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Philippe Jeffrey |
Gustavo Carmona |
On November 12 2013, the Brazilian government published Provisional Measure (MP) No 627 which profoundly changes many aspects of the Brazilian tax system, including, as reported in last month's issue, the taxation of profits earned by foreign controlled and affiliated companies. In this issue, we present below other main points of attention for investors. Please note that these rules will enter into effect from January 1 2015, although taxpayers may opt to adhere to the new rules from January 1 2014.
Goodwill assessment and amortisation
Current legislation provides that upon a share acquisition, if the cost of the investment is higher than the net equity value of the acquired company, the difference must be booked as goodwill (supported by an appraisal report) which is typically allocated to future profitability and amortised over a period not less than five years.
MP 627 establishes new rules for the determination of the goodwill amount for Brazilian income tax purposes. In this regard, and in line with IFRS principles, the share purchase price must be allocated to: (i) the net equity of the acquired company; (ii) the fair market value of the net assets (by means of an appraisal report); and (iii) the goodwill attributable to future profitability, which is determined based on the difference between the purchase price and the sum of items (i) and (ii). As under current law, the goodwill amount may be amortised for Brazilian income tax purposes over a five-year period, but it is expected that, under the new rules, the goodwill amount shall be significantly lower than under current rules. Amortisation is conditioned to the compliance with certain conditions, such as: transaction between non-related parties, preparation of an independent appraisal report which will need to be filed with the Revenue Services and with the Register of Deeds and Documents. Note that certain grandfathering rules apply.
Taxation of dividends and INE payments
Normative Instruction No. 1,397 of 2013 issued by the Federal tax authorities before publication of the MP, stated that for the purpose of assessment of tax exempt distributable dividends and deductible Interest on Net Equity (INE) expenses, the equity balances to be considered are the ones based in the accounting practices in force up to December 31 2007. Any amounts distributed based on new accounting rules, in excess of such balances, should be subject to taxation. This generated substantial debate among scholars and taxpayers. To bring legal certainty to the matter, MP 627 establishes that excess amounts will not be subject to taxation, but only if the taxpayer opts to adhere to the MP's provisions from January 1 2014, and if the amounts have effectively been paid up to November 11 2013.
Please note that, whether or not the option is made for 2014, taxpayers are required to comply with different ancillary tax obligations. However, to date, no specific regulations have been issued in this regard and it remains unclear how taxpayers are to comply with these requirements. In this sense, further regulation is expected to be issued shortly.
Philippe Jeffrey (philippe.jeffrey@br.pwc.com) and Gustavo Carmona (gustavo.carmona@br.pwc.com)
PwC
Tel: +55 11 3674 2271
Website: www.pwc.com
