The tax implications of this adjustment caused controversy. The solution was a Transitional Tax Regime (RTT), which had the premise that the IFRS regime should be neutral, that is, the new rules are neither meant to create new taxation nor to grant benefits in respect to corporate taxes, including corporate income taxes IRPJ and CSLL, and tax on revenues, PIS and COFINS.
Generally, RTT states that Brazilian corporations should follow the former regime for tax purposes, disregarding the accounting changes that modify the recognition criteria of revenues, costs and expenses. Even though RTT was foreseen as provisional, new legislation to harmonise the tax rules with the IFRS regime has not been enacted.
Additionally, in September 2013, the Normative 1,397 was issued, indicating that the former regime will remain in effect for tax purposes, and also imposing tax rules that go beyond the limits of the legislation for the taxation of dividends.
As dividends are exempt from income tax, Brazilian corporations have distributed their results to investors taking into account their financial statements prepared under the IFRS regime.
Even though the tax rules do not require dividend distributions calculated based on the former regime, the Normative adopted the position that the exemption applies only to the extent that the dividends were derived from results assessed upon the former regime. With this approach, any excess of dividends – even if derived from profits assessed according to the IFRS regime – would be taxed as follows:
· Income tax up to 27.5% for Brazilian individuals;
· IRPJ and CSLL of 34% for Brazilian corporations; and
· Income tax of 15% for non-residents (or 25% for tax havens).
As this approach was not expected after so many years, there was an immediate reaction from several stakeholders, such as corporations, investors, advisers and industry associations, arguing that the Normative is unlawful and should not impose new taxation.
As a result, even though the Normative is still in force (potentially generating liabilities for dividends not taxed), it seems that the government will step back and will impose any taxation on dividends only after introducing a new law, which is expected before the end of this year.
By principal Tax Disputes correspondent for Brazil, Andrea Bazzo Lauletta of Mattos Filho Advogados.
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