the prevention of fiscal evasion concluded between Brazil and Mexico has entered into force. The provisions of the treaty are applicable as of January 1 2007.
The treaty, which is mainly based on the OECD model, sets forth standard regulations on permanent establishment and business profit issues and limit withholding tax rates on remittances. Yet, article 22 of the tax treaty, which grants taxing rights to the source country with respect to other income, still demonstrates a clear protection of exclusive source based taxation rights, which is diverging from the OECD model convention.
The regulations of the treaty limit withholding tax rates on interests and royalties to 15% and on dividends to 10% if the shareholder is holding at least 20% of voting shares of the company paying the dividends, or 15% in all other cases. At the moment either Brazilian or Mexican domestic tax law generally subjects dividends to income tax withholding, as such, this provision should not have immediate practical effect.
The protocol of the treaty also sets forth that payments of interest on capital (as allowed by the Brazilian tax legislation), will be considered interest for the purposes of article 11 of the treaty.
It should be noted that Brazil maintains the most expansive tax treaty network in Latin America, including treaties with key nations such as Belgium, Canada, France, Italy, Japan, Luxembourg, the Netherlands, Portugal and Spain. It also has treaties with the Latin American nations of Argentina, Chile and Ecuador.
Nélio Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com) São Paulo
