The federal Brazilian tax authorities (RFB) published guidance on October 4 2018 stating that revenues recognised as a result of debt forgiveness (in this case, a bank loan) should be subject to PIS/COFINS at a combined rate of 4.65% (Solução de Consulta - Cosit 176/2018, dated September 27 2018).
By way of background, Brazil has a variety of different transaction and indirect taxes and contributions, including a Contribution to the Social Integration Program (PIS) and Contribution for Social Security Financing (COFINS). Broadly speaking, these contributions apply on gross revenues as well as on the import of goods and services. The applicable rates depend on the particular transaction as well as the methodology the Brazilian taxpayer applies (the cumulative method does not allow for input credits whereas the non-cumulative method allows for input credits in specific circumstances).
In 2015, Decree 8.426 re-established that financial revenue should be subject to PIS and COFINS at the rates of 0.65% and 4%, respectively, for entities applying the non-cumulative methodology. Subsequently, Decree 8.451/2015 amended the original decree, introducing a number of scenarios where 0% should apply, specifically in relation to hedging and foreign exchange transactions.
In past situations where debt forgiveness was considered, there was a discussion whether the principal debt forgiven (as well as any interest on such debt) should be considered a revenue item subject to PIS/COFINS, and if so, at what rate.
Solução de Consulta - Cosit 176/2018 considers that the forgiveness of debt should be regarded as a revenue item. Citing the accounting rules (CFC No. 1.374/11), the RFB considered that the reduction of a debt originating from its forgiveness creates a requirement to recognise a revenue item.
In order to subsequently determine the implications from a PIS/COFINS perspective, the RFB considered whether the revenue should be considered financial revenue. Drawing parallels with the corporate income tax definition of financial income and associated guidance issued by the RFB, similarities were drawn between the forgiveness of a debt and a discount (or re-negotiation) of an original debt, both of which the RFB considered financial revenue. The RFB clarified that such a conclusion applies to entities that are not dedicated to financial activities.
Once determining that the forgiveness of the debt should be regarded as financial revenue, the RFB confirmed that the entity should apply the combined rate of 4.65%.
While Solução de Consulta does not represent law or legal precedent, it does provide further support and guidance for Brazilian entities in relation to how the RFB are treating such arrangements.
|Priscila Vergueiro||Mark Conomy|