Brazilian tax law has long had an established approach to the treatment of intangible assets. The first rule on the matter dates back to 1964, when Law 4,506 was enacted. This law enshrined the right of taxpayers to amortize costs related to the acquisition of rights, as long as the acquisition was connected to a company’s activities.
Nonetheless, Brazilian companies, accountants and tax experts never paid too much attention to this subject because intangible assets, in general, were not commonly valued and booked. There were no clear criteria under Brazilian accounting standards for how these types of assets should impact an entity’s assets, liabilities and net equity value.
Over the past few decades, local concerns mainly focused on the tax implications arising from the overwhelming inflationary environment experienced in Brazil during the 1980’s and 1990’s, and the implementation of global standards for corporate income tax (1995) and transfer pricing controls (1996). Local tax practitioners were also busy dealing with the tax consequences of the privatisation process, fostered during the mid-to-late 1990’s, and wrestling with the limits of tax planning strategies in relation to the implementation of anti-avoidance rules, even though these latter were finally never enacted.
It was only with the adoption of the IFRS accounting standards in Brazil in 2007 and the change in the economic setting, driven by new technologies and so-called disruptive businesses, that intangible assets were definitively put under the spotlight.
Law 11,638/07, as amended and supplemented by Law 11,941/09, laid the ground for intangible assets to gain importance in and become key elements of M&A transactions, corporate reorganisations and corporate transactions in general. The high added value attached to these assets, which span software, patents, technical expertise, models, design patterns, intellectual property rights and know how, offered companies reviewing their policies and strategies a large number of opportunities.
From an accounting perspective, the Brazilian Board of Accounting Standards issued Technical Opinion No. 04, based on IAS 38, to regulate the matter. Whenever an entity identifies an intangible element that does not qualify as a mere current expense or goodwill, has a limited life expectation and may reliably generate future economic benefits, it may be entitled to book that intangible as an asset, subject either to an amortization or an impairment test, depending on that expected useful life.
Based on that accounting treatment, tax law provided for a more specific approach in addition to article 58 of Law 4,506/64, mentioned above. Pursuant to article 41 of Law 12,973 of May 13 2014, the amortization expenses related to intangible assets booked as non-current assets may be tax deductible, provided such expenses are connected with the company’s activities and that they are able to influence the results of the company for more than one fiscal year.
In practice, once a company identifies an intangible asset, the corresponding amortization expenses may be deducted from the corporate income tax and social contribution on net profits bases under the ‘actual profit regime’ at the general 34% rate, if such expenses are normal, necessary and usual for the type of business. And even though Brazilian law does not formally provide for an anti-avoidance rule, tax authorities have been adopting a very strict approach when it comes to possible tax savings obtained from transactions carried out without actual economic substance. Given the latter, this aspect should be always taken into account.
There are no particular requirements under tax rules regarding the amortized amounts, except that should be booked as intangible assets, related to the company’s business and not be deemed as tax deductible expenses. In order to reinforce the validity and legitimacy of the cost incurred with the intangible asset subject to tax amortization, taxpayer entities should move with caution and commission an appraisal report from an expert firm, which can confirm the cost allocated to the intangible asset, the expected useful life, possible future economic benefits and amortization curve. This document will ground the accounting recognition of the asset and provide further substance and justification to the deducted amounts.
In our view, intangible assets are playing a key role when it comes to M&A and corporate reorganisation strategies and under the Brazilian tax rules applicable to intangible assets, there may be opportunities to be taken into consideration.
Of course, there are certain requirements that should be taken into consideration in each particular case, for instance, the means of acquisition of the intangible asset and its valuation, but there is no doubt that in a digital economy era deeply influenced by disruptive businesses, this is an important aspect that should be kept in mind.