Highlights of Brazil

Authors: Alessandra S. Machado/Clarissa G. Machado/Juliana P. Assis -
Trench, Rossi e Watanabe Advogados

11.1. Local taxation - introduction

Historically, Brazilian tax legislation is complex. Despite of the government's efforts to reduce and simplify the Brazilian tax system there still exists a large number of taxes and pulverized rules currently in force. This chapter briefly addresses the main taxes that are levied in the businesses conducted with Brazil, as well as the most important aspects related to the taxation of the individual's income in Brazil, which also affects non-residents and, more particularly, the expatriates.

11.2. Individual Income Tax ("IRPF")

Brazilian law distinguishes resident from non-resident individuals. Generally, a Brazilian national is automatically a resident when he/she is legally domiciled in Brazil or, if not domiciled in Brazil, as of his/her election to be treated as a resident for tax purposes. As regards foreign individuals, however, specific rules are applied, as quoted below.

11.2.1. Payments to Non-Resident Individuals

By rule, the salaries paid by a Brazilian source for services supplied by non-resident individuals are subject to withholding income tax at the rate of 25%.

11.2.2 Visas

As of January 1, 1999 individuals that hold temporary visas are considered residents for tax purposes upon their entry in Brazil to work pursuant to a labor agreement. Thus, they are required to file an annual income tax report, also stating their foreign income. The payments are subject to progressive income tax at the rate of 7.5%, 15% or 27.5% (maximum tax rate).

Further, individuals that hold temporary visas who enter Brazil for any other reason other than to work under a labor agreement are considered residents for tax purposes after a permanence of 183 days in a 12-month period as of the date of entry.

11.2.3 Non-Residents

Expatriates treated as non-residents are subject to Brazilian income tax only in regard to the income earned from Brazilian sources, whether individuals or companies.

The Brazilian source of income pursuing from salaries and remuneration is subject to a standard withholding income tax of 25% while capital gains are subject to a 15% withholding income tax. This taxation may be reduced in cases where a treaty to prevent dual taxation applicable to the case exists.

The tax is usually based on gross income, net of any deductions, being due upon the crediting, availability or use of the resources on behalf of the non-resident or remittance thereof to the non-resident, whichever occurs first.

11.2.4. "IRPF" - progressive list

Brazilian residents are subject to the payment of income tax on their global income, with progressive tax rates, which vary according to the specific class in which the taxpayer is classified, based on the overall taxable net profit earned. The current tax rates are as follows: (i) 0% for monthly income whose value does not exceed R$ 1,499.15; (ii) 7,5% for monthly income from R$ 1,499.16 to R$ 2,246.75 (iii) 15% for monthly income from R$ 2,246.76 to R$ 2,995.70; (iv) 22,5% for monthly income from R$ 2,995.71 to R$ 3,743.19 and; (v) 27.5% for monthly earnings over the figure of R$ 3,743.19.

11.3. Corporate Income Tax ("IRPJ")

Brazilian companies are subject to Corporate Income Tax ("IRPJ") which is levied over the net profit at the rate of 15%, and in the event the net profit exceeds R$ 240,000.00 per annum it shall be subject to an additional 10%. The calculation basis for IRPJ is susceptible to calculation upon definition of the taxable income or assumed profit (upon application of the percentage that varies pursuant to the activity performed, being percentage applicable on the gross revenue obtained by the legal person), as per the criterion defined by the taxpayer.

According to Law No. 9430 of Dec. 30, 1996 the taxpayer may elect to calculate the IRPJ on the taxable income from an annual or quarterly basis. If the IRPJ is calculated quarterly, it may also be paid on a quarterly basis. Over the profit ascertained in the quarter applies a 15% tax rate, plus an additional rate of 10% over the net profit that exceeds R$ 60,000.00 per quarter. If the IRPJ is calculated on an annual basis, the taxpayer advances the monthly payments of the IRPJ, calculated based on an assumed profit (or by means of the profit obtained by the analysis of monthly balance sheets). To a large number of companies the monthly assumed profit corresponds to 8% of the total monthly gross revenues plus capital gains and other income and positive results obtained by the company, whose percentage may vary between 8% and 32% according to the field of business in which the taxpayer is engaged. A tax rate of 15% applies over this tax basis, plus an additional 10% over the assumed profit that exceeds R$ 20,000.00 per month. In the case of electing the annual calculation method and making advance monthly payments, at the end of the period the company must pay the amount due or apply for the return of the difference between the entire of the amount paid monthly and the amount calculated based on the annual taxable income.

For the taxpayers that have adopted the Taxable Income, the Tax Loss created in a given period may be cleared through the taxable income related to the subsequent period, provided that such loss is restricted to 30% of the taxable income (e.g. for each R$ 1.00 of profit, R$ 0.70 are susceptible to taxation, irrespectively of the figure representing the existing tax loss). The tax loss may be maintained on an infinitum basis, that is, without legal restriction. It shall be noticed that non-operating Accrued Tax Loss may only be cleared through non-operating profits.

Another method that is adopted to calculate income tax consists in the method of the Assumed Profit, in which the income tax is calculated quarterly and, for most of the fields of business, the calculation basis is 8% of the gross revenues, (however, the quoted percentage for calculation of the assumed profit varies between 8% and 32% depending on the activities carried out by the company). The following tax rates of income tax apply over the assumed profit: 15% income tax plus an additional 10% over the amount that exceeds R$ 60,000.00 per quarter. If method of the Assumed Profit is adopted to calculate the income tax the taxpayer is not subject to adjustment of the annual income tax that is asserted.

However, the possibility of adopting the assumed profit method is subject to the fulfillment of certain conditions, such as:
• incomes asserted in the preceding year cannot exceed R$ 48,000,000.00;
• the profit, capital gains or other gains cannot have a foreign origin;
• financial institutions or similar organizations, as determined in Brazilian law, cannot adopt the assumed profit method for income tax purposes;
• companies cannot be beneficiaries of tax incentives granted under Brazilian law (e.g. tax exemption or reduction of income tax);
• companies cannot have paid income tax calculated based on a monthly estimate; and
• factoring companies cannot adopt the assumed profit method.

11.3. Social contribution on net profit

In addition to Corporate Income Tax (IRPJ) the Brazilian companies are subject to the payment of the social contribution on the net profit ("CSLL"). The current tax rate is 9%, with the exception of financial institutions that, due to Law no. 11727/2008, beginning at May 1st, 2008, are subject to rate of 15%).

CSLL is levied separately form the IRPJ given that the CSLL is paid to the social security and not to the federal government, to whom the IRPJ tax is paid.

The tax basis of the CSLL is the net profit specifically calculated for the CSLL payment purposes. The calculation basis for CSLL is susceptible to calculation upon definition of the taxable income or assumed profit (upon application of the percentage that varies pursuant to the activity performed, being such percentage applicable on the gross revenue obtained by the legal person), as per the criterion defined by the taxpayer.

Similar to IRPJ, the taxpayers that have adopted the Taxable Income may calculate the CSLL on an annual or quarterly basis. In the event the calculation of the CSLL is on an annual basis, the payments must be made based on an estimate. Law No. 9316 of Nov. 22, 1996 establishes that the CSLL can no longer be deducted from the net profit for the purposes of calculating IRPJ.

The negative tax basis of the CSLL (tax loss for CSLL purposes) may be used to offset the taxable profit in the subsequent periods, limited to 30% of the taxable profit in each calculation period. Similar to what occurs in regard to the tax loss for IRPJ purposes, the negative tax basis of the CSLL may be used by taxpayers that have adopted the taxable income to offset a future taxable income, without a transient limit for the expiration for usage of these amounts.

For the taxpayers that have adopted the assumed profit, the calculation for CSLL takes place on a quarter basis, constituting the calculation basis of 8% over the gross income (however, such percentage for calculation of the assumed profit varies between 8% and 32%, depending on the specific activities carried out by the company). The rate of 9% is applicable to the assumed profit.

11.5. Transfer pricing

The Rules dealing with Transfer Pricing in Brazil were introduced by Law under no. 9430, dated December 27, 1996, with application since January 1st, 1997. Such rules set forth the system for calculation of the maximum amounts to be abated as expenditures and the minimum amounts to be considered as taxable income of those Brazilian legal entities that execute transactions with bound parties established abroad or other transactions subject to standards on transfer price under the Brazilian law.

The standards on transfer price apply also to foreign transactions executed by individuals or legal entities, even if it is not bound to, residing or domiciled (i) in country or place which does not use to lay tribute on the income or do sob but on the rate that is inferior to twenty percent ; or (ii) in country whose legislation impose secrecy as to the corporate organization or are subject to a beneficial tax regime. Furthermore, the transactions executed with exclusive distributors are also subject to the transfer pricing rules.

11.5.1 Concept of bound parties

As bound to the legal entity domiciled in Brazil it is considered:

• The main office thereof, when domiciled abroad;
• Its branch, when domiciled abroad;
• The individual or the legal entity, residing or domiciled abroad, whose corporate interest in its capital stock characterizes the latter as its holding company or joined company, according to the provisions set forth by the Corporate Law;
• The legal entity domiciled abroad which is characterized as its holding company or joined company, according to the provisions set forth by the Corporate Law;
• The legal entity domiciled abroad, when the latter and the company domiciled in Brazil are under common corporate or administrative control, or when at least ten percent of the capital stock of each one of them belongs to the same individual or legal entity;
• The individual or legal entity, whether residing or domiciled abroad, which, jointly with the legal entity domiciled in Brazil, have corporate interest in the capital stock pertaining to a third legal entity, whose sum characterizes them as holding companies or joined company thereof, according to the provisions set forth by the Corporate Law;
• The individual or legal entity, residing or domiciled abroad, which is its associated, under the form of consortium or condominium, as set forth in the Brazilian legislation, should there is any undertaking;
• The individual residing abroad that is a relative, third kinsman or kinswoman, spouse or companion of any of its directors or its partner or controlling shareholder through direct or indirect interest;
• The individual or legal entity, residing or domiciled abroad, which enjoys exclusivity, as its representative, distributor or concessionaire, for purposes of sale of goods, services or rights; and
• The individual or legal entity, residing or domiciled abroad, in relation to which the legal entity domiciled in Brazil enjoys exclusivity, as representative, distributor or concessionaire, for purposes of sale of goods, services or rights; and
• The taxpayers that shall declare the existence of relationship with individual or legal entity domiciled abroad in their Declaration of Economic and Tax Information of Legal Entities (DIPJ) as well as the transactions which are subject to the rules on transfer price.

The rules on transfer price apply to transactions executed by the legal entity domiciled in Brazil, by means of intervention of person who is not characterized as bound, who use to perform activities in conjunction with another abroad, which is characterized as bound to the Brazilian Company.

11.5.2. Methods for calculation of the transfer price

The Brazilian Legislation that deals with transfer price adopts three methods aiming at defining the maximum deductible amount that applies to the expenditures, costs and charges incurred by goods, services and rights proceeding from the bound party. The methods follow below:

1. Comparable Uncontrolled Price Method - PIC
2. Resale Price Less Profit Method - PRL
3. Production Cost Plus Taxes and Profit Method - CPL

In case of exports, the legal entity will be subject to arbitration whenever the average sale price in such transactions is inferior to 90% in relation of the average price executed together with parties that are not bound to the domestic market during the same period, through similar conditions of payment. Should the average price among the parties be inferior to 90% of the average price executed in the Brazilian market, the income of export will be adjusted based on the methods appointed below:

1. Average Export Sales Price - PVEx
2. Retail Price in Country of Destination Less Profit - PVV
3. Wholesale Price in Country of Destination Less Profit - PVA
4. Purchasing or Production Cost Plus Taxes and Profit - CAP

Methods Applicable to Import of Goods, Services and Rights

Comparable Uncontrolled Price - PIC

This method is defined as the weighted arithmetic average of the prices of goods, services or rights, whether identical or similar ones 3, examined in the Brazilian market or markets of other nations, in sale transactions, through similar conditions of payment. In other words, the legal entity shall compare the costs, expenditures and charges related to the goods, services or rights proceeding from bound parties, during a given time, with the quoted weighted arithmetic average. For identical goods, services or rights, the Normative Instruction no. 243/02 allows adjustments related to:

1. Terms of payment;
2. Volumes negotiated;
3. Liabilities for assurance of operation of the good or of the applicability of the service or right;
4. Liabilities for promotion, before the public, of the quoted good, service or right, by means of propaganda and advertising;
5. Liabilities for costs related to surveillance of quality, standard of the services as well as conditions regarding hygiene;
6. The costs of intervention in sale transaction executed by non-bound companies, which are only considered for purposes or comparison of prices;
7. Packaging; and
8. Freight and insurance.

As regards goods, services or similar rights, in addition to the adjustments itemized above, the legislation deals with adjustments due to differences as to the physical and content-related nature of goods, services or rights exclusively present in those parts corresponding to the differences among the frameworks object of comparison.

Further as regards the arithmetic average, only the transactions executed between non-bound purchasers and sellers will be considered for purposes of calculation of the same arithmetic average. Furthermore, it is worthy to note that Law no. 9430/96 and the Normative Instruction no. 243/08 do not elect a preferential jurisdiction, whether if it is local, state or foreign, in which the prices of the transactions among the non-bound parties will be used as basis. Thus, the legal entity may consider, for purposes of calculation of the arithmetic average of the prices for goods, services or rights, the prices of the transactions executed in conjunction with non-bound parties (which are not subject to rules of transfer price) assessed in the Brazilian market or in markets of other nations, import/export transactions as well as transactions executed outside the Brazilian territory.

Resale Price Less Profit Method - PRL

Nowadays, the Resale Price Less Profit Method may be used in the following situations: (i) when the imported good, right or service is applied in the manufacturing process; or (ii) when the imported good, right or service is merely resold.

For imported goods, rights or services which will be applied in the manufacturing process, the Resale Price Less Profit Method (PRL) is defined as the weighted arithmetic average of the prices for resale of the goods (in Brazil), being such prices deducted from:

1. The unconditional abatements granted;
2. The taxes and contributions to be levied upon the sales;
3. The commissions and brokerage paid; and
4. Profit margin of sixty percent (60%), to be calculated on the price for resale following deduction of the amounts referred to in prior items, and from the aggregate proportional amount in the Country.

The Normative Instruction no. 243/02 establishes an specific procedure aiming at the calculation of the price to be used as parameter. In this case, it is achieved by determining that this price be calculated based on the percentage of imported goods, services and rights in relation to the total cost of the end product.

For the imported goods, rights and services which will not be applied in the manufacturing process, the Resale Price Less Profit Method is defined as the arithmetic average for the resale prices of the goods, services or rights (in Brazil), being such prices deducted from:

1. The unconditional abatements granted;
2. The taxes and contributions to be levied upon the sales;
3. The commissions and brokerage paid; and
4. Profit margin of twenty percent (20%), to be calculated on the price for resale following deduction of the unconditional abatements).

The prices for resale to be considered for purposes of this method will be those executed by the legal entity in resale and wholesale transactions with purchasers, individuals or legal entities, which are not bound to the legal entity. The differences existing the terms of payment may be adjusted based on the interest rate exercised by the company itself, in its habitual sales. Should it be impossible to ratify the consistent application of a rate, the adjustment will be executed based on the rates set forth by Law.

The costs of freight and insurance paid by the Brazilian importer, as well as the non-recoverable taxes paid by occasion of the import (e.g. Import Tax, in case of import of goods) shall be included in the calculation of the costs related to the goods imported through the Resale Price Less Profit Method.

Production Cost Plus Taxes and Profit Method - CPL

This method may be defined as the average cost for manufacturing of goods, services or rights, whether identical or similar ones, in the country where they were primarily manufactured, plus the taxes of export that are charged by the quoted exporter country and profit margin of twenty percent (20%), to be calculated on the assessed cost. The items below may be included in the cost of manufacturing process for purposes of this method:

1. The cost for acquisition of raw-materials, intermediary products and packing materials used in the manufacturing process of the good, service or right;
2. The cost with any other goods, services or rights applied or consumed in the manufacturing process;
3. The cost with the staff, applied in the manufacturing process, including with direct surveillance, maintenance and monitoring of the manufacturing facilities as well as the corresponding social charges incurred, demanded or accepted by the legislation of the native country;
4. The costs with lease, maintenance and repair as well as the charges regarding depreciation, amortization or exhaustion of the goods, services or rights applied in the manufacturing process; and
5. The amounts of reasonable tears and losses occurred in the manufacturing process, which are accepted by the tax legislation of the native country in which the goods, services or rights were manufactured.

Methods Applicable to the Export of Goods, Services and Rights

For application of any of the methods shown below, the price of export in a transaction among bound parties shall be inferior to 90% of the average price performed in sales among non-bound parties in the Brazilian market (if any), that is to say, should the price of export for the bound party do not reach such percentage, the company will have prove it complies with the rules of transfer price according to the amount defined through one of the four methods provided for in the legislation for purposes of export.

Export Sales Price Method - PVEx

The Export Sales Price Method may be defined as the weighted arithmetic average of the sale price in exports performed by the company itself for non-bound parties or by other domestic exporters of goods, services or rights, whether identical or similar ones, during the same period of survey for calculation basis of the income tax and through similar terms of payment. The same adjustments described for the PIC Method (in case of import) apply in this case.

Retail Price in Country of Destination Less Profit Method - PVV

The said method is defined as the weighted arithmetic average for the sale prices of goods (identical or similar prices) which are performed in the wholesale market of the native country, through similar terms of payment, being such prices deducted from:

1. The taxes included in the price which are charged in the quoted country; and
2. The profit margin of fifteen percent (30%) on the sale price performed in the retail business.

Wholesale Price in Country of Destination Less Profit Method - PVA

The said method is defined as the weighted arithmetic average for the sale prices of goods (identical or similar prices) which are performed in the wholesale market of the native country, through similar terms of payment, being such prices deducted from:

1. The taxes included in the price which are charged in the quoted country; and
2. The profit margin of fifteen percent (15%) on the sale price performed in the wholesale business.

Purchasing or Production Cost Plus Taxes and Profit Method - CAP

This method is defined as the weighted arithmetic average for the costs of purchasing or production of imported goods, services or rights plus taxes and contributions charged in Brazil and profit margin of fifteen percent (15%) on the amount of the costs plus taxes and contributions.

Safe Harbors in exports

Besides the methods described below, the legislation in respect of the transfer prices foreseen some situations in case of export, which are referred to as Safe Harbors usually. However, such Safe Harbors can not be considered as perfect Safe Harbors, once the authorities may accept or not the amount of the income acknowledged by the legal entity in conformance with such Safe Harbors.

Indeed, the Normative Instruction No. 243/02 foreseen the following situation:

• The legal entity in charge of verifying the net profit (before the provision for the tax income and for social contribution on the profit) proceeding from sale incomes in the exports for bound parties through amount equivalent to at least five percent (5%) of the total of such incomes may prove the suitability of the prices performed in such exports, exclusively holding the documents related to the transaction itself ("Safe Harbors of 5% of net profit").

The percentage of 5% on the net profit shall be considered by using the annual average of the calendar year itself and the two precedent years. For the assessment of the net profit corresponding to such exports, the common costs and expenditures related to sales will be prorated respecting the respective net profit.

The calculation of this Safe Harbor can not include the sales of rights, goods or services whose profit margin has been amended through Consultation before the Finance Minister.

• The legal entity whose net profit of the exports, in the calendar year, does not exceed 5% of the total of the net profit in the same period may also prove the suitability of the prices performed in such exports, exclusively holding the documents related to the transaction itself ("Safe Harbors of 5% of net profit").

As previously mentioned, these Safe Harbors can not be considered as perfect, once they only reveal the burden of proof for the tax authorities in charge of providing evidence that the prices performed are not in compliance with the market prices.

Such Safe Harbors are not applied to exports of goods, rights or services in case of exporters domiciled in countries whose taxation is assisted or countries whose legislation imposes secrecy as to the corporate organization.

11.5.3. New rules applicable to export in 2005, 2006, 2007 and 2008

In order to reduce the potential negative impact of the pertinent BRL appreciation in comparison to other foreign currencies in the last years, mainly in relation to the USD currency, the Brazilian taxpayers subject to the rules of transfer price have the option to adjust at 35%, 29%, 28% and 20% the export incomes with bound parties, which were assessed in 2005, 2006, 2007 and 2008, respectively.

For instance: considering that the original amount of the exports for the bound parties during the year of 2008 has been equivalent to R$ 100.00, the taxpayer is entitled to use the amount of R$ 120.00 as the "effective" amount of those exports, for purposes of application of the rules regarding transfer prices in the year of 2008.

The possibility of usage of the additional agent applies in the following cases only: (i) comparison with the local independent transactions, in order to conclude in respect of the possibility for application of the minimum amount of ninety percent (90%) of the price with non-bound parties; (ii) comparison with the price being used as parameter, should the taxpayer have elected the usage of the Purchasing or Production Cost Plus Taxes and Profit Method (CAP), and (iii) calculation of the net profit in 2005, 2006 and/or 2007, for purposes of application of the Safe Harbor concerning the minimum margin of 5% of net profit.

Furthermore, in respect to the Safe Harbor referring to the minimum margin of 5% of net profit, the Normative Instructions nos. 602/05, 703/06, 801/07 and 898/08 allow the taxpayer to consider only the calendar year under examination (2005, 2006, 2007 or 2008) in order to define the net profit on the export income to bound parties, to be increased by the percentage of 35%, 29%, 28% or 20%, depending on the year under examination. All things considered, the taxpayer is not bound to include the outcomes achieved in the two precedent years.

11.5.4. Transfer prices - supplementary rules

Amendment to margin

There is the possibility to amend the fixed margins required by the rules concerning transfer prices in the methods applicable to export and import.

Therefore, the legal entity (or trade association that is representative of the economic sector) shall submit an application before the Treasury Department in conjunction with other documents. After submission of the petition, the said Treasury Department will verify the application, the term during which it is intended to apply the amended margin as well as the remaining documents submitted.

Conquest of new markets

The rules on transfer prices provide special treatment to a Brazilian exporter intending to conquest new markets abroad. In this case, the rules makes feasible to a exporter to adopt prices inferior to 90% of the average prices performed in the domestic market.

Notwithstanding, the Brazilian exporter may only take advantage of such special arrangement in case of compliance with some legal requirements and conditions, besides obtainment of prior approval of the "export plan" by the Treasury Department.

Financial loans and transactions among bound parties

As regards the financial transactions, the Brazilian borrower may only deduct as deductible financial expenditure the maximum interest rate of LIBOR plus three percent (3%) paid or due to the non-domiciled, bound party. In the case of the Brazilian lender, however, it shall acknowledge as taxable income at least LIBOR plus three percent (3%) by way of spread on the loan and extended to the non-domiciled, bound party.

The rules referred to above do not apply to loan transactions regularly registered with the Brazilian Central Bank; hypothesis in which the interests defined based on the registered rate will be accepted.

11.6. Interest on own capital

Law No. 9249/95 determines that a Brazilian company may pay or credit interest on own capital to its partners/shareholders provided that the company has a cumulated profit or accrued in the period. The total amount of interest that may be paid or credited cannot exceed 50% of the company's profit accrued in the period or cumulated profit. The basis for calculating the interest on own capital constitutes the company's net equity, excluding the reserves for reappraisal of assets or rights that were not computed in asserting the real profit and the basis for calculating the social contribution over the net profit.

The interest is established based on the long-term interest rate controlled by the government ("TJLP") and calculated on a pro-rata basis. The expenses with interest on capital are considered deductible operational costs for income tax and social contribution on the net profit purposes. A 15% IRRF rate applies over the interest paid, asserted by the partners or (25% if the partner/quotaholder is domiciled in country where the taxation is somehow subsidized).

11.7. Withhold Income Tax ("IRRF") in foreign payments - (services, royalties, interests)

The incomes, gains derived from capital and other revenues paid, credited, delivered, applied or sent, through resource placed in the Country, to the individual or to the legal entity domiciled abroad are subject to levy at withholding income tax ("IRRF").
The quoted tax levies on the rates of:
(i) 15% on transactions not taxed according to the specific manner provided for in Law as well as on (a) the gains derived from capital concerning investments performed via foreign currency; (b) the gains derived from capital assessed upon assignment of goods and rights; (c) alimony and reserve funds; and (d) the awards obtained through competitive examination or competitions.
(ii) 25%: (a) on the revenues proceeding from any transaction under which the beneficiary is resident or domiciled in country where the taxation system is subsidized and; (b) on the labor revenues, with or without employment relationship, or on the revenues regarding rendering of services.
It shall be noted that the services taxed by CIDE [Contribution for Intervening on Economic Dominance], whose applicable rate is of 10% are entitled to a reduction of the IRRF to 15%.

11.8. Social Contributions on Revenues ("PIS" and "COFINS")

The Contribution for the Financing of Social Security ("COFINS") and the Social Integration Program ("PIS") levy on the revenues received by the Brazilian legal entities, a few cases excepted.

Laws nos. 10637/02 and 10833/03 introduced the new system for verification of PIS/COFINS [Social Integration Program/Contribution for Social Security], which applies to the major of the companies. The intent of the new legislation is to prevent the accumulation of this contribution by way of grant of credits in the acquisition of goods and services needed in the company's activities. Nowadays PIS/COFINS levy on a combined rate of 9.25% (COFINS - 7.6% and PIS - 1.65%).

Under the new form of calculation of PIS and COFINS, the taxpayer is entitled to the credit related to the contribution pursuing from the operations of:

1. goods acquired for purposes of resale, excepting for those goods expressly referred to;
2. goods and services used as input for the rendering of services and for the production or manufacturing of goods or products addressed to sale, including fuels and lubricants;
3. electrical and heat powers, including steam Power, consumed in the legal entity's establishments;
4. payment of leases of buildings, machines and equipment to companies for the use thereof in the company's operations;
5. amount of the considerations of commercial lease transactions of legal entity;
6. machines, equipment and other goods incorporated to the fixed assets acquired or manufactured to be leased to third parties or used in the manufacturing of goods intended for sale or in the rendering of services;
7. buildings and betterments in own real property or real property pertaining to third parties used in the corporate activities;
8. goods received in return;
9. storage of good and freight in the sale transaction, for cases (i) and (ii), when the burden is supported by the seller.

The credits may be used by the company in order to reduce PIS/COFINS that levy on the revenues proceeding from other subsequent transactions. This form does not apply to the cooperative organizations, immune or exempt companies, companies taxed by income tax based on the assumed or arbitrated profit, legal entities that have adopted the SIMPLES [Unified Tax Collection System], to the revenues arising out of rendering of telecommunication services, arising out of services of call center, telemarketing, phone collecting and phone services companies in general, among others.

In regard to the taxpayers that are subject to higher tax rates pursuant to the single-phase system of the PIS and COFINS, such as the pharmaceutical and auto industries, pursuant to Law No. 10865 of April 30, 2004 they thenceforth are entitled to credits under the non-accumulation system.

Further, there exists an express provision determining that PIS and COFINS does not apply over the revenues resulting from the export of products to abroad, supply of services to an individual or company domiciled abroad, whose payment represents the inflow of foreign currency and over the revenues of sales to trading companies with the specific purpose of export. Another important aspect concerns the reduction to zero of the tax rate of these contributions over the financial revenues (except those pursuing from interest on own capital and hedge) as of August 2004, provided that the taxpayer is covered in the non-accumulation system of the tax.

PIS/COFINS-Import
Moreover, Law No. 10865/04 introduced the taxation of PIS and COFINS on imported products and services. This law determines that PIS and COFINS are due in the entry of foreign goods in Brazil and in the payment, crediting, delivery, the use or remittance of amounts to foreign residents or domiciled abroad as payment for the services supplied.
The taxpayers thereof are all the importers and companies or individuals that contract the services of individuals or companies domiciled abroad. The general tax rate of the PIS and COFINS - Import contributions are, respectively, 1.65% and 7.6% and the tax basis shall be as follows: value for customs purposes adopted as the tax basis in the import tax, plus the State Sales tax (ICMS) and the PIS and COFINS amounts. In the import of services the tax basis is the price of the service plus Service tax (ISS) and the PIS and COFINS contributions.

11.9. Contribution for Intervention in Economic Domination ("CIDE")

The CIDE contribution was introduced to finance a new social program (Incentive for the College-Company Relations to Support Innovation Program) for the interaction between colleges and companies, aiming to incentive the technological development in Brazil. The program shall be realized through scientific and technological research programs between colleges, research centers and industries.

This contribution is paid by Brazilian companies that hold licenses to exploit rights, purchasers of know how or parties to contracts that imply in the transfer of technology executed with non-residents and domiciled abroad. As of January 1, 2002 the CIDE contribution is also paid by companies that supply technical services, administrative assistance and other similar services. The CIDE contribution is due over the amounts paid, credited, delivered, used or remitted, on a monthly basis, to non-resident beneficiaries, such as royalties (any type) and remuneration in the following types of contracts:

1. technology supply,
2. technical support (technical assistance and specialized technical services),
3. assignment and licensing of trademarks,
4. assignment and licensing of patents, and
5. contracts for the supply of technical services, administrative assistance and other similar services.

In this scenario, Law under no. 11452/07 introduced the non-levy of CIDE on payments for use license and rights for commercialization of software, excepting for cases involving technology transfer (transfer of source code). The effectiveness of the hypothesis regarding non-levy brought by Law under no. 11452/07 is retroactive to January 1st, 2006.

The tax rate of this contribution is 10% over the amounts paid, credited, delivered, used or remitted per month to non-resident beneficiaries or domiciled abroad as payments under the types of agreements mentioned above. The contribution whose taxpayer is the Brazilian legal entity is due on the last business day of the fortnight subsequent to the month in which the taxable event takes place.
11.10. Contribution for intervention in the economic domain ("cide") over combustion fuels

This contribution is due over the import and sale of certain types of combustion fuels (petrol, diesel oil, aircraft kerosene and other types of kerosene, gasoline, liquefied petrol gas, including the by-products of natural gas, methanol and naphtha) in a fixed amount in Reais [Brazilian currency] pursuant to the measure unit adopted for each of the products susceptible to contribution.

The CIDE contribution is payable by the producer, mixer or importer of combustion fuels. In the domestic market, the taxpayer may deduct the amount of CIDE, paid in the export or commercialization, from the amounts of contribution for PIS/COFINS due in the commercialization, in the domestic market. The CIDE contribution is not due over the revenue that results from the exports of the aforesaid products.

11.11. Contribution for the Development of the Brazilian Cinematographic Industry ("CONDECINE")

This contribution is due over the exhibition, production, licensing and distribution of movies and photography work in video with profit purposes, per market segment, and it is calculated based on the period of work on predetermined basis.

CONDECINE is also due at the tax rate of 11% on the amounts paid, credited, remitted, delivered or used by local agents to foreign producers resulting from the exploitation of audiovisual work in Brazil.

11.12. Export Tax ("IE")

The export tax is due upon the export. This tax has an ad valorem tax rate that is applied according to a limited product list and varies according to the type of product that is being exported.

11.13. Import Tax ("II")

The import tax is due upon the clearance by customs of the imported products, according to an ad valorem tax rate. The tax rate varies according to the tariff classification of the imported product. Imports of products are also subject to IPI (Tax on Industrialized Products), ICMS (Sales Tax) (further addressed below) and PIS/COFINS-Import. These taxes, jointly with the import tax, are calculated as follows: the import tax is applied over the CIF price of the imported product; the IPI tax applies over the CIF price plus import tax; the ICMS tax applies over the CIF price, plus import tax, IPI tax, the PIS/COFINS-Import and the ICMS tax and the PIS/COFINS-Import applies over the CIF price, plus ICMS (calculated according to the PIS/COFINS regulation) and the PIS/COFINS-Import themselves.

11.14. Tax on the Circulation of Products and Services ("ICMS")

Similar to the IPI tax, the ICMS tax is another tax that is due over the sale of products and, also, the supply of services, due upon the import of a product into Brazil and the sale or transfer thereof within Brazil, or upon the supply of communication services and intra or interstate transportation, upon the supply of the service.

The ICMS tax rates and the tax benefits vary from state to state and also according to the type of operation (e.g. intra or interstate sale of products, communication services or transportation, etc). In the state of São Paulo the most common tax rates are currently (i) 12% over transportation services, (ii) 18% over imported products, sold or transferred and (iii) 25% over communication services. According to Constitutional Amendment (EC) no. 33/01, ICMS is due over imports by companies and individuals, even when not considered taxpayers for the purposes of ICMS payment, at a tax rate of 18%. The other tax rates may be applied depending on the product/service. The tax rates may also vary in interstate operations (usually 7% or 12% depending on the state of destiny of the products and services).

Similar to IPI, the ICMS system allows a certain taxpayer to offset the ICMS paid upon the purchase of products and services with the tax amount due in subsequent taxable operations (e.g. sale of products and services subject to ICMS). The difference among such amounts shall consist of the amount due to the state.

As of Nov. 1, 1996 importers/buyers may be credited by the ICMS paid over imports and local purchases of fixed assets (which was prohibited up to Nov. 1, 1996). However, Supplementary Law (LC) No. 102/00 introduced a new system for the use of ICMS credits upon the purchase of fixed assets so that the taxpayer may record the aforesaid credits at a 1/48 monthly rate.

In regard to taxpayers that have excess ICMS tax credit, some state laws establish options that allow the taxpayer to transfer its credits. In the sate of São Paulo, for example, the state law offers three options for the taxpayer that has an excess of ICMS tax credit to use the tax already paid (instead of offsetting same with ICMS debt), namely: (i) transfer of ICMS credits to any of its affiliates or offices established in the state of São Paulo, (ii) transfer the credits to an inter-dependent company, as defined by the law, or (iii) use the credits to pay suppliers of raw materials and/or certain fixed assets. Other state laws may establish other options for the use of ICMS credits.

11.15. Tax on Industrialized Products ("IPI")

The tax on industrialized products is a federal tax that is due over industrialized products upon the exit thereof from the facility where they are manufactured. The IPI tax is also due in the import of industrialized products in the case of import of a product used as an input and its subsequent sale by the importer. The IPI tax rates vary according to the product's essentiality.

The IPI is due in each stage of the manufacturing process of the industrialized products, and also in the import thereof. This tax is paid upon the purchase or import of raw materials and products, parts, intermediary components and packaging materials and may be offset in subsequent operations.

11.16. Services Tax ("ISS")

ISS is a municipal tax levied on the supply of any type of services, as defined in federal Supplementary Law (LC). This tax is currently governed by Supplementary Law (LC) no. 116/03. The rate of ISS varies between 2% and 5%.

ISS is due generally for the Municipality where the establishment rendering services is located. The following exceptions are determined in LC no. 116/03: civil construction, services acquired abroad, sweeping and collection of garbage services, treatment of effluents, environmental sewage, forestation, parking security, storage and amusement services.

As of January 2004 the ISS tax is due over the purchase of foreign services, the Brazilian beneficiary thereof being liable for the payment of the tax, in addition to its levy over exports of services when the results occur in Brazil (despite that the payment is made by a foreign resident).

Law No. 14042/2005 introduced the mandatory registration of services providers domiciled in other municipalities with the Treasury Department of the City of São Paulo. Service providers that fail to comply with this accessory obligation will be subject to the withholding of the ISS by the respective client, meaning that the tax will be collected to the Municipality of São Paulo, regardless of the possible payment of the tax to the Municipality where the service company is located. Upon the registration, the legal entity is obligated to provide evidences that it is in fact domiciled in other municipalities.

11.17. Tax on Financial Operations ("IOF")

The Decree no. 4494/02, which used to regulate the IOF, was revoked recently and substituted by Decree no. 6 306/07, which initiated the new regulation. Notwithstanding, successive alterations to Decree no. 6 306/07 were initiated by Decrees nos. 6339/08, 6453/08, 6566/08, 6613/08, 6655/08, 6691/08, 6983/09 and 6984/09.

With respect to IOF-credit, which applies to in case of credit operations of any nature, this becomes due in the delivery moment of the value which shall constitute the obligation object, or at the moment it is made available for the interested party. Concerning the credit operations with term and values determined, applies to on the main loan the IOF to the tax of 0.0041% per day, in case of legal entity borrower or individual borrower, followed by a supplement of 0.38 %, totalizing maximum amount of 1.88%.

For payments with undetermined terms, applies to also the tax of 0.0041% per day, for the legal entity borrower or individual borrower, followed by a supplement of 0.38 %, but applies to a specific methodology of calculation to benefit the amount of the due tax.

The tax on the financial transactions incurs also to determined exchange transactions ("IOF-exchange"). Recently, for the majority of transactions that the IOF-exchange is due, including in respect to the payments related to import of services, applies to a tax of 0.38%. Notwithstanding, the IOF-exchange falls upon the tax of 5.38 % on loans assigned for non-resident to Brazilian companies which the date of settlement is less than 90 days and 2.38% in relation to exchange transactions carried out by credit card administrators to cover debts carried out by their clients in a foreign country. For incomes arising from export to due IOF-exchange tax is of 0%. In addition, a 2% rate applies to the inflow of funds to be invested in the financial and cpaital maarket by non-residents.

In addition to incidence of IOF on credit and exchange transactions, this tax also falls upon financial transactions related to insurances, (mostly the incident tax is 7.38%), title deeds and real state (with taxes that in the majority of transactions oscillate between 0%, 0.5% and 1% and upon operations with gold, financial assets, or exchange instrument, under tax of 1%.

11.18. Provisional Contribution on Financial Activities ("CPMF") - (dismissed since 2008)

The Law no. 9331, of October 24, 1996, created the CPMF to the tax of 0.38% on all the banking transferences and currency withdrawals to obtain temporary term. Although, the term of this contribution was repeatedly extended, as it was predicted through the Constitutional Amendment no. 42/2003 the possibility of collection of this contribution up to December 31, 2007. The new constitutional amendment that afforded on the extension of CPMF from 2008 was not approved, being this dismissed from January, 2008.

11.19. Tax on Urban Buildings and Property ("IPTU")

IPTU is a municipal tax that is levied on an annual basis and has tax rates that are normally progressive, based on the use and appraised value of the real estate property.

11.20. Tax on the Transmission of Real Estate Property ("ITBI")

ITBI is a municipal tax levied over the transfer of real estate property. The tax rates may vary according to the real value of the operation or the appraised value of the real estate, whichever is higher. Note that, in the Municipality of São Paulo, the tax authorities are allowed to update the appraised value of the real estate through market researches. In addition, in the municipality of São Paulo it has a fixed tax rate of 2%. The ITBI tax is not due in the transfer of real estate property in the events of merger of companies or contributions for the integralization of the capital stock in cases where the taxpayer's corporate objective is not related to the real state activity.

11.21. Tax on Transmission of Property Causa Mortis and Donations ("ITCMD")

The ITCMD is a state tax levied on the transmission of chattels or real estate property by way of donation or death (inheritance). Currently, in the state of São Paulo, the ITCMD tax rate is 4% of the appraised value of the chattels or real estate or the transmission of rights.

11.22. General aspects of the treaties to avoid Double Taxation ("TDT")

Chapter written by
Souza Schneider e Pugliese Advogados
Contact: H. Philip Schneider

In order to facilitate the economic activity flow with your commercial partners, Brazil signed TDT with some countries, so as to avoid that the incident taxation in each of them make impracticable such activity.

TDT Supremacy about the Internal Legislation

Whitin the constitutional scope, the TDT prevalence on the internal legislation of the analysis combined with article 5, paragraph 2, article 150, caption, both of the Federal Constitution can be inferred. The paragraph 2 of article 5 provides that the rights and fundamental warranties assured by the international treaties signed by Brazil can not be excluded by the subconstitutional internal legislation. But the caption of article 150, which deals with limitations on power to tax, includes tax issues in relation to fundamental rights.

In the tax scope, the article 98 of CTN [Brazilian National Tax Code] is pointed out, which expressively determines that the treaties and international conventions, in tax scope, should prevail upon the internal legislation. Thus, if Brazil celebrates a TDT with other Contracting State, the analysis of the legislation which governs the international transactions involving residents of the both countries should take into consideration, for tax purposes, the present TDT provisions.

But in the non-statutory scope, in order to confirm the TDT supremacy, specially in respect to the income tax, the article 997 , of the Income Tax Regulation, approved by the Decree no. 3000, from March 26, 1999 ("RIR/1999"), stated that the international treaties, celebrated by the Brazilian government and duly inserted in our legal system, should prevail upon the established rules by the internal legislation.

It is important to take into consideration that, also in relation to the TDT, there are significant decisions of the Superior Court in Brazil - Supreme Court (STF) and Superior Court of Justice (STJ) - that make reference to the determined rule at article 98 of CTN, defending, therefore, the prevalence of the TDT in face of the domestic legislation.

Taxes reported by TDT

The Brazilian legal entities are, generically, subject to the named "corporate tax" in Brazil, incident on (i) the income (profits), in the form of Corporate Income Tax ("IRPJ") and Social Contribution on the Net Profit ("CSLL"); and (ii) the revenues, by the Contribution for the Social Integration Program ("PIS") and Contribution for the Financing of Social Security ("COFINS").

In the terms of article 2 of the Model Convention of OCDE , the TDT apply on the incident taxes over the "income" (paragraph 1), regardless of the system used for its collective, on the total of income, or on part of it (paragraph 2). Therewith, the similar taxes or identical which are created after the date of signature of TDT, in addition to the already existing, or in their replacement (paragraph 4), are excluded, also in its scope.

Thus, the application of the TDT and IRPJ rules and its additional due by the resident and domiciled in Brazil seems uncontested.

In relation to the CSLL, it is mandatory weight that, in line with article 2 of the Model Convention of OCDE, the taxes list in paragraph 1 of the mentioned article is merely connotative or exemplifying, containing only the taxes in force in the moment of the negotiations, in order to present the TDT, not being necessary to discuss about the TDT's limitative scope in relation to the taxes initiated in the future. The TDT should be denominated in relation to the existing taxes in the moment of the TDT negotiation, but not limited to them: future taxes can be included by the TDT, since they comprise with the requirements of paragraph 2 of the same article, in other words, hold the identity or substantial similarity with those expressly provided in the text.

In relation to the taxes considered "identical or substantially similar" it is concluded in the sense that their generated facts and tax base should be identical or substantially similar (in the patterns of article 4 of CTN), so that they can hold the same law nature.

For such reason, it should be understood that the CSLL holds the same IRPJ nature: the generator fact of both taxes is essentially the same (to benefit the income), and the tax base is very similar ("profit", with small discrepancies due to the fact of legal adjustments lapsed by the specific legislation of each tax). Thus, if the CSLL is not expressly comprised by all the celebrated TDT by Brazil, it should be understood by its scope from the TDT signed before its creation. Therefore, the individual analysis of each TDT is recommended, specifically regarding its celebration and CSLL establishment.

In respect to the Contribution to PIS and to COFINS, these are not comprised by the TDT terms, because significant differences are identified between the tax bases of these contributions and what is generically considered in the TDT as tax on income (which find correspondents in IRPJ and CSLL, as mentioned above).

In recent times, Brazil holds TDT signed with the following countries:

i. South Africa
ii. Argentina
iii. Austria
iv. Belgium
v. Canada
vi. Chile
vii. China
viii. Korea
ix. Denmark
x. Ecuador
xi. Spain
xii. Philippines
xiii. Finland
xiv. France
xv. Holland
xvi. Hungary
xvii. India
xviii. Israel
xix. Italy
xx. Japan
xxi. Luxembourg
xxii. Mexico
xxiii. Norway
xxiv. Peru
xxv. Portugal
xxvi. Czech Republic and Slovakia
xxvii. Sweden
xxviii. Ukraine

Therefore, according to each one of the celebrated treaties, the companies headquartered in these countries have, in some way, privileged treatment relating to the IRPJ and, in some cases, the CSLL, and the negotiation with these countries may be beneficial.