In a moment where many discussions on tax reform in Brazil are prevalent, some parallel tax changes are often hidden from the spotlight. In recent times, there has been some focus on the consolidation of taxes, VAT changes and the taxation of dividends, which have assisted tax authorities to put in place a new proposal to calculate corporate income tax in Brazil (new CIT project).
Tax authorities, through the members of the Brazilian Revenue Service (Receita Federal do Brasil – RFB), are trying to project that the new CIT project would bring simplification, stability and legal security to the existing model.
Businesses express caution at proposals
Companies remain cautious that tax increases could be jointly introduced and have expressed that the timing for change is currently inappropriate. They feel that the new CIT project was not expected at this stage, especially when considering the significant level of modification that it proposes, and the fact that a full set of rules for the previous system were only released in 2015.
The 2015 CIT changes were a consequence of adopting international accounting standards for Brazilian corporations (IFRS system), which modified the form, procedures and rational that had been previously applied. While the prior accounting system was guided by legal nature and formality, the IFRS system’s main drive was led by economic substance, different valuation procedures and a fair value approach.
Although CIT procedures should be adjusted accordingly with time, the 2015 CIT changes took seven years to discuss and finalise. It therefore imposed a smaller burden for companies to acclimatise to when building a separate accounting tracker for tax purposes. Despite the time taken, the situation did still bring a lot of cost and uncertainties, and the efficiency of the 2015 CIT changes were perhaps over-celebrated.
Based on the 2015 CIT changes, the profits under the IFRS system were defined as the starting point for the CIT calculation, except if Law no. 12,973/14 would expressly state differently. The view in this context was that tax and accounting were fairly aligned, and this would minimise controversies.
However, after five years, tax authorities realised that (i) CIT has a strong dependency of accounting records; (ii) the IFRS system is much more sophisticated and complex than the prior accounting system; (iii) not everyone is ready for the accuracy necessary for the accounting procedures (including the tax inspectors); (iv) the IFRS system permits a certain level of interpretation and subjective analysis and is constantly in modification. As a consequence, the CIT calculation would also be affected by all those points.
After the earlier changes were announced, the fact is that the corporations invested to adjust their systems and software to fit in with the 2015 CIT changes and to train their tax people. A lot of effort was put in place and corporations are only beginning to get familiar with the IFRS systems and the 2015 CIT changes.
Thus, the question arises if we are ready to change again as there was not enough time for consolidation of the 2015 CIT changes.
The scope of the new CIT project
The new CIT project tries to separate CIT from accounting profits. The idea is to have a calculation that is significantly different from the current procedure, which is intrinsically linked to accounting profits.
The new CIT project would have its own calculation defining taxable revenues, gains and deductible expenses, as well as costs and losses to compose the tax basis. As an example, accounting revenues would not necessarily be taxable, but only if they would coincide with the concept of revenues defined by law.
The changes in the new CIT project would be significant, demanding investments in system, software and training again. The intention of simplification, stability and legal security is remarkable, but questions arise if a radical modification is necessary and if the timing is appropriate.
Countries take different approaches to define CIT tax basis, where some take a very close approach to accounting profits, while others have totally separate or even mixed strategies. As it is clear that there is no correct regime, the debate remains whether one is more consistent than the other, and whether tax, constitutional and legal principle changes would be worthwhile in the long run.
It should be noted that the new CIT project is still not a formal proposal for a change in law for the Brazilian Congress. The authorities have been conducting an informal road show of the idea through many events, presentations and seminars, so there remains a lot of speculation in respect to the final version and timing of the new CIT project.
As we move into 2020, Brazilian legal entities will have to wait to see how the matter unfolds, with a lot of uncertainty about the events that may unfold in 2021.
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