Originally published in the December 18, 2009 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s official gazette of December 16 published Provisional Measure 472/2009, which puts in place some of the tax breaks announced December 9 by Finance Minister Guido Mantega.
The measure also creates some special tax regimes and introduces other tax changes that had not been announced by the government.
REPENEC
Provisional Measure 472 creates REPENEC (Regime Especial de Incentivos para o Desenvolvimento de Infraestrutura da Indústria Petrolífera nas Regiões Norte, Nordeste e Centro-Oeste), a special tax regime that grants tax breaks for infrastructure projects for the petrochemical industry developed in the northern, northeastern, and central-west regions of Brazil. Provisional Measure 472 also considers oil refining and production of ammonia and urea from natural gas part of the petrochemical industry.
Only companies headquartered in those regions are eligible for the REPENEC program, which provides the following tax incentives for imports and local acquisitions of new machinery, equipment, instruments and devices, and construction materials to be used or applied in infrastructure works that will be ultimately incorporated in the taxpayer’s fixed assets:
- suspension of Program for Social Integration contribution (P.I.S.) and the Contribution for the Financing of Social Security (COFINS) on sales of goods and services to REPENEC companies;
- suspension of P.I.S. and COFINS on imports of goods and services for REPENEC projects;
- suspension of federal excise tax (IPI) imports and local acquisitions;
- suspension of import tax; and
- suspension of P.I.S. and COFINS on lease income of machinery, equipment, instruments, and devices for use in REPENEC projects when leased by a REPENEC company.
PROUCA and RECOMPE
Provisional Measure 472 creates a federal program, One Computer per Student (Programa Um Computador Por Aluno, or PROUCA), to distribute computers to, and promote digital inclusion for, students of public schools (federal, state, and municipal).
Acquisitions of computers for PROUCA will be made by means of a special regime, RECOMPE (Regime Especial para Aquisição de Computadores para uso Educacional). RECOMPE will accept public bids and award contracts to manufacturers able to produce computers for the PROUCA Program. Technological specifications for PROUCA computers will be issued by a joint act by the ministries of education and of finance.
The RECOMPE incentive program suspends the following taxes for eligible manufacturers:
- IPI on domestic acquisitions of materials and intermediate products destined to manufacturing of PROUCA computers;
- P.I.S. and COFINS levied on gross income arising from domestic sales of materials and intermediate products destined to manufacturing of PROUCA computers; and sales of services rendered to RECOMPE companies;
- IPI, import tax, P.I.S., COFINS, and CIDE (10 percent royalty tax) levied on imports of goods and services destined to manufacturing of PROUCA computers; and
- IPI exemption for sales of computers made by RECOMPE companies under PROUCA.
RETAERO
Provisional Measure 472 creates a special tax incentive regime for the Brazilian aircraft industry (Regime Especial de Incentivos Tributários para a Indústria Aeronáutica Brasileira, or RETAERO), which includes manufacturers of parts, components, tools, equipment, systems, subsystems, and materials to be used in maintenance and conservation, modernization, repair, revision, conversion, and manufacturing of certain types of aircraft.
RETAERO benefits include the following tax incentives for domestic purchases and imports of eligible goods:
- P.I.S., COFINS, and IPI suspension for domestic sales to RETAERO companies; and
- P.I.S., COFINS, and IPI on imports carried out by RETAERO companies.
The RETAERO regime also includes tax breaks for domestic acquisitions and imports of services related to basic industrial technology, technological development and innovation, technical assistance, and technology transfers carried out by RETAERO companies. The tax breaks are:
- suspension of P.I.S. and COFINS on domestic sales of eligible services;
- suspension of P.I.S. and COFINS on imports of those services by RETAERO companies; and
- P.I.S. and COFINS on lease income of Brazilian companies from leasing of machinery, equipment, instruments, and devices to companies under RETAERO.
Application for RETAERO can be made within five years from the publication of Provisional Measure 472. After approval, companies under RETAERO may enjoy the above tax breaks for a period of five years.
Extension of Tax Benefits
Provisional Measure 472 extends some tax benefits that would expire on December 31, 2009, and also introduces the following changes to existing benefits.
Computer Law
Law No. 8,248/1991 provides specific tax incentives, such as IPI exemptions, for local production of computer products. Provisional Measure 472 amends the minimum research and development investments in Brazil that the law requires for companies to benefit from those tax incentives.
Computer Products Manufactured in the Manaus Free Trade Zone
Provisional Measure 472 also changes some rules for eligible companies to enjoy IPI exemptions including minimum R&D investments.
Sales of Personal Computers
As previously announced by Mantega, the measure extended to December 31, 2014, the P.I.S. and COFINS zero rates on retail sales of personal computers. The zero rate would otherwise expire on December 31, 2009.
Other Tax Changes
Provisional Measure 472/2009 also introduces the following tax changes.
- Reduction to zero of the withholding tax on payments made by Brazilian companies for services rendered abroad to comply with technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS) agreements.
The 10 percent CIDE (royalty tax) and P.I.S. and COFINS on imports levied on those payments is also reduced to zero. However, the zero rates do not apply to payments made to beneficiaries domiciled in low-tax jurisdictions, as defined under Brazilian tax laws.
- Mandatory use of the actual method to calculate corporate income tax for securitization companies (of real estate, finance, and agribusiness credits).
- Imposition of assessed penalty of 75 percent for undue tax deduction or tax setoff made by individuals in their annual tax return. Before the change, individuals were subject to a maximum delay penalty of 20 percent.
- Imposition of penalties for undue reporting of tax payments, payments under tax payment schedules, and tax setoffs.
Restrictions on Deduction of Interest Paid to Foreign Related Parties
An important innovation of Provisional Measure 472 is the imposition of restrictions on the tax deductibility of interest paid to a foreign related party.
In addition to requiring that interest be a business expense, article 24 of the measure imposes the following requirements:
- the amount of the relevant debt cannot exceed twice the amount of the participation of the foreign related party in the net equity of the Brazilian taxpayer; and
- the total amount of debts (with foreign related parties) cannot exceed twice the total amount of all participations of foreign related parties in the net equity of the Brazilian taxpayer.
For interest paid to foreign related parties domiciled in low-tax jurisdictions, the double-test requirement is reduced to 30 percent. In other words, the amount of a specific debt with a foreign related party located in a low-tax jurisdiction cannot exceed 30 percent of (as opposed to twice) the amount of that foreign related party’s participation in the net equity of the Brazilian taxpayer. The same 30 percent limit applies for the second test.
Any excess will be disregarded as a business expense and nondeductible for tax purposes.
Payments to Low-Tax Jurisdictions
Article 26 of the measure introduces one of the measure’s most important changes. It creates a default rule that any payment made to a low-tax jurisdiction is nondeductible.
It includes, however, an exception. The following must be provided to make the relevant payment deductible for tax purposes:
- identification of the beneficial owner of the payment;
- proof that the beneficiary is operational to carry out the activity for which it is being paid; and
- documental evidence of the payment and corresponding receipt (by the Brazilian company) of the good, service, or right that gave cause to the payment.
Transfer of Residency to a Low-Tax Jurisdiction
Article 28 of the measure provides that a Brazilian resident that transfers her residency to a low-tax jurisdiction will continue to be considered a Brazilian resident for tax purposes unless she proves that, by virtue of the tax laws of that low-tax jurisdiction, she is taxed on a worldwide basis in that jurisdiction. The taxpayer must also present evidence of tax payments in that jurisdiction.
Reinsurance Payments Abroad
Article 29 of the measure increases the tax basis for P.I.S. and COFINS on reinsurance payments abroad. Before the measure, a reduced tax basis of 8 percent applied to reinsurance payments made abroad. That means that for every $100, the P.I.S./COFINS tax basis was $8. Measure 472 increases the tax basis to 15 percent.
David Roberto R. Soares da Silva