Originally published in the December 22, 2009 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s economy recovered quickly in 2009 as stimulus measures boosted domestic consumption. The year’s major tax developments were the creation of a transitional tax regime for corporate taxpayers, a comprehensive tax payment schedule and amnesty program, and a series of tax cuts to stimulate targeted sectors of the economy.
As this review was being written, Brazilian taxpayers were days away from the November 30 deadline to apply for the country’s most comprehensive tax payment schedule. What started the year as a limited tax amnesty proposed by the executive branch became a major tax payment schedule in Congress, featuring discounts on penalties and interest that could reach 90 percent and payment terms that can be extended for up to 15 years.
Almost 1 million Brazilian companies and individuals have applied for the payment schedule.
Stimulus Tax Cuts
The financial crisis hit Brazil hard in the last two quarters of 2008, and the government acted quickly to stimulate the economy. It offered tax cuts for those sectors deemed most important to the country, such as construction companies and automobile manufacturers. The tax cuts, which for some activities resulted in a zero rate, were passed on to consumers in the form of lower retail prices.
For the middle class, the government adjusted current tax brackets and created new brackets that reduced the overall personal tax burden. The main goal was to leave more disposable income in the hands of individuals so they could either shop or save during the period of instability.
The strategy of strengthening local markets succeeded in alleviating the domestic effects of the crisis. Losses in export sales were compensated for with domestic sales and lower taxes.
Tax Treaties
In October, after nearly two years of debate, the House Commission of Constitution and Justice finally approved a legislative decree that would introduce the Brazil-U.S. tax information exchange agreement into Brazil’s legal system. The decree now proceeds to the full Brazilian House of Representatives for review and a vote. If approved, it will be forwarded to the Senate, possibly in 2010.
The 1969 Vienna Convention on the Law of
Treaties received congressional approval. Although ratification still depends on a presidential decree incorporating the convention into Brazilian domestic law, congressional approval was a major step, as many believe the convention will improve the approach to resolving conflicts between tax treaties and local tax laws.
Also, some technical cooperation agreements (with the African Union, Botswana, and Nicaragua) entered into force in 2009.
Case Law
Exporters suffered one of the most significant defeats in the history of Brazilian tax litigation in August when the Supreme Court ruled that the extra federal excise tax (IPI) credit, which exporters have claimed for almost 20 years, expired in 1990. The decision ended a tax dispute that had generated conflicting lower court decisions over the years, and it gave the government an opportunity to claim billions in unpaid excise taxes. For exporters, the solution seems now to try to include unpaid IPI debts under the new tax payment schedule.
Also in August, the Court began, but eventually suspended, judgment of a case dealing with the Contribution for the Financing of Social Security (COFINS) and the Program for Social Integration contribution (P.I.S.) as applied on the gross income of insurance companies and financial institutions. The first opinion, delivered by Justice Cesar Peluso, supported applying P.I.S. and COFINS to the gross income of financial institutions and insurance companies. The final judgment will not be decided in 2009, because nine other justices must still deliver their opinions.
Another important issue submitted to the Court concerned the municipal service tax (ISS) as applied to franchise income. Brazilian franchisers have an opportunity to reverse the 2007 decision by the Superior Court of Justice that franchise income was subject to ISS starting in 2004.
One important tax decision in 2009 came from the Federal Court of Appeals for the Fourth Region, which ruled that service payments remitted to Canada are not subject to Brazilian withholding tax because the payments qualify as business profits under the Brazil-Canada tax treaty. The same decision applied to service payments remitted to Germany before 2006, under the Brazil-Germany treaty. It was the first ruling on the issue at the appellate level, although the withholding tax on service payments has been debated between taxpayers and the Federal Revenue Department for over a decade.
Tax Increases?
The tax cuts enacted to alleviate the effects of the economic crisis resulted in plunging tax revenue. To compensate, the government attempted to reintroduce the bank transaction tax, renamed the Social Contribution for Public Health (Contribuição Social para a Saúde, or CSS). The CSS would be levied at a 0.1 percent rate on every debit made to a bank account.
Despite congressional support, the CSS proposal has not yet succeeded. It will be difficult for lawmakers to approve it in 2010 because national elections will take place.
The government made a separate attempt at taxing savings accounts. Proposals were announced, but no bills have been submitted to Congress. If not approved before year-end, any new tax on savings accounts couldn’t become effective until 2011 at the earliest.
In 2009 Brazil introduced a 2 percent financial transactions (IOF) tax on financial investments made by foreigners that was designed more to reduce inflationary pressure than to raise revenue.
What to Expect in 2010
No major tax increase is expected in 2010. It will be an election year for Congress, the presidency, state governors, and state assemblies. President Luiz Inácio Lula da Silva cannot run for reelection because of term limits.
Any tax increase by the current government will be used by opposition parties to attack Lula’s presumptive political heir, Civil Staff Minister Dilma Rouseff. Any talk of tax reform will be left for Brazil’s next president to deal with after January 2011.
If fiscal stability is threatened because of this year’s tax cuts or delays in the economic recovery, the government may be tempted to further increase taxes on foreigners. Many foreigners are eager to invest in Brazil, particularly after the country was recently chosen to host the 2014 World Cup and the 2016 Olympic Games.
The IOF tax, intended to prevent overvaluation of Brazilian currency, has already been implemented but has limited effect. Taxation of royalties paid to foreigners may also be considered.
David Roberto R. Soares da Silva