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Tax (5-12)

Tariff

5.1 Import tax

[The Import Tax (“II”) is imposed on the import of foreign products, i.e., products manufactured or extracted abroad and brought into Brazil. The taxable basis is the customs value, whose definition follows the Customs Valuation Agreement, which is part of the General Agreement on Trade and Tariffs (“GATT”). Based on said Agreement, the customs value corresponds, in general, to the Cost, Insurance and Freight (“CIF”) value of the imported products, plus additional expenses with wharfage. The II rates vary in accordance with the tax classification code of the imported product in the Mercosur Common Nomenclature (“NCM”), which follows the Commodity Description and Coding System (Harmonized System). Based on these codes, Mercosur established a common table of import tax rates (Mercosur Common External Tariff table – “TEC”), with possibility of limited variations on the rates applied by each jurisdiction. The II cannot be recovered by the importer.][1]

 

 

     5.1.1 Exemption of import tax

[The following goods are exempt from Import Duty:

  • Foreign goods that, correctly described in the transport documentation, arrive in Brazil due to proven error in the shipment of the goods, and that is shipped again or returned abroad
  • Identical foreign goods, of equal quantity and value, intended to replace goods that were previously imported and that, after customs clearance, were proved to be defective or useless
  • Foreign goods subject to Pena de Perdimento, which is Portuguese for Confiscation Penalty
  • Foreign goods returned abroad before the registry of the Import Declaration
  • Vessels built in Brazil and shipped by a Brazilian navigation company to an integral subsidiary abroad, returning for Brazilian registration, provided it is still owned by the same national company that built it
  • Damaged or useless foreign goods, provided that they are destroyed under customs control, before customs clearance, with no costs to the National Treasury
  • Foreign goods on transit between customs units that are accidentally destroyed

Goods re-entering Brazil are exempt from Import Duty in the following cases:

 

  • Goods sent on consignment and not sold within the authorized deadline
  • Goods returned due to technical malfunction, for repair or substitution
  • Goods returned due to changes in the importing legislation of the importing country
  • Goods returned due to war or public disaster
  • Goods returned due to all other reasons beyond the exporter’s control.

Products imported to Brazil that have an overall value of less than USD 50 are exempt from Import Duty.][2]

 

 

 

 

     5.1.2 Penal regulations

5.2 Export tax

[The Export Duty is a federal tax charged on Brazilian exports that were produced in Brazil or that were nationalized and then exported after reprocessing. The basic tax rate for the Export Duty is 30% but, this may be reduced or even increased to a maximum of 150% in order to meet the objectives of its exchange rate policy and foreign trade policy. The Export Duty is calculated at the moment it is registered as an Export Declaration on Siscomex. The calculation basis for the Export Duty is the FOB value that the product, or its similar, would have at the time of its export, not its production cost. When the price of the product is difficult to evaluate or is likely to suffer from sudden oscillations in the international market, the government, through an act by the National Monetary Council, will establish specific criteria or establish a minimum agenda for determination of the calculation basis of the product. Due to the fact that the Brazilian trade balance depends mainly on exports and that the tax is extra fiscal - meaning that its collection is not calculated and made part of the tax collection forecast - the tax is not highly considered by the government, which makes it common for Export Duty to have a tax rate of 0% in order to encourage exports of certain goods.][3]

 

6. IOF

6.1 Credit Operation

[The IOF is calculated through two different aliquots. It is up to the Minister of Finance to set the rate of IOF for credit operations, which cannot exceed 1.5% per day. The current rate levied on transactions entered into by individuals is 0.0082% per day, plus the incidence of a fixed rate of 0.38% on the sum of the debtor balances accrued daily, calculated on the last day of the month.

As for the transactions entered into by companies, the aliquots is 0.00137% per day for companies opting for the Simples Nacional in operation less than or equal to BRL 30,000.00. For the other companies, the rate is 0.00.41% per day for the other cases. Plus, the additional rate currently fixed in 0.38% levied on the sum of the debtor balances accrued daily, calculated on the last day of the month.][4]

 

 

 

6.2 Foreign Exchange

[The maximum rate of IOF for foreign exchange transactions is 25%. Currently, however, in the case of loans, it is reduced. See how it relates to the following situations:

In the settlement of exchange transactions from April 7th, 2011, for inflow of funds into the Brazil, including through simultaneous operations referring to foreign loan, subject to registration with the Central Bank of Brazil. Contracted so directly or by issuing bonds on the international market with an average minimum of up to seven hundred and twenty days: 6% rate

In foreign exchange operations to ensure compliance with obligations to credit card companies or commercial banks or acting as multiple credit card issuers arising from the acquisition of goods and services from abroad made ​​by users: 6.38% rate

In foreign exchange transactions related to the payment of import of services: 0.38% rate

Transfer of resources from abroad to Brazil:

Up to 90 days of commencement of employment: 5% on the amount transferred

Over 90 days: zero rate

Other transfers: zero rate

Transfer of funds from Brazil to other countries:

Linked to a credit card: 2% on the amount transferred

Other transfers, not linked to a credit card: zero rate][5]

 

6.3 Insurance

[As in foreign exchange transactions, the maximum rate for the IOF levied on insurance operations is 25%, although the effective rate is much lower:

 

Private insurance for health care: 2% tax rate

Reinsurance, compulsory insurance, insurance linked to home mortgage, exports and international transport, among others: zero rate

Life insurance, personal and labor accident: 4%, for contracts made from September 1st, 2004 to August 31, 2005, 2% for contracts made from September 1st, 2005 to August 31th, 2006, and zero rate for contracts made from September 1st , 2006.

Other insurance operations: 7%][6]

 

6.4 Securities

[The maximum rate of IOF levied on those transactions is 1.5% per day. Currently, however, the effective rate is zero, except for the following operations:

Applications made by foreign investors in mutual funds investing in emerging companies and real estate investment funds: 1.5% per day, limited to 10%.

On redemption, sale or refinancing of transactions of this nature: rate of 1% per day, limited to the yield of the operation, according to the time. In redemption made ​​after 30 days the rate is reduced to zero.

Redeeming units of investment funds before completion of the grace period for credit income: tax rate of 0.5% per day.

In transfer of shares that are admitted to trading on a stock exchange located in Brazil, with the specific purpose of ballast the issuance of depositary receipts traded abroad: 1.5% tax rate][7]

 

6.5 Trade of gold through financial institution

[Tax operations with Gold financial asset or Exchange instrument: 1% tax rate.][8]

 

7. Property taxation

  7.1 Property tax of possession

     7.1.1 Property tax on cars

[Motor-vehicle ownership tax (imposto sobre propriedade de veiculos automotores - IPVA) is payable for all motor vehicles in Brazil. This is paid for annually; the month in which it is to be paid corresponds with the final digit of the vehicle's registration number. It is paid in arrears and not for the following year. The process is referred to as “licenciamento”, and to obtain the road tax statement the driver must pay any outstanding fines for parking or speeding.

This tax is calculated on the vehicle's value and is levied by the state, though the municipality in which the car is registered also receives money. The money is used at state and municipal level for general purposes.][9]

 

 

 

     7.1.2 Property tax on buildings and land

         7.1.2.1 Standard of tax payment of IPTU

The so-called IPTU is a municipal tax charged over the property of urban real estate. Its [rate is calculated on the venal value of the urban constructed areas, which is determined by mass valuation. The basic unitary value of the square meter of lands and buildings will correspond to the value fixed in the Plants of Generic Values (Plantas de Valores Genéricos – PVG), elaborated through statistical processes and field work.

As IPTU is a municipal tribute, its rates vary significantly from city to city, as well as the maximum number of installments. This tax is paid every year, by the owner of the house, building or land plot. In case of rentals, it is a usual practice to include in the contract a clause passing to the tenant the obligation to pay the IPTU. Still, for the municipality, the legal debtor is the owner (the municipality will sue the owner, in case the tax is not paid).][10]

 

     7.1.3 Property tax on farmland

         7.1.3.1 Standard of tax payment of ITR

[This is a tax charged on Rural Land, usually named ITR. It is a federal tribute, charged on any property outside the limits of urban areas. The rates are calculated over the total area (constructions or plantations do not influence the tax's value), depending also on the lands' degree of utilization. The land's owner has to fill an annual declaration online that will generate the value to be paid.

Since 1990, the ITR's value is much higher for unproductive fields, in an effort to end speculation. The government's measure turned empty large fields no longer economically interesting, what contributed to the 90's agribusiness boom in Brazil.][11]

 

 

  7.2 Property tax of transfer

     7.2.1 ITBT between survivors

         7.2.1.1 Standard of tax payment

[The collection of ITBI is mandatory whenever there’s an onerous transfer of immovable property in any capacity, whether it's a transfer of ownership or ownership rights or even the assignment of rights. Without paying this tax, it’s not possible to register the property in the name of the new owner at the public notary.

Each Brazilian municipality has a different aliquot for ITBI. To give an example, São Paulo city has its ITBI fixed at a rate of 2% over the assessed value of the real estate. The Federal Constitution does not provide for a maximum tax rate for ITBI, which means that each municipality can establish the rate it wants, as long as it is not characterized as confiscation effect (Article 150 of the Constitution). In contrast to what happens with ITCMD, which can be paid in up to 12 installments, ITBI must be paid in a single payment.

ITBI is not levied over the transfer of property or rights that are incorporated to the patrimony of a legal entities through capital realization, or in the transfer of property or rights pursuant to an merger, incorporation, split-off or extinction of a legal entity, unless in these cases, the main business of the buyer consists in the purchase and sale of such property or rights, real estate rental or leasing. The non-levy does not apply if the purchaser has a legal entity principally engaged in the sale or lease of real property or the assignment of rights to purchase.][12]

 

     7.2.2 ITCMD

         7.2.1.1 Standard of tax payment

[The Imposto sobre Transmissão Causa Mortis e Doação (Causa Mortis Transfer of Real Estate Property Tax and Donation of Any Type of Property or Rights) is better known by the acronym ITCMD.

As stated above, ITCMD is a state tax, which means that it’s up to the Brazilian federative units to establish the rates, legislation and payment deadlines regarding this tax. Each Brazilian state has a different aliquot for ITCMD. To give an example, São Paulo state has its ITCMD rate fixed on 4% over the value of the inheritance. The maximum rate allowed by the Federal Government is 8%.

In this article, we are focusing on inheritance, but ITCMD is also meant for donations as well.][13]

 

8. Other taxes

  8.1 Burden charge for social insurance

     8.1.1 Types of payment

[INSS is responsible for collecting contributions to maintain the Brazilian Social Security regime operating:

 

·       Paying retirements

·       Pensions due to death

·       Illness

·       Disability aids

·       Others benefits foreseen by law][14]

 

     8.1.2 Requirement and burden rate

         8.1.2.1 Employee

·       [For employees

Type/ nature: Income

Calculation Basis: Wages

Subject Liable: Individual

Rates: from 8% to 11%

Taxing capital Authority: the union[15]]

 

         8.1.2.2 Employer

·       [For employers

Type/ nature: Production

Calculation Basis: Payroll

Subject Liable: Corporate entity; or individual (domestic employer)

Rates: 15%, 17.5%, 20% and 22.5%; or 12% (domestic employer)

Taxing capital Authority: the union[16]]

 

         8.1.2.3 Manager, director and sole proprietor

·       [For self-employed

Type/ nature: Income

Calculation Basis: Earnings

Subject Liable: Individual

Rates: 20%

Taxing capital Authority: union[17]]

9. Tax investigation

9.1 Overview of tax investigation

[There are two basic audit procedures: tax audit in the taxpayer’s premises and notification of the taxpayer when there is no specific investigation.

The audit procedure begins with any written act issued by the competent tax authorities to inform the taxpayer or its representative. It can also commence with the retention of the taxpayer’s goods, documents or books and, in case of import transactions, commence during the customs procedures.][18]

 

9.2 Report of tax assessment

[Tax authorities may request the presentation of any tax, civil and corporate documents connected to the facts being audited. In this sense, the taxpayer is obliged to present to the tax authorities all information and documents required through the corresponding notification, regardless of corporate confidentiality terms.][19]

 

10. Withholding system

10.1 Taxable income

[Brazil provides relief from double taxation of foreign-source income by a credit or tax reduction, depending on the income. A foreign tax credit may be claimed for foreign tax paid limited to the Corporate Income tax liability to the extent the foreign-source income in included on taxable income. Withholding taxes are creditable, as well as underlying income tax paid, regardless the existence of double tax treaty signed under certain conditions.][20]

[Profits/dividends distributed to resident or non-resident beneficiaries (individuals and/or legal entities) are generally not subject to IRRF (Brazilian term for withholding income tax).This provision is also applicable to dividends paid to non-resident companies located in a tax haven jurisdiction.

The RFB issued guidance in relation to how they should treat certain service fees, which, in effect, allow certain payments to be protected from IRRF in Brazil, under certain tax treaties.][21]

 

11. International tax

11.1 Exemption of foreign tax

[The Law provides for the exemption of federal taxes due on import of goods or services used exclusively in activities directly related to the organization or realization of both events, such as trophies, medals, plaques, statuettes, pins and badges, flags, and other commemorative objects; promotional material, flyers, and the like; and other similar non-durable material (which useful life is up to one year). Taxes included in this exemption are II, IPI over imports due on customs clearance, and PIS/COFINS-Import, among other charges and duties.][22]

 

11.2 Transfer pricing tax system

    11.2.1 Overview of transfer pricing tax system

·       [Taxing authority: Brazilian Internal Revenue Service (Receita Federal)

·       Tax law: Internal Revenue Code by Decreto 3000, 26 March 1999 (RIR99)][23]

[Transfer pricing rules apply for: – Transactions involving a corporate entity or individual residing in Brazil and a corporate entity or individual residing abroad: • Who are related under the terms of the Brazilian legislation; or • Unrelated corporate entities or individuals, with residence or domicile in: – A tax haven jurisdiction – A jurisdiction allowing corporate secrecy (ownership and/or composition); – A jurisdiction whose domestic legislation fails to identify the effective beneficiary of the revenue – Privileged tax regime jurisdictions.

Transfer pricing rules also apply to: – transactions involving a related Brazilian legal entity or individual and a foreign legal entity or individual which are mediated by a third unrelated party; and – Ordered import transactions (importação por encomenda).][24]

 

    11.2.2 Foreigners that can apply for the system

[The following shall be considered to be related to a Brazilian legal entity or individual:

• It’s foreign parent company;

• A foreign affiliate or branch;

• A foreign corporate entity or individual whose shareholder participation in the Brazilian entity qualifies her as a controlling or colligated entity;

• A foreign corporate entity characterized as a controlled or colligated entity;

• The foreign legal entity which is under the same corporate or administrative control, or when at least 10% of the capital of each of the companies belongs to the same corporate entity or individual;  Application of the Transfer Pricing Legislation

• The foreign corporate entity which, together with a Brazilian corporate entity or individual detains enough shares in a third person to qualify her as controller or to make her colligated;

• The foreign corporate entity or individual associated to a Brazilian entity or individual through a consortium or condominium structure;

• A foreign individual who is a relative or is related up to a third degree kinship, or is a spouse or cohabitant of any of its directors, partners, or controlling shareholders in direct or indirect participation;

• The foreign corporate entity or individual, bearing exclusivity as an agent, distributor or concessionaire for the purchase and sale of goods, services or rights abroad;

• The Brazilian corporate entity or individual, bearing exclusivity as an agent, distributor or concessionaire of a foreign company, for the purchase and sale of goods, services or rights in Brazil;][25]

 

 

 

 

 

 

    11.2.3 Overview of price calculation between independent companies

[26]

 

    11.2.4 Methods to calculate price between independent companies

         11.2.4.1 Method to calculation price when import

[1. Comparable Independent Price Method (PIC):

The comparable price (or benchmark) results from the weighted arithmetic average of: (i) The price of the goods, services and rights (ii) verified in Brazil or abroad (ii) between unrelated parties (only - related party data not admissible) (iii) In purchase or sale transactions, (iv) of the same or similar assets, goods, services or rights (functional analysis) (v) under similar payment conditions.

 

2. Resale Price Minus Profit Method (profit Margins 20% and 60%) (PRL):

Weighted Arithmetic Average of the resale price of the goods, services or rights, reduced by: (i) The unconditional discounts granted; (ii) The taxes and contributions levied on the sale; (iii) The paid brokerage and commission fees; (iv) The profit margin of: 1. 20%, for the resale of goods, services or rights; 2. 60% for the import of goods, services or rights to be applied in a production process.

 

3. Production Cost Plus Profit (CPL):

The comparable price under this method is determined by assessing the average cost of the production of similar or identical goods, services or rights, in the country where they were originally produced, and add: i. A profit margin of 20%, before the assessment of taxes and levies; ii. Taxes and levies assessed by the foreign country Production costs should be discriminated per component, value and respective suppliers.][27]

 

         11.2.4.2 Method to calculation price when export

[1. Export Sales Price (PVEx) Method:

Benchmark = arithmetic average of the sales price applied by the company itself on export transactions, to unrelated clients or to other unrelated (Brazilian) exporting company. The method applies to the sale of similar or identical goods, services or rights. Only sales concluded with unrelated parties may be used for benchmark calculation under this method.

 

2. Wholesale Price in Country of Destination Less Profit (PVA):

Benchmark = weighed arithmetic average of the sales price of similar or identical goods, practiced in the wholesale market of the country of destination, reduced by: i. The taxes already included in the price and charged in the country of destination; and ii. Profit margin of 15% on the wholesale price (gross price) The excludable taxes included in the price by the country of destination, are those considered to be similar to the Brazilian ICMS, ISS, COFINS and PIS/PASEP.

 

3. Retail Price in Country of Destination Less Profit (PVV):

Benchmark = weighed arithmetic average of the sales price of similar or identical goods, practiced in the retail market of the country of destination, reduced by: i. The taxes already included in the price and charged in the country of destination; and ii. Profit margin of 30% on the retail price (gross price) The excludable taxes included in the price by the country of destination, are those considered to be similar to the Brazilian ICMS, ISS, COFINS and PIS/PASEP.

 

4. Purchase or Production Cost plus Taxes and Profit (CAP):

Benchmark = weighed arithmetic average of the acquisition or production cost of exported goods, services or rights, increased by: i. The taxes and contributions levied in Brazil; and ii. Profit margin of 15% on the cost of the item, already increased by the taxes •Transport and insurance costs are to be included in the acquisition or production cost under this method. •Taxes credited back to the exporter upon export shall be excluded from the acquisition and/or production costs. •This method may also be applied in case the company exports through a third party or an exporting company. •The exporting company’s profit margin cannot be added on to the acquisition or production cost][28]

 

11.2.5 Documentation system

[The exporter must send the Brazilian importer all necessary document following embarkation. This include:

1.     Shipping information

2.     Commercial invoice

3.     Certificate of origin

4.     Other certificates if required

2.     The Import Duty and the Tax on Industrial Products (IPI) will have to be paid.

3.     When goods arrive to Brazil the importer must prepare the Import Declaration (DI).

4.     All documents including the Import Declaration, a receipt generated by the Siscomex and ICMS payment receipt (or waiver) must be presented to the Secretariat of Federal revenue (SRF).

When completing these steps the clearance process is finished and the product can be traded in Brazil.][29]

 

 

11.3 Business through tax haven

    11.3.1 Tax haven system

[Tax haven is a state, country, or territory where, on a national level, certain taxes are levied at a very low rate or not at all.][30]

 

    11.3.2 Tax haven system in Brazil

[Restrictions against "tax haven jurisdictions" were first introduced in Brazil in 1996 when the concept of a Tax Favorable Jurisdiction was first enacted. Until recently, the countries and locations embraced by this concept were identified in a list.

From 1 January 2009, however, a new Law extended the Tax Favorable Jurisdictions criteria and created a new concept called the Privileged Tax Regime. This new regime prompted the Brazilian Revenue Service to issue a new set of regulations. The impact of being placed in a 'list' means there will be tax consequences and this has become a discussion point worldwide. Tax and Brazil, Tax and Luxembourg, Tax and Netherlands and Tax and Spain discuss the main impacts, consequences of being on a 'list' and areas of concern for multinationals.][31]

11.4 Tax system for inadequate capital

[The concepts of a Tax Favourable Jurisdiction and the Privileged Tax Regime. Investments in the stock market or over-the-counter market, including portfolio investments made in Brazilian companies according to CMN Resolution No. 2.689/00, for instance, do not apply. Currently, Tax Favourable Jurisdictions encompass countries or locations:

(a) that do not tax income
(b) that tax income at a rate lower than 20%
(c) the laws of which do not allow access to information related to shareholding composition, ownership of investments, or identification of the beneficial owner of earnings attributed to non-residents.

The new Law introduces the definition of the Privileged Tax Regime, including not only countries and locations which qualify under criteria (a) or (b) above, but also those which grant a tax advantage to a non-resident individual or legal entity:

i. without requiring substantial economic activity in the respective country or location
ii. Conditioned to the absence of substantial economic activity in the respective country or location.

As a final criterion, countries and locations which do not tax offshore income in particular, or that tax such income at a maximum rate lower than 20%, are also defined as Privileged Tax Regimes. ][32]

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12. Tax treaty

  12.1 Overview of tax treaty

      12.1.1 Countries that conclude tax treaty with Brazil

[Brazil has signed a total of 32 treaties that are currently in force

Withholding Income

Taxes Rates under Brazil's
Interests%(3)

Double Tax Treaties(1)
Royalties%(4)

Non-treaty rates(2)

15

15

Argentina

15

15

Austria

15

15 / 10

Belgium

15 / 10

15 / 10

Canada

15 / 10

15

Chile

15

15

China

15

15

Czech Republic

15 / 10

15

Denmark

15

15

Ecuador

15

15

Finland

15

15 / 10

France

15 / 10

15 / 10

Hungary

15 / 10

15

India

15

15

Israel

15

15 / 10

Italy

15

15

Japan

12,5

15 / 12,5

Korea

15 / 10

15

Luxembourg

15 / 10

15

Mexico

15

15 / 10

Netherlands

15 / 10

15

Norway

15

15

Peru

15

15

Philippines

15

15

Portugal

15

15 / 10

Slovakia

15 / 10

15

South Africa

15

15 / 10

Spain

15 / 10

15 / 10

Sweden

15

15

Turkey

15

15/10

Trinidad and Tobago

15/10

15

Ukraine

15

15

Venezuela

15/10

15

 ][1]

 

 

      12.1.2 OEOC

[The Organization for Economic Cooperation and Development (OECD) is a unique forum where the governments of 34 democracies with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.][2]

 

      12.1.3 OECD model treaty
[Brazil has signed a total of 32 treaties that are currently in force, most of which follow the OECD model treaty. Most of the treaties signed have exchange of information provisions. The treaties generally provide for relief from double taxation on all types of income, limit the taxation by one country of companies resident in the other, and protect companies resident in one country from discriminatory taxation in the other.
A distinct aspect of the Brazilian treaty policy which deviates from the OECD Model Convention is the inclusion of matching credit clauses in the treaties signed with developed countries, especially with regards to payment of dividends, royalties and interest. Brazilian treaties also tend to privilege source taxations as opposed to granting exclusive taxing rights to the state of residence of the beneficiary of the income.][3]
 

  12.2 Tax treaty between Japan and Brazil

       12.2.1 Definition of PE and tax payment

[PE stands for Permanent Establishment, a permanent establishment is created when the individual remains in the country acting on behalf of the employer while making decisions and deals on the employer’s behalf.][4]

 

       12.2.2 Tax payment on allocation

[General taxes on income (aliquots)

The CID is 15% plus a surcharge of 10% if benefits exceed US $ 136,424 per year][5]

 

       12.2.3 Tax payment on interest

Other income taxes (rates)

- 15% or 25% on capital gains earned by non-residents - 15% or 25% royalty, and other services,

- 10% for CIDE][6]

 

       12.2.4 Tax payment on Rent (royalty etc.)

[Royalty ad valorem 10% (can be reduced to 5%, depending on risk geological and other factors)][7]

 

 

References:

http://www.investorguide.com/article/11164/the-difference-between-direct-tax-and-indirect-tax-igu/

http://brazil.angloinfo.com/money/income-tax/

http://www.deloitte.dbbrazil.com.br/show.aspx?idCanal=8hHo0x0rj82lLoheU0ETGA==

 

 



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