Originally published in the June 8 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s executive branch on May 31 submitted to the National Congress an extensive law project designed to grant full federal tax exemptions for two major soccer events that will take place in Brazil: the Fédération Internationale de Football Association’s (FIFA’s) 2013 Confederations Cup and 2014 World Cup (events).
Law Project 7422/2010 would grant tax exemptions for transactions carried out in Brazil by or on behalf of FIFA as long as the transactions are directly connected with the two soccer events, including the competitions themselves, seminars, meetings, workshops, press conferences, and so on. The proposal also would allow FIFA to form as many as five tax-exempt subsidiaries in Brazil in connection with the organization and execution of the competitions.
The law project contains 30 articles dealing with tax issues associated with the 2013 and 2014 events. Federal Revenue Department (FRD) officials have estimated that the federal tax breaks associated with the soccer cups would total around BRL 900 million (about $475 million) between 2011 and 2015.
This article addresses the main tax proposals relating to investments and transactions to be carried out in Brazil or with Brazilian parties in connection with the 2013 and 2014 events.
Tax Exemptions for Imports
Article 3 of the law project would grant full federal tax exemptions for imports of goods and consumables for exclusive use in the organization and execution of the events, including:
- food, medical supplies (including pharmaceuticals), fuel, and office supplies;
- trophies, medals, plaques, statutes, badges, flags, and other commemorative items;
- promotional materials, printed materials, and other items with similar purposes that are to be freely distributed or used in the events;
- other items of a nature and quantity normally used in sporting events of the same size;
- other nondurable goods (defined as goods with a useful life of up to one year); and
- durable goods with a unit value of up to BRL 5,000.
The exemptions would apply for the following:
- federal excise tax (IPI) due on customs clearance;
- import tax;
- Program for Social Integration contribution (P.I.S.);
- Contribution for the Financing of Social Security (COFINS);
- freight tax (AFRMM);
- fee for the use of the Foreign Trade System (SISCOMEX); and
- Contribution of Intervention in the Economic Order, levied on imports of fuel (CIDE-Fuel).
Law Project 7422/2010 clarifies that the tax exemptions would apply only to imports carried out by FIFA itself, FIFA’s Brazilian subsidiaries, and companies and entities associated or hired by FIFA to execute the 2013 and 2014 events.
FIFA would have to indicate the foreign companies, partners, and entities that meet the aforementioned criteria so they could be expressly listed by the executive branch.
Imports eligible for the special tax exemptions would not trigger P.I.S. and COFINS tax credits for the importers. Further, imports of durable goods and equipment for use in the events would have to come into the country under the temporary admission customs regime, meaning that while import duties would be fully suspended, the goods and equipment eventually would have to be returned to the source country after the events. Among the durable goods and equipment subject to this condition are:
- technical sports equipment;
- sound and image recording and broadcasting equipment;
- medical equipment;
- technical office equipment; and
- other durable goods to be listed in a future regulation.
Unlike in other temporary admission situations, Brazil would not require FIFA importers to place financial guarantees for the suspended import taxes and duties. The FRD will issue regulations on the subject if the project is converted into law.
The suspension of import taxes would be converted into a tax exemption if the imported durable goods and equipment are exported back to the source country within 180 days after December 31, 2015. The same exemption would apply if the relevant durable goods and equipment are donated to the state or to certain state-owned companies, charities, or nonprofit sports or similar associations within the same period. Otherwise, the suspended taxes would be charged with interest and penalties.
Also, the law project delegates powers to the FRD to issue special tax treatment for the baggage for foreigners entering Brazil to participate in the events.
Tax Exemptions for Legal Entities
Article 7 of the law project exempts FIFA, as a nonresident entity, from taxes related to its own activities in Brazil as long as the activities are directly connected to the organization and execution of the 2013 and 2014 events. The exemptions would apply for:
- withholding tax on cross-border payments;
- the financial transactions tax (IOF);
- payroll taxes, including social security taxes and similar social contributions;
- P.I.S. on imports;
- COFINS on imports;
- the 10 percent royalty tax (CIDE-Royalty); and
- the Contribution for the Development of the National Cinematographic Industry (CONDECINE).
The exemptions from the withholding tax, IOF, CIDE-Royalty, and CONDECINE would apply exclusively to income paid, credited, delivered, used, or remitted to FIFA or by FIFA, its confederations, members of its foreign associations, FIFA’s primary broadcaster, and FIFA service providers. They also would apply to credit, currency, and insurance transactions carried out by FIFA and its partners listed above.
The law project clarifies that business places set up in Brazil by FIFA and its aforementioned affiliates for exclusive purposes of the soccer events would not constitute permanent establishments for tax purposes.
It also clarifies that the tax exemptions would not apply to income and capital gains arising from financial transactions or dispositions involving assets or rights.
For Brazilian suppliers, whether corporate or individual, who receive payments from FIFA or its affiliates, the law project clearly states that such income would be subject to full taxation.
For the activities of FIFA’s Brazilian subsidiaries that are directly connected with the soccer events, the law project would grant exemptions from:
- corporate income tax;
- withholding tax;
- IPI on imports;
- the 9 percent Social Contribution on Net Income (CSL);
- P.I.S. on imports and domestic transactions;
- COFINS on imports and domestic transactions;
- payroll taxes, including social security taxes and similar social contributions;
- CIDE-Royalty; and
The tax exemptions would not apply to income and capital gains arising from financial transactions or disposition of assets or rights. However, they would apply to credit, currency, and insurance transactions carried out by FIFA’s Brazilian subsidiaries. The law project also clarifies that sales of tickets and accommodation packages are not exempt from P.I.S. and COFINS.
The same tax exemptions granted to FIFA’s Brazilian subsidiaries would apply to its primary broadcaster if it is a Brazilian company.
For FIFA’s domestic service providers that directly bill FIFA and/or FIFA’s Brazilian subsidiaries that are formed as special purpose companies to conduct activities directly related to the soccer events, the law project would grant exemptions from:
- corporate income tax;
- P.I.S.; and
The P.I.S. and COFINS exemptions would not apply to sales of tickets or accommodation packages. The same exemptions and restrictions would apply to the local organization committee formed as a Brazilian company to promote the events.
Tax Exemption for Individuals
Compensation paid by FIFA, its Brazilian subsidiaries, and official partners to nonresident individuals hired to work temporarily in the events would be exempt from income tax. The tax exemption would also cover compensation and prizes paid to referees, soccer players, and members of soccer delegations. The project makes it clear, however, that income (including capital gains) received by those individuals from Brazilian sources would be fully taxed locally.
As for Brazilian individuals volunteering to work for FIFA during the events, Law Project 7422 would grant an income tax exemption for fringe benefits and expense reimbursements paid by FIFA’s subsidiaries or the local organization committee. The exemption would apply to amounts up to the equivalent of five minimum wages (currently, one minimum wage equals BRL 510); any amount exceeding that limit would be fully taxable.
Tax Exemptions for Local Supplies to FIFA
Sales of Brazilian products (other than durable goods) to FIFA, its subsidiaries, or its primary broadcaster for use or consumption in the organization and execution of the events would be exempt from IPI if sold by the manufacturer. The same sales would be eligible for a P.I.S./COFINS suspension, which would be converted into a tax exemption after evidence of appropriate use or consumption has been presented.
Sales of durable goods under the same conditions as mentioned above would be eligible for IPI, P.I.S., and COFINS suspensions. The suspensions would be converted into tax exemptions if the durable goods are exported abroad within 180 days after December 31, 2015. The same exemption would apply if the eligible durable goods are donated to the state or certain state-owned companies, charities, or nonprofit sports or similar associations within the same time period. Otherwise, suspended taxes would be charged with interest and penalties. Failure to comply with the exemption requirements would trigger IPI, P.I.S. and COFINS retroactively, along with interest and penalties.
P.I.S. and COFINS on FIFA’s Brazilian Subsidiary
Apart from the other tax exemptions, FIFA’s Brazilian subsidiaries would be subject to P.I.S. and COFINS under the cumulative regime (that is, P.I.S. and COFINS at rates of 0.65 percent and 3 percent, respectively, on their monthly gross income).
The same tax regime would apply to event income earned by FIFA’s primary broadcaster, if it is formed as a Brazilian company.
Special Tax Regime for Stadium Construction, Expansion, Etc.
The law project would also create the Special Tax Regime for Stadium Construction, Expansion, Remodeling, or Modernization (RECOM), which would apply to work on stadiums that will host FIFA games during the events.
The regime would benefit companies working on stadium construction, expansion, remodeling, or modernization projects approved by the Ministry of Sports by December 31, 2012.
Local sales to RECOM companies and imports of new machinery, instruments, equipment, and construction materials by RECOM companies would be eligible for suspensions of:
- P.I.S. and P.I.S. on imports;
- COFINS and COFINS on imports;
- IPI and IPI on imports; and
- import tax.
The tax suspensions would be converted into tax exemptions after the use of the relevant asset or material in the construction work on the relevant stadium. Failure to comply with the RECOM requirements would trigger the suspended taxes, along with interest and penalties.
The P.I.S. and COFINS suspensions also would apply to imports and local acquisitions of services to be used under the RECOM regime, and to rental and lease payments made to Brazilian companies for machinery and equipment.
Law Project 7422/2010 makes it clear that RECOM tax benefits would apply to local acquisitions and imports carried out between January 1, 2011, and June 30, 2014.
Except for the RECOM provisions, all the other tax benefits related to FIFA’s 2013 and 2014 events would be effective from January 1, 2011, through December 31, 2015.
The law project also says that any future change to Brazilian tax laws must take into consideration the project’s provisions in such a way as to preserve the tax breaks granted to FIFA and its partners.
The law project now will be reviewed by the House commissions of economic development, industry, and commerce; of tourism and sport; of finance and taxation; and of constitution and justice. The commissions have conclusive powers, which means that if the law project is approved by all of the commissions, it will be sent directly to the Senate with no need for a debate or vote by the full House of Representatives.
For the tax breaks to be effective by January 1, 2011, Congress must approve the law project before the end of 2010.
David Roberto R. Soares da Silva