Brazil: Tax consequences of adopting international accounting standards

In December 2007, Brazil adopted the International Financial Reporting Standards (IFRS) for the preparation of all financial statements issued after 2008. The adoption of these new accounting standards was defined by law (Law 11.638/07) in an immediate and mandatory way.

Fundamentally, the main change resulting from the new accounting parameters consisted of the fact that the financial statements have come to be prepared under a strictly accounting perspective, without any kind of interference. This is absolutely different from the accounting standards adopted until December 31 2007, which were premised on the satisfaction of tax criteria.

Despite the adoption of IFRS, Brazil’s tax laws were not adapted to follow the changes in accounting standards. As a consequence, a complete distinction between the accounting and tax bases have become reality.

To minimise these consequences, and especially because the law that amended the accounting standards specifically mentioned that any tax impacts derived from the new criteria could be verified, the Temporary Tax Regime (TTR) was created. This regime was intended to neutralise any differences between accounting criteria upon IFRS (effective from 2008) and tax rules that have been premised on the accounting criteria in force until December 2007.

To neutralise the tax effects, the TTR, in practical terms, meant that taxpayers should keep two sets of accounts: (i) one according to the IFRS, and (ii) another according to strict fiscal criteria.

Due to the complexity and high costs involved in maintaining two different sets of accounts, much was expected to happen regarding the adequacy of tax law for IFRS. However, the TTR, which was created in 2008 to be in force for a temporary period, remained in force until the publication of Law 12,973 in May 2014.

This new law has brought many new tax rules. The premise of these rules is the taxation on a permanent basis, as from the economic facts recorded in the books according to international accounting standards. Thus, the determination of corporate taxes from the revenues and expenses recorded in accordance with IFRS criteria avoids the maintenance of two accounts and puts an end to the TTR.

Under such new law, taxpayers are required to comply with these new rules from 2015. They can opt to anticipate their application for the 2014 tax year.

The new law introduced numerous changes for the most varied situations and a lot of specific details must be observed. In summary, it is important to note that both the exemption of dividends from Brazilian sources and the possibility of a tax benefit resulting from the amortisation of goodwill in M&A transactions will continue. Brazil has a very complex tax system and it is important to be aware of the complexity of such new rules for compliance to avoid tax contingencies.

Alessandro Amadeu da Fonseca (afonseca@mattosfilho.com.br), is a partner of Mattos Filho.

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